Satyam's a Steal

Satyam Computer (SAY - commentary - Cramer's Take) recently announced a deal to spend all its cash (and more) on unrelated businesses with ties to its chairman, creating shockwaves in the investment community. Satyam has since canceled the deal, leaving investors with a good business -- though it will suffer recessionary pressures -- lots of cash and an attractive valuation. This morning the company announced a board meeting scheduled for Dec. 29 to consider future moves, including a company buyback. For investors with a strong stomach for volatility, Satyam may offer a unique contrarian play.

Satyam is an India-based provider of IT services, including application development, consulting, infrastructure management and business process outsourcing. It is the fourth-largest Indian IT services company (based on 2008 export revenues). The company has more than 680 customers, including a large number of Fortune 500 companies, and operates in more than 65 countries worldwide.

India is a leading destination in the outsourcing business. With high-quality service, a large English-speaking population and significant cost advantages in office space and labor, India has prospered as a low-cost provider for IT services. Satyam has performed well during the Indian outsourcing boom; its revenues and earnings have grown in excess of 38% and 35%, respectively, over the last four years.

To date, Satyam's business has been holding up quite well. Satyam recently reported quarterly revenue of $652 million, a year-over-year increase of 28%, and net income of $132 million, a 30% increase; the company beat its guidance for the quarter. The business outlook remains strong, with more than 20 large deals in the pipeline.

Pitfalls

However, everyone is aware that there are storm clouds over the horizon. Nearly 60% of the company's revenue is from North America; almost a quarter of IT revenue comes from manufacturing, banking, financial services and insurance. Satyam certainly has some integration and end-to-end efficiency work that it can pick up, though the impact of the current slowdown could be substantial. Should the current economic slowdown be in place for a few months longer, pricing pressure will likely emerge.

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At the time of publication, Gear had no positions in the stocks mentioned.

Steve Gear was director of capital markets at Stockhouse.