Shares of Mahindra Satyam Ltd have risen by 16% this week and by 33% this month, with investors getting excited about the fact that the company will be finally announcing its financial results. On the one hand, this development is positive, since it would remove the obstacle Satyam’s clients face in dealing with a vendor whose financials are unknown. Even so, it has been known for some time now that the company would be announcing results by end-September. There’s no particular reason why the company’s shares should rise by 33% in three weeks.

Once the company’s true financial position is known, more clients should be expected to engage with the company—of course, provided its financial position isn’t in a mess. The Street’s reaction seems to suggest that the company is likely to report a positive surprise. But analysts say that there are no indications of how good/bad things are at Satyam, with the company sharing precious little in terms of details about the company’s performance.

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According to one analyst with a domestic brokerage, institutional holding in the company has fallen to very low levels, and the movement in the stock can be attributed to speculation by retail traders. With the results announcement data nearing, the time is ripe for rumour-mongering.

With the shares already having risen sharply, there is clearly room for disappointment. Satyam’s current share price is already at levels that assume reasonably strong growth prospects. According to a note by JPMorgan to its clients, Satyam would deserve a value of 110-120 under the following assumptions—revenue grow by 20% in fiscal 2012; operating leverage kicks in; and operating margins are similar to those of HCL Technologies Ltd. Some of the other assumptions include an employee base of 30,000 and billing rates that are at a 20-25% discount to Infosys Technologies Ltd. The valuation also assumes a price-earnings multiple of 14 times FY12 earnings, matching the brokers’ fair value multiple for HCL Technologies. In other words, at Satyam’s current share price of 106, fairly optimistic assumptions are already being made.

If the company’s results announcement next week reveals that it may be much longer before the company can achieve margins and growth rates that are similar to its peers, shares could correct sharply.

Graphic by Ahmed Raza Khan/Mint

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