Sell Satyam – Accumulate Infosys: Edelweiss

Edelweiss has maintained its Accumulate rating on Infosys Technologies.

A report released on December 10 said: “We recently met Infosys Technologies’ (Infosys) management. ‘The leaders will pull away further amidst this turbulence. It’s now become a zero-sum game of relative performance and not an absolute one- – these two statements constitute the crux of our takeaways from the meeting. Looking at the near term, Infosys is likely to reduce its FY09 growth guidance (in USD) by a further 1.5-2% (some of it for continuing impact of cross-currency and some of it for the environment).

“A sharply deteriorating outlook is perhaps not nearly fully factored in, and we expect negative reaction to this in course of time through the following events: (a) management commentary at the time of Q3FY09 Infosys call accompanied by downgraded earnings outlook for FY09; (b) Cognizant’s annual outlook for CY09 expected in February 2009; and (c) Infosys’ own FY10 guidance (at this point in time, we believe that it could be mid-single digit in USD terms). We revise down our FY10 EPS estimates for Infosys to INR 101.4 (7% down from our earlier EPS estimate of INR 108.7). This translates to a modest earnings decline of about 1% in FY10 over FY09. On revised earnings, Infosys trades at 11.5x FY09 and 11.6x FY10.”

Satyam

Edelweiss has downgraded Satyam to Sell.

A report released on December 17 said: “Satyam’s proposed acquisition of Maytas Properties (unlisted) and Maytas Infra (listed) marks a new low in conduct and integrity of corporate governance in our view notwithstanding that it has called it off later.

“That the acquisition consideration to acquire 100% of Maytas Properties for USD 1.3
bn is egregiously expensive is a minor point in the context of the other factors which
we discuss that bear on this event. Even though the deal has now been suspended,
the P/E erosion that Satyam will suffer is likely to be permanent. We see an immediate decline of 20% in the Satyam stock from INR 227, attributable to P/E damage on account of heightened corporate governance concerns. This comes on the back of recently surfaced issues with the Upaid event and the controversy on the World Bank account. We downgrade the stock to ‘SELL’. Satyam’s investors could be seen to be much more activist in pressing for reconstitution of the board and/or management.

“The cash from Satyam (USD 1.2 bn) was to have gone to the promoter and not to the target companies. If indeed Satyam and its board felt enthusiastic about entering the infrastructure and real estate space in India, then why did the company not prefer a three-way stock-based merger of the entities without taking cash out of the system?

“The deal has been valued in such a manner that the company is not required to seek the approval of Satyam’s shareholders. Notably, the net debt of Maytas Infra shot up to INR 6.4 bn in FY08 from INR 1.8 bn in FY07. Much of this is of a short-term nature which we believe places this entity in an extremely tight position when liquidity is otherwise severely squeezed.

“The deal seems to have been deliberately valued to avoid obtaining share holder approval. Section 372A of the Companies Act, 1956, says the Board of Directors of a company can make any loan, investment or give guarantee or provide any security within the prescribed ceiling of 1) 60% of the aggregate of the paid up capital and free reserves or 2) 100% of its free reserve, whichever is more without passing a special resolution by the share holders. Satyam under above mentioned criterion 1 has USD 1 bn, while under criterion 2 Satyam has USD 1.64 bn, extremely close to the transaction consideration of USD 1.6 bn. Thus, the deal seems to have been deliberately valued to avoid obtaining share holder approval.”

Source : Utvi