Satyam becomes third Indian IT company to list on NYSE

High oversubscription for a debut ADR by Satyam Computer indicates that there might yet be life in the Asian equity markets.

Lead manager Merrill Lynch increased the deal by its maximum 20% limit after books closed yesterday (Tuesday) seven times oversubscribed. Consequently, instead of selling 12.5 million units, the software services company sold 14.5 million, raising $140.8 million, or $162 million should a 2.175 million unit greenshoe be exercised.

Co-lead was Deutsche Bank, with Bank of America, CLSA and Salomon Smith Barney as co-managers.

As well as being able to increase its deal, the company's second major achievement was to price it at parity to the underlying stock, which closed at Rp228.2 ($4.86). With one unit equalling two shares, this priced the New York Stock Exchange listed deal at $9.71 per ADR.

Bankers attribute success to the high demand the company was able to draw from both Indian and tech funds. There is said to have been a 60%/40% split in favour of the former, although a number of larger accounts split orders between two funds. A total of 130 investors are also said to have participated, placing a minimum average order of $8 million. Geographically, demand was fairly evenly split, with 35% going to Asia, 30% Europe and 35% US.

"The combination of the right company and a reasonable valuation was the main reason why this deal worked," says one observer. "Tech investors are sitting on a lot of cash and they are willing to play, but they're being very careful. It takes the right story to get them interested. They don't want semiconductor companies with high capex and uncertain prices. With Satyam they saw a good opportunity to come in early and build up a large position."

In terms of valuation, Satyam is currently trading at 14 times 2002 earnings, compared to multiples in the 30 times and 40 times range for comparables Wipro and Infosys. Analysts comment that a more reasonable valuation for the company should fall in the mid 20 times range.

"The reason it's trading much lower is because of losses at subsidiaries Satyam Infoway and VisionCompass, but we're forecasting these will perform much better over the coming year," says one Bombay-based analyst. "To the end of March 2002, we think the two will only affect the profitability of the company by about 10% to 15%. On a standalone basis, the company posted a profit of Rp3.9 billion to the end of March and next year we believe it will increase up to about Rp5.1 billion."

The reason underlying the optimism is the company's strong international client base and its focus towards the manufacturing and financial services industries rather than telecommunications. At 59% of total revenue, analysts say that Satyam derives the highest proportion of revenue from offshore activities of any company in its sector.

"Although it might seem as if a global slowdown would affect this, the opposite is true," the analyst continues. "A lot of US corporates looking to cut costs are starting to outsource their computer operations and Satyam being so cost-efficient is picking up the business. We have a buy recommendation on the stock."