Mahindra Satyam Ltd’s settlement with Upaid Systems Ltd to end all outstanding disputes has led to its investors breathing a sigh of relief. Satyam’s shares rose by around 10% in early trading on Thursday, but ended the trading session with gains of 5.2% over Wednesday’s close of Rs102.55.
The company has agreed to pay $70 million (Rs327 crore) for the settlement. A CLSA report dated 23 November had estimated the Upaid liability at $50 million. Some other brokers such as JPMorgan Chase and Co. had estimated the liability at $100 million. The final settlement price isn’t substantially different than these estimates. What’s more important is that a major legal dispute is out of the way. The class action suits in the US are still pending and CLSA estimates that the cash outflow related to these could be in the $30-90 million range.
JPMorgan expects them to be around $100 million.
But legal issues aren’t Satyam’s biggest problems currently. According to analysts, client attrition hasn’t really stopped. While there was a period of stability in the middle of the year, large clients have since ramped down. The CLSA report states: “In our view, revenue leakage continues to be the single biggest worry at Satyam and no amount of cost-cutting can neutralize the lack of top-line traction.”
Graphics: Yogesh Kumar / Mint
Besides, with the environment for information technology outsourcing having improved, lateral hiring has picked up. Satyam has already lost key people in areas such as business development and delivery and the return of lateral hiring in the market could result in more exits. According to an analyst who did not want to be named, the company has lost a sizeable portion of its ERP professionals to a competitor. Apart from these concerns, the company also has to deal with the fact that clients and investors are eagerly awaiting its restated accounts. Winning large orders from big clients seems difficult until restated accounts are available—this is expected in June.
Keeping these worries in mind, it makes sense for investors to exercise caution. There are quite a few unknowns and the stock’s valuation doesn’t reflect all this uncertainty. CLSA estimates a best-case earnings per share of Rs7.40 for fiscal year 2011-12, which puts valuations at almost 15 times two-year forward earnings. This is far higher than firms such as HCL Technologies Ltd, which trades at 12 times FY12 earnings, based on Bloomberg consensus estimates.
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