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Should You Buy Into Satyam?

The stock has jumped to new highs after its financials were revealed for the first time since the scam

On Tuesday, Satyam made public the financial document that was shown to its bidders indicating the state of the health of the corporate entity wracked by the Rs 7,000 crore owner-sponsored scam.

Though when this document was shown to the bidders, the maximum bid that the suitors could quote was Rs 58. Coincidentally, this was also the winning bid by Tech Mahindra. When the market got this news from the two-month-old document on Tuesday, June 9, 2009, it got so euphoric that the stock ended the day locked at the upper circuit of 10 per cent, in effect all trading in the stock was stopped. The same thing happened on Wednesday too.

Though the disclosure came as a huge relief to investors of Satyam, indicating to them that the company is still alive and more than that, its future prospects were not totally compromised. It was still a company with prospects.

But for investors to get so overtly excited about Satyam to drive its scrip to these levels, seems pretty premature. Compared to other infotech (IT) companies, the quarterly earnings per share (EPS) of Satyam in December 2008 was Rs 2.69 compared to Rs 5.01 of Wipro and Rs 5.94 of HCL.

Since Satyam stock is trading at a price that is almost half or thereabouts of share prices of other IT companies, it makes the company very attractive to many investors. But, apart from the euphoria that is based on not looking at the risks facing the company, one has to take into account the litigation costs that Satyam faces, which none of the other companies is facing accounting for the current value on stock markets. Also, none of these companies have emerged from a near-death experience that Satyam faced and barely survived, courtesy the intervention by the government of India.

At this price, Satyam can be considered a steal, only if one is overly positive about the outcome of the various litigations against the company across the world.

One positive outcome of this disclosure is that Tech Mahindra may no longer have to pay Rs 1,154 crore to buy the additional 20 per cent from the public, which the company was bound to do through an open offer going live on Friday as a consequence of it winning the bid and acquiring a 31 per cent stake in Satyam.

The open offer price per share was fixed at Rs 58 and that is very low compared to where it is trading today, which means no one will be wanting to surrender their holdings in Satyam when market price is so high.

In case the open offer fails, and the company takes the option of issuing fresh equity to the new promoters, then it would still be a good thing to happen for Satyam shareholders as this additional cash inflow would do a lot of good to the company as it would solve the cash crunch that is hurting the company.

On the other hand, if Tech Mahindra decides not to raise its holdings in Satyam, then it would certainly good for the former as it would be able to reduce much of its debt burden, which it is facing as a consequence of the takeover.

Whatever other positives that it may have generated, the disclosure of Satyam’s financial fundamentals has definitely removed much of the mystery regarding how the beleaguered company was valued by Tech Mahindra.

But apart from that, it is quite debatable whether anyone should take the risk of investing their good money in a company that is still facing grave threats to its very existence or, at best, questioning its long-term viability.