Why Satyam is probably still a good business bet
Unless you’ve been in a coma for the past month or so, there is no way that the Satyam fiasco has not caught your attention. It has been the biggest corporate scam in Indian history, and the current revelations are probably not even the tip of the iceberg. The total fallout of the fraud till date is about Rs. 7,500 crores (about $1.5 bn), not counting the shareholder value that’s been decimated (another $2.5 bn or so). This is likely to get much worse – snowballing into layoffs, lost revenue for the IT industry, lawsuits etc etc.
The one area that’s being largely (and I say largely as there are a few analysts that have brought it up) ignored is the viability of Satyam’s business. Even if the revenues were overstated by more than Rs. 500 crore for the last quarter, they still amount to Rs. 2,100 crores. On an annualized basis, thats ~Rs. 8,500 crores in revenue, nothing to sneeze at. The issue being brought up in this regard of course was profitability, which was actually Rs. 61 crore (3%), as against an industry standard of nearly 30%. The explanation for this lies in the statement made by Ramalinga Raju.
The differential in the real profits and the one refleted in the books was further accentuaated by the fact that the company had to carry additional resources and assets to justify higher level of operations – thereby significantly increasing the costs.
The profit margins were therefore suffering because artificial costs were being piled on. About half of Satyam’s business came in from foreign clients, with operating margins as high as 45%. They have a roster of top tier clients ranging from Ford to Nestle and serve a third of the Fortune 500. That’s no mean feat. In terms of revenues, they were the fourth largest Indian IT vendor.
If, as the government is now suggesting, a new board and new management can be inducted, the core business of the company, which in my opinion is sound, can be leveraged to bring this back. Of course, if a strategic investor with some appetite for risk, or the right deal in terms of deflecting legal risk, can come on board, then I think they’ll make a killing.
