News APP

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  gplay

Rediff.com  » Business » Tech Mahindra: Satyam calling

Tech Mahindra: Satyam calling

By Shobhana Subramanian in Mumbai
April 14, 2009 09:32 IST
Get Rediff News in your Inbox:

A back of the envelope calculation shows that the Rs 58 per share that Tech Mahindra has paid to acquire Satyam Computer Services is not unreasonable. At that price, the market capitalisation for Satyam works out to about Rs 6,200 crore (Rs 62 billion) and assuming a debt of Rs 2,200 crore (Rs 22 billion), the enterprise value would be in the region of Rs 8,400 crore (Rs 84 billion).

It shouldn't be too difficult for Satyam to be able to turn in an operating profit of close to Rs 1,000 crore (Rs 10 billion) in 2009-10, so that would translate into an EV/ebitda (earnings before interest, depreciation and tax) of 8.4 times for the company.

That may not be too different from the kind of valuations that bigger companies in the IT space, like TCS, for instance, are quoting at. It goes without saying that Satyam should be available much cheaper, but then Tech Mahindra is paying a premium for a controlling interest and more important, for an opportunity to diversify away from telecom.

With Satyam, it has access to a strong client list that does not overlap at all and revenues of around $1.3 billion. It's a known fact that Tech Mahindra has been going through a rough time lately because it has been so dependent on the telecom space.

Also, while the deal may appear expensive today, there's undoubtedly potential in Satyam that Tech Mahindra should be able to unlock.

For one, it shouldn't take long for Satyam's current operating profit margin of 3 per cent to move up to 14-15 per cent. The concern, of course, is the huge debt burden that Tech Mahindra is taking on of close to Rs 2,200 crore (Rs 22 billion), which will undoubtedly depress earnings in the near term.

More than that, the legal liabilities should not blow up in its face.

At Rs 359, Tech Mahindra trades at around 5 times estimated 2009-10 earnings but at this point, despite the overhang of the 12 per cent stake in Satyam held by Larsen & Toubro, the latter seems to be a better bet if at all one is keen to play technology.

Get Rediff News in your Inbox:
Shobhana Subramanian in Mumbai
Source: source
 

Moneywiz Live!