Negative cash flow for two years in Satyam-TRW JV

NetScribes/Ganesh Ramamoorthy

The joint venture between Satyam Computers and the $17-billion TRW Inc is likely to post negative cash flows for the next two years.

The JV, which was formed in June 2000, has Satyam holding 76 per cent and TRW with 24 per cent. Satyam has an option to buy out TRW's stake after December 31, 2003. The pricing of this 24 per cent stake is based on a formula, which takes into account the business volume passed on to the JV. Satyam can pay for this through cash or issue its own equity. Satyam has chosen to make its first payment with equity. On Tuesday, Satyam sold 5 per cent of its stake in the JV to TRW. This is for the business that has been passed on to the JV so far.

In a report on emerging markets, US based securities firm, SG Global Research said, "The reason for a separate JV is not fully clear as Satyam is diluting to TRW anyway and it is a related business."

"We are not sure as to the rationale for the JV, especially since Satyam is giving a part of its own shares to TRW through warrants now. Also, in end-2003, Satyam can buy out TRW's stake by giving further share of its own equity. Also, the business is of a related nature and Satyam is present in all these areas," the securities firm said.

As per the JV, TRW would outsource work to the JV in the areas of enterprise resource management, supply chain management, information systems, e-business application and engineering services. All these are areas where Satyam already operates.

While analysts say the JV could be to avoid parting of stake in the larger parent, SG Global Research feels that the JV's bottom line could be hit by about 5 per cent over the next three years.

"It is likely that the JV would have slightly lower billing rates and margins than Satyam. And though the revenue streams are assured, the additional capital needs for the JV would be significant," SG said, adding that it was not clear if the business would be executed in the JV or if the JV pass on the business to Satyam.

In any case, SG Global expects the investment for infrastructure to well exceed the $1-million paid-up capital. "So we believe Satyam would need to make investments in the JV, which could be front-ended and have not been specified. There could be a negative cash flow impact for the first two years for Satyam," it said.

On Tuesday, Satyam sold 5 per cent of its stake to TRW for Rs 716, Rs 232.15 more than Satyam's Monday closing of Rs 483.85. Following the announcement of the sale, Satyam shares rose nearly 4 per cent on Wednesday. Shares rose by 3.98 per cent to Rs 503.10 from the previous close of Rs 483.85. A total of 804,000 shares were traded during the day at the Bombay Stock Exchange.

"Though the news was already known, there has been some buying after the news was published, mainly due to the high sale price," said an analyst with Tata Mutual Fund. He expects the impact to be temporary and doubts the sustenability of the rise. Satyam's shares are currently trading after a five-for-one stock split.

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