Satyam's a Steal

Now for the big question: Why would the company consider spending so much on a totally unrelated business with ties to its chairman? The company cited business diversification and a good opportunity in the future growth of Indian infrastructure, but the idea made little sense to the Street. Though the chairman may have some private knowledge about Indian government policy and economics, I can't see a good answer here. All I can say is that the company did bow to investor outrage and canceled the proposed transaction.

A Solid Outlook

So what should investors make of Satyam? The recent attempt at irresponsible spending will place a cloud over the company for quite some time. But investors should take an objective look at where we are from a contrarian perspective. With the deal canceled, Satyam has a substantial business, with more than $1 billion in cash. Satyam may well be too important to the Indian capital markets and IT industry for the country to allow something like the previously proposed transaction to happen.

The stock has an enterprise value of about two-thirds of its market cap, making it a prime candidate for a takeout, stock buybacks or special dividends. I suspect that EPS estimates for fiscal 2010 may have to come down, but at 5.5 times forward earnings, this stock's valuation covers a lot of earnings estimate revisions.

The stock has fallen from the $12 to about $8 this week, and the upcoming board meeting may provide good news for shareholders. I suggest that contrarian investors with a stomach for volatility take a long, hard look at Satyam as an opportunistic play on a corporate event at these levels.

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Know what you own: Gear mentions Satyam Computer. Other India-based ADRs include Infosys (INFY - commentary - Cramer's Take), ICICI (IBN - commentary - Cramer's Take), HDFC Bank (HDB - commentary - Cramer's Take), Tata Motors (TTM - commentary - Cramer's Take), Sterlite Industries (SLT - commentary - Cramer's Take) and Wipro (WIT - commentary - Cramer's Take).

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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.