Satyam's Valuation-CLSA

Hi,

Satyam's Founder and Chairman Ramalinga Raju has quit. In a letter to the Board and exchanges, he has admitted that:

Satyam over-stated cash assets: Rs50.4bn out of Rs53.6bn cash assets are "inflated or non-existent"
Satyam over-stated revenues: In Sep quarter, revenues were reported as Rs27bn whereas revenues were actually Rs21.12bn
Satyam over-stated operating profits: Real operating profits in Sep08 quarter were 3% of revenues, which were stated as 24% of revenues.
Satyam also has under-stated liabilities - more details in the attached release sent to the exchanges.
Satyam is now India's Enron. Recent chatter on value emerging in the Satyam stock based on cash per share has been rendered irrelevant. The independence of the Board was already in question, now the auditors' (PwC) complicity in what seems to be a multi-year mis-statement of financials will also be explored.

An embarrassing and shocking episode for Indian corporate governance continues to unravel, surprising all at every step. Legal measures may follow, and introspection too, by regulators, corporates, auditors, and of course, by analysts like us. The 10th January Board meeting now becomes irrelevant. When there is no cash, how can there be a buy back? And where did the cash go? Only an investigation can tell.

So much for the "moral outrage", which is the easy way out. Is there any way Satyam can be valued now? What about 50,000+ employees (is the count of employees real?), and hundreds of customers (the large ones are real for sure); and what about UPaid which had filed a forgery litigation against Satyam?

Book value becomes meaningless, with cash out and asset/debtors unknown or uncertain. A different approach could be that the business, or SOME PART OF THE BUSINESS, is real

M Cap per employee for Indian IT majors = $100-120k
Assume a 70% discount for Satyam
Assume Satyam DOES NOT have 50k+ employees but only 30k in reality
Satyam could be valued at = $120k x 0.3 x 30000 = $900m
Remove still unknown (yet to be disclosed) liabilities of $300m (assumed). Value becomes $600m or about Rs40 per share
Based on the declared real EPS for Sep quarter, and a 8x multiple, price could be Rs25 per share.