The Hindu Business Line : A Satyam hole in market cap

Chennai, Dec. 31 It is a ‘hole’ that Satyam’s Computer Services management is going to find as hard to fix as Harry Belafonte felt about his bucket in that memorable song, ‘There is a hole in my bucket’.

Only that for Satyam the bucket in question is its market capitalisation. Despite a subsequent withdrawal, the ‘hole’ in it stays just as resolutely as when it first sprung in the wake of company’s announcement of plans to acquire two promoter controlled companies in the real estate and infrastructure sectors.

Consider the evidence: Satyam’s market capitalisation stood roughly at Rs 15,270 crore at close of market hours on December 16th. It shed about Rs 4,700 crore the very next day to settle at around Rs 10,600 crore despite the company reassuring the market that it is calling off the acquisition plans. Indeed, even after the passage of another 10 days of trading and despite the speculative buzz about the company being a ripe takeover target, the share price has stayed in the Rs 160-170 mark giving it a market cap of approximately Rs 11,500 as of December 31. The hole in market cap has narrowed by a Rs 1000-odd crore but is still sizable at around Rs 3,750 crore.

There is no reason to suppose that the business fundamentals have undergone a change for the worse. The company’s chairman himself has been at pains to dispel any such notion. The market is clearly nervous about erosion in the company’s asset base that has more to do with what it currently owns rather than accruing to it in the future by way of profits in its core IT business.

It may be irrational, but as it happens, the figure roughly corresponds to the cash hoard that it possessed as of March 31, 2008 as augmented by some back-of-the-envelope calculations of cash accruing from its operations in the first nine months of the current fiscal.

The company’s profits in the first two quarters before charging depreciation, interest and taxes amounted to Rs 1,410 crore. The third quarter numbers are yet to be announced. However, the third quarter numbers of last year offer a rough and ready measure. That adds another Rs 540 crore to the profits of the first two quarter giving it a total sum of approximately Rs 1,950 crore. But not all of that translates into liquid cash. There are additional investments in working capital (28% last year). Financing and investing activities take a big chunk of operating cash flows (64% last year). If we net out these values we arrive at an incremental net cash accretion of another Rs 500 crore from the first three quarters of the current year to the hoard of Rs 3,300 crore carried from the close of last year. That gives us a figure of Rs 3,800 crore. This corresponds closely to the gap in market capitalisation that refuses to go away.

As connections go, it may appear far-fetched. But market is known to operate on far more irrational fears than this.