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Aarati Krishnan

Does a 87 per cent decline in the stock price of Satyam Computer over the last week make it an attractive buy? The answer, if you are a long-term investor, is for the moment a resounding no.

That’s because the startling confessions of the company’s founder, Mr Ramalinga Raju, last week make it quite difficult for an investor even to guess the real size, scale, nature or profitability of the company’s operations, all of which would be key to arrive at the stock’s real value. To decide if the stock is indeed undervalued at Friday’s close price of Rs 24, you need to have some measure of what the company is really worth. (Remember, the face value of the stock is not Rs 10, but Rs 2).

Nor is it possible to value the company based on the assets on its balance sheet.

With much of the cash on its books turning out to be fictitious, the only other assets of note are land and plant and machinery. These were valued at about Rs 424 crore or just Rs 6.3 a share, based on their March 31 book value.

Mr Raju’s statements reveal that the company’s quarterly revenues and operating profits are overstated to the extent of 22 per cent and 90 per cent respectively. Adjusting for this, its operating profit margins would stand at 3 per cent, while other top IT companies report 25-35 per cent. That hints at an actual loss at the net level for the September. If this does represent the sustainable picture of Satyam’s financials, it would place the stock’s valuations much below even mid-rung IT companies.

Clarity on the company’s true financials would emerge only after investigations are complete and the restated financials are available for public consumption.

To compound matters, with a minuscule promoter holding, Satyam’s stock price performance has historically depended quite heavily on institutional investors’ appetite. However, the aborted Maytas deal and the chain of events last week have seen FIIs as well as domestic brokerages suspending their coverage of the stock, while institutional investors such as Aberdeen Global, Morgan Stanley, JP Morgan and Fidelity have exited, in an exodus. That these investors have exited at prices ranging between Rs 13 and Rs 45, speaks of their disinterest.

The stock’s exclusion from bellwether indices such as the Sensex and Nifty and its removal from the derivatives segment could be the last straw that will ensure that institutional investors do not even buy it as a part of their basket trading in the Indian indices.

Of course, all the above reasoning applies only to investors who would look to make the stock a part of their long-term portfolio. Day traders, who have seen the stock swing between Rs 6 and Rs 36 on Friday alone, may not be much deterred by all this.

More Stories on : Stocks | Stocks | Software | Satyam Computer Services Ltd

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