It is going to take longer than most analysts estimated for Satyam to say ‘all is well’, specifically, at least 18 months
After hitting a 52-week low of Rs78.55 on 31st August, Satyam's share price rose up to Rs114 on 23rd September on hopes of a speedy merger and good results. However, investors were in for a disappointment as restated financials only indicated that the road to recovery for this troubled company is going to be longer than initially expected. Satyam estimates that it will take at least 18 more months to fully convalesce.
A note from Kotak Institutional Equities Research today says, "Satyam faces multiple challenges, including operating with a reduced addressable market, lack of competitive differentiation, loss of quality client base, reduced management bandwidth and high attrition. The new management has done a creditable job in holding the organisation together, but we believe a meaningful turnaround is some time away."
What Satyam disclosed yesterday is this: revenues of Rs54.8 billion in FY10, EBITDA margin of 8%, net loss of Rs1.2 billion after including extraordinary items of Rs4.2 billion [relating to severance compensation for employees (almost Rs1 billion), forensic investigation expenses (Rs1.1 billion), and write-down in value of assets of subsidiaries (Rs2.2 billion)], cash and cash equivalent of Rs22 billion as of 31 March 2010 (but Rs19 billion after payout for the Upaid dispute) and accumulated losses of Rs27.5 billion.
The balance sheet impact of the fraud committed by Raju has been about Rs69 billion. Satyam had just 27,000 employees at the end of FY10 and plans about 3,000 campus hires this year. However, it is still unclear about hiring at a senior level for 2010.
In a televised interview, Vineet Nayyar, chairman; CP Gurnani, CEO and S Durgashankar, CFO of Mahindra Satyam disclosed that its main revenue contributors are US (2/3rd) and Europe (15%-20%).
The market is disappointed that it did not disclose whether there will be a tax shield available on accumulated losses, some details of FY10 such as Q4 revenue run rate and margin and details on any operational metrics.
Brokerage reports after Satyam's disclosures are far from euphoric. CLSA's note to its institutional clients today says, "Through the last 15 months, we have been advising investors to stay away from the Satyam-Tech Mahindra combine. Satyam's reported financials for FY10 do nothing to change our view." It talks about five key truths which will drive investment decisions in Tech Mahindra-Satyam in the future - Satyam's FY10 revenues are not representative of its future revenues. CLSA expects 2HFY10 revenues to be lower than 1H as clients who initially did not pull out subsequently cancelled contracts. FY11 revenues are likely to be lower than FY10 because it could not participate in a lot of deals because its financials were not ready and the company had high attrition creating supply side pressures. CLSA believes Satyam will trail industry revenues in FY12 as well as IT services is a 'game of scale' and Satyam is lagging behind too much.
A merger with Tech Mahindra may not change things much feels CLSA - "While a merger with Tech Mahindra does give Satyam some scale, it does not give it the muscle to compete with larger peers in sectors outside telecom." Satyam's margins will improve going forward but not rapidly as it will have to make pricing compromises to win deals. "Risk-reward is favourable neither in Satyam nor in Tech Mahindra," concludes CLSA.
CLSA's bull case estimates for Satyam are revenue at $1.2 billion or Rs54.6 billion in FY11 and $1.4 billion or Rs62.8 billion in FY12 and EBITDA of Rs7 billion and Rs10.4 billion - CLSA assumes margins doubling in two years. Assuming a tax rate of just 5% it will earn a profit of Rs6.2 billion and Rs9.7 billion. Kotak estimates FY11 and FY12 revenues at $1.1 billion and $1.3 billion and profit at Rs5.9 billion and Rs6.3 billion, based on the assumption that FY11 revenue growth will be -5%, FY12 at 22%, FY11 employees at 31,050 and FY12 at 36,329, employee additions at 4,050 and 5,279 and utilisation rate at 77% after being at 68%.
The Kotak report points out a couple of challenges that Satyam faces - it says that Satyam's $800 million revenue loss from 150 clients implies that it lost $5 million of revenue per customer. This is high compared with its current revenue per client at $3.3 million. The second big challenge is the loss of almost its entire management team. Kotak says, "We understand that only four members of the 42 key members of the senior team of Satyam are still with the company."
(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).
It’s a pity that investors are withdrawing money from mutual funds. Most new funds launched in...
New products, regulations, features and options, interpreted from your perspective
Big dream, low return
Since the Insurance Regulatory and Development Authority (IRDA) started clearing unit-linked insurance plans (ULIPs) according to the revised regulations, new and improved ULIPs are flooding the market. Birla Sun Life Insurance (BSLI) unveiled 'two non-participating' ULIPs - BSLI Dream Endowment Plan and BSLI Classic Endowment Plan. As with other ULIPs, these new products also claim to offer customers 'a balance of savings and protection'. But they actually offer very low returns. By our estimates, you will earn not more than 6%-7%, almost similar to bank fixed deposits.
BSLI Dream Endowment Plan promises a guaranteed savings amount on maturity. But this amount (the company does not say how much) will, in all likelihood, be more than eaten up by high inflation, especially in urban areas. BSLI Classic Endowment offers a self-managed option that provides customers access to BSLI's suite of 10 investment funds, allowing them freedom to switch between its funds by allocating 5%-100% of the premium, in varying proportions, according to their risk appetite.
These policies come in different flavours: Income Advantage, Assure, Protector, Builder Plans, Enhancer, Creator, Magnifier, Maximiser, Multiplier and Super 20. But, in practice, these choices are neither useful nor relevant. Investors can also opt for an additional sum assured while buying a policy, and pay a top-up premium of Rs5,000 that will be added to their basic premium. The policy comes with five riders like BSLI Accidental Death and Disability Rider, BSLI Critical Illness Rider, BSLI Surgical Care Rider, BSLI Hospital Care Rider and BSLI Waiver of Premium Rider.
The policy carries a 7.50% premium allocation charge in the first year; 6.50% in the second year; 5% from the third year onwards; and 2% will be charged on any top-up premium. BSLI will charge 1% per annum as fund management fee for Income Advantage, Assure, Protector and Builder Plans. Enhancer and Creator carry a 1.25% management fee, while Magnifier, Maximiser, Multiplier and Super 20 carry a 1.35% charge. Remember, all charges are fixed (whether the investment gives any returns or not) and will eat up a large part of the returns.
More of the same
SBI Life is offering SBI Unit Plus Super, available in nine options: Index Fund, Equity Fund, Top 300 Fund, Equity Optimiser Fund, P/E Managed Fund, Growth Fund, Balanced Fund, Bond Fund and Money Market Fund. The scheme is almost identical to BSLI's products.
The Index Fund will track the S&P CNX Nifty Index; 90% will be invested in equity and 10% in cash and money-market instruments. The Equity Fund will invest 80% in equity and the rest in debt and money-market instruments. The Top 300 Fund will focus on the top 300 stocks based on market capitalisation on the National Stock Exchange (NSE). The Equity Optimiser will invest 60%-100% in equities and up to 40% in debt and money-market instruments. The P/E Managed Fund will make investments based on the forward price/earnings ratio of the S&P CNX Nifty Index. The Bond Fund will invest 60%-100% in debt and up to 40% in money-market instruments and the Money Market Fund, as the name suggests, will invest mainly in money-market instruments and a small portion in debt.
The policy has four rider benefits, like Criti Care 13 (that covers 13 critical illnesses), an accidental death benefit-linked rider, a Premium Pay Waiver Benefit and Income Sustainer Rider (early death or permanent disability benefits).
Investors have the option to switch a minimum of Rs5,000 between the nine funds, twice during the term of the policy free of charge; more than two switches will involve a charge of Rs100 per switch. Unused switch options will not be carried forward. The regular premium policy carries 9% fund allocation fees in the first year, 6.50% for the second and third years, 6% for the fourth and fifth years, 3.50% during the sixth and seventh years and 3% until the 10th year.
Single premium policyholders will have to pay only 3% as fund allocation charges in the first year. There will be no fund allocation charges thereafter.
The Equity Fund, Top 300 Fund, Equity Optimiser Fund, P/E Managed Fund and Growth Fund carry 1.35% fund management charges. The Balanced Fund, Bond Fund and Money Market Fund carry 1.25%, 1% and 0.25% charges per annum, respectively.
Not so smart a performer
SBI Life Insurance has also floated a plan called SBI Smart Performer which claims to offer 'Higher than the Highest' NAV. It comes with two options - a Secure Plan and Secure and Growth Plan.
The entire corpus of the premium of the Secure Plan will be invested in a 'daily protect fund'. Investors will get returns based on the performance of this Fund and the underlying guarantee. In the Secure and Growth Plan, 80% of the premium will be invested in a 'daily protect fund' and 20% in an index fund that tracks the S&P CNX Nifty Index. The Secure and Growth Plan offers an auto-rebalancing facility. If the money invested in the index fund appreciates or crosses 15%, these gains will be put into the daily protect fund to secure the gains.
This facility is available only for the first six years of the policy term. If the gains do not reach the 15% mark, investors' wealth will be further eroded due to a high tracking error.
The daily protect fund claims to offer 5% higher than the highest guaranteed NAV in the first seven years, or the prevailing NAV at maturity, whichever is higher. The Fund will further charge 0.50% per annum on the daily fund value, by cancellation of units on a monthly basis, to provide the guaranteed NAV. The sum assured is ten or seven times the annual premium, depending on the policyholder's age. The Fund will invest in equity and debt.
The term of the policy is 10 years. It will charge 8.50% for premium allocation in the first year, which will be reduced to 6% from the second to the fifth years. If one takes into account the high charges, the returns will be almost similar to those of a debt fund! These so-called highest NAV products aim to lure gullible investors by concocting confusing methodologies.
Full cover on purchase price
Bharti Axa General Insurance has introduced an add-on insurance product for car owners that will give them the full purchase price of the vehicle, in case of theft or loss, in the first two years after the purchase. This will also cover the road tax and first-time registration charges that a buyer would incur on the vehicle.
This add-on product, called the 'invoice price cover', will be available with the company's motor insurance product, SmartDrive Private Car Policy. Most insurance companies provide cover on the depreciating value, which varies from 20% to 30% in the first two years. This product will enable customers to avail of cover which is equivalent to the purchase price of their vehicles.
After two years, the cover will be based on the normal depreciating value. Motor insurance premium constitutes 3.5% of the car value. The add-on product would increase the premium by 0.25%-1.25% of the value of the vehicles.