L and T @Satyam

We are witnessing a rather perplexing event in corporate India- a professionally managed company like L and T increasing its holding in Satyam - a limited liability company with still undetermined liability !
Satyam as an entity is the target of two very definitive claims - one from a customer Upaid which has alleged Intellectual Property Infringement and the other from ADS shareholders by way of a class action suit . The former liability is estimated at USD 1 billion and the latter could be in the region of USD 4 billion. There could be some intelligent guesses that L and T could be making on these numbers and could have revised these liabilities substantially downwards but still one cannot wish them away as if they do not exist.

The key question therefore is what is the Enterprise Value that L and T is ascribing to Satyam and consequentially what is the equity valuation?.Today's closing price of the scrip imputes a market capitalisation of INR 3300 crores. If one adds a conservative liability figure of atleast 2.5 billion USD ( usd 500 million for Upaid + 50 % of the class action liability(while the average settlement to potential investment losses ratio is around 17 % , Satyam is an exception where they would be claimed against for multiple allegations of Misleading statements, Failure to disclose,Insider trading, Improper Accounting,Revenue Recognition,Siphoning Of Funds et al and i believe the figure could be closer to 50% ), then we are valuing Satyam at over 3.2 billion USD.

Therefore is Satyam worth USD 3.2 billion?

Top tier IT firms are getting valued at between 1.8 to 2.2 times revenues and these companies have cash which is up to a good 10% of their market cap. Satyam which has almost nil cash at the moment is expected to have a realistic revenue of 1.8 billion USD for this fiscal. Even if one were to give it a 1.5 revenue multiple (adjusting for its lower operating margins compared to TCS and Infosys), then the EV of Satyam should be in the region of 2..75 Billion USD.So even the optimistic scenario suggests that there is a gap of 0.5 billion USD gap in the valuation assumptions made by L and T. This is of course subject to the caveat of L and T being able to do the open offer at a price not exceeding Rs 50 per share.

The other important Caveat is that the Satyam business remains intact - a very difficult proposition given the current circumstances . As of now there is no guarantee that Onsite salaries would be paid for the next month as the current board has not been successful yet in raising badly needed working capital.Given this scenario one wouldnt be surprised if there is attrition of key resources at crticial customer engagements which would lead to client dissatisfaction and eventual winding down of the business relationship . Unless there is white knight (as of now it seems like L and T )and the white knight moves in with great speed, we can surely see enormous value destruction taking place in a matter of 3-4 weeks.

Therefore it is imperative that L and T comes clean with it gameplan and be quick at that else they could end up at the receiving end of shareholder litigation which could well be avoided. As it is there are more questions than answers and L and T would be well advised to share the "more information"(that A M Naik seems to possess) with their shareholders and public at large!!