Don't see Satyam as going forward: iGATE CEO

CEO of iGATE, Phaneesh Murthy stated that the company is less concerned about Satyam's margins and more on revenues. He feels there is a need to analyse impact of key customers exiting on Satyam's revenues.

According to him, shareholder loss in Satyam could be around $100 million. However, he believes that it is tough to put number to overall liability of Satyam. He expects number of serious bidders to come down dramatically and doesn't see Satyam as $2 billion revenue company going forward.

Here is a verbatim transcript of the exclusive interview with Phaneesh Murthy on CNBC-TV18. Also watch the accompanying video.

Q: Have you been able to arrive what could be the reasonable price that a bidder could pay for Satyam given the information that is at hand and given the general information that you are picking up from your channel checks on what their financials could be?

A: Not yet. The key information which we do not have yet which will be 2009 which is January and February financials of 2009 which we have been promised post this Friday and also management estimate of what 2009 revenues will look like because there are three components of revenue which we know will be significantly off from $ 650 million odd which was reported in the September '08 quarter.

The three components are: (1) we need to verify whether any of the revenue was fraud revenue or not (2) because of the recession work will be getting cut; work is getting cut from all companies and Satyam is no exception (3) a lot of the customers have been leaving and lot of customers are still leaving. So given the last point no current financials can capture because of the fact that if a customer is leaving or has left in February; January and February financials doesn't capture that impact but management estimate of 2009 revenues will. So, on the revenue side that's a key piece of financials.

Given the nature of what we know about the company, the pricing and so on we know that we can get it to a margin structure of around 18-20% EBITDA in a couple of years. So we are less concerned about the margin side more concerned on the revenue side and huge concern on the liability side where we have some models and estimates but we need to understand the company position a lot more. So the key pieces of information which will come out from the company which we will get access to build all our prices and bid model will start probably after this Friday.

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Q: Having said that you probably have some assessment of what Satyam's revenue profile from what you just indicated that you know about some clients leaving, revenues coming off and if you put in that kind of a discount to Satyam's revenues and then you try and price in what you will have to pay and what you will have to pay out or factor in for the class action suites. Do you see yourself paying more than the current market price or do you think any bid from your end will have to be at a discount roughly speaking?

A: We will have to wait for the full financial information but what we have picked up from the knowledge in terms of financials and all of these three factors which I talked about and stuff like that, I do believe that our bid will be quite a bit south of the 90 cents a share which is currently the market price of Satyam.

Q: Where do you think fair value might lie for Satyam right now - Rs 20-30 range, less than that?

A: The problem is that I do not know because we haven't yet got access to the right information, is it Rs 20, is it Rs 30; is it Rs 10, is it Rs 40, I do not know but it's certainly not at the current Rs 45 range – that we have pretty much established based on some of the other indicators that we are seeing. And can the company come up to much better range given a couple of years? The answer is yes based on the kind of customers they have.

Q: Not just yours or bidders assessment of what the real value of Satyam could be, do you think because most of the bidders or many of the bidders are actually publicly listed entities. There could be constraining factors give the nature of liabilities where even if they thought they could extract value they might be restrain to go out in a limb and bid for it?

A: I think so. I think this is going to be a very difficult transaction for a public company to pull off. While we are public, we believe that we are a lot more entrepreneurial and to be honest we are actually struggling with it, some of the factors which I talked about on the revenue reduction and the liabilities side. The liabilities are coming in multiple shapes and shareholder loss that is one set of liabilities which is coming in. We know that there are liabilities in terms of loans to banks which is probably the most easily quantifiable.

Q: To work the numbers a bit from what the board has asked for. There is a Rs 100 crore guarantee that you need to pay straight up then there is a Rs 1,000 crore cash infusion they are talking about with Rs 700 crore presumably for bankers liabilities. In terms of cash how much are you willing to spend on this acquisition?

A: I think its going to be dependent on financials. We have a strong private equity partner; it's a $ 5.5 billion fund, so they have the wherewithal to take care of it and in the next few days we will be able to announce the name. I think we have probably picked the best kind of PE partner for this kind of a job.

I think we are struggling to come to terms with the liabilities of the company because there is other essential liability which potentially is looming large on the fact that Raju has claimed that he has loaned money to the company. So there are these kinds of things which we still have to get adequate documentation once we get into the company to understand it a little better and then we will be able to make some calls on how much we are willing to pay. I think it's not the question of wherewithal right now because of the fund that we have been able to tie-up with but it's what is the willingness to pay and what kind of price we are willing to pay.

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Q: You mentioned earlier that you have done your own checks on models on what the liability amount could be ballpark even – is it close to USD 100 million mark or quite a distance away from it?

A: I think just the shareholder lawsuit is probably around that order of magnitude but there are the other liabilities that we still need to get our hands on. But the number of shareholder lawsuit and class action – we have got assessments saying from law firms indicating that it can probably be settled around that figure. There is no guarantee of course of that and when we factor in a price obviously we will put some cushion and so on and then only bid but that's roughly the order of magnitude from the shareholder lawsuit side.

Q: How aggressive do you think MNC companies can be given the nature of the lawsuit and the liabilities in this game because that's one hope for the investors that the MNCs will probably bid more aggressively. Having worked with these companies in the past do you sense that some of these MNCs could be aggressive in bidding for Satyam given the nature of the liabilities?

A: I think it's a big struggle for any public company to bid for this company. We are public company; we believe we are little more entrepreneurial, we are willing to take little more risk and we are struggling with this transaction. So I believe that it's going to be big struggle for any public company and any MNC to be honest to do this and therefore while there are multiple players in the fray, I do believe that net-net the number of players is going to come down dramatically very soon.

Q: What do you make of the Upaid case because that potentially could be even bigger than the class action lawsuits but that is not getting enough attention? Do you think that can be settled at a fraction of what they are asking for?

A: In general all lawsuits start off with a number of zero attached to them. Then slowly it winds its way down a little. I have no expertise in this area so I have to rely on some legal help and they have models to try and figure out what these things could be settled at, that's the basis on which are going ahead.

Q: What's worrying you the most right now, as someone who is interested in buying this company. The size of liabilities you might have to deal with or the kind of haemorrhage the company maybe seeing in terms of losses of clients?

A: I think it is really both. The fact is that, the amount of time that it is taking is creating erosion of value. I am an IT professional, if you ask me what are the assets in the company, I will say it is clients and its employees. Somebody might feel that the assets are somewhere else but those are the primary assets as far as we are concerned, that we are interested in. The physical infrastructure and the physical assets of land automatically come with it but these are the primary assets. Now they are haemorrhaging and therefore the potential to convert this into a profit making company, the potential to build on scale, all that will be going down as these clients are haemorrhaging. So it increases the risk of being able to convert into profitability.

On the other hand, the liabilities are really scare, with the numbers that you said which are being thrown around are quite high. It is possible to get two-three crosschecks of legal firms to come in and estimate that these can be settled at this price and nobody gives a guarantee. I think this is a reason why public companies and MNCs will find it very difficult to bid effectively for Satyam.

Q: What is your assessments from the IT market at large not from the information that you have got from the Satyam board but forget the $ 650 million which they have reported in December quarter. Do you think Satyam is running today at a run rate of half a billion dollar ($ 0.5 billion) a quarter. Is it a $2 billion revenue company in your eyes in the next one-two years?

A: I do not think so. But I am not going to say anything more. It is still a comparative situation and obviously I do not want to put all the models on the table right now.