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Satyam: Holding its head above water - Outside View by Luke Verghese
 
 
Satyam: Holding its head above water

Altering the etymology

When the -late- Ramalinga Raju in his wisdom decided to christen his foundling as Satyam he apparently did not quite grasp the meaning of this word, or if he did, he did not care. As a matter of fact he almost drastically altered the etymology of the word. He also engineered the exemplary feat of fooling all of the people for quite some period of time. This episode brings back memories of another nattily misnamed company, Fairgrowth Financial Services, promoted by ex-banker B Ratnakar Shenoy. The company grew more by means foul than fair before it too stood exposed.

Now under the tutelage of the Mahindra group, the new managers are uncertain on how the company should stand named. So the blood red front cover of the latest annual report finds the company going by two names-the original, and the new moniker Mahindra Satyam. But this too will come to pass as it gets swallowed up by its bigger sibling Tech Mahindra - sooner than later. The Mahindras are itching to do so but the only obstacle standing between them and a merger is the expected shareholder backlash at the new management taking advantage of the current low valuation of the Satyam scrip to hike the group stake in the new entity. For some unexplained reason the company has also deemed it unnecessary to disclose upfront the shareholding pattern in the company as on the close of books on March 31, 2011.

The chairman goes ballistic

Nevertheless, the chairman of the Board Vineet Nayyar is exultant at what the company has been able to achieve in the year past. In his communiqué (as he prefers to call it) to the shareholders he almost goes ballistic, chortling at the company coming closer to creating a powerful new brand, as also the quick turnaround that the management has achieved. It has been a year of multi-year, multi-million dollar wins, deals and contracts, notable quality recognitions and positive Analyst ratings he adds. He signs off on a heartwarming note by prognosticating that that they are well on their way towards their vision of being the world-s most valued Information and Communications Technology (ICT) Company. Not only will it take more than some doing, but this is hyperbole at its very best! If nothing else he is blessed with the power of positive posturing.

Uncomfortably straitjacketed

Suffice to say that judging from the directors- report and the auditor-s notes to the audited accounts; the company is still very uncomfortably straitjacketed. The devil as they say is in the detail, and in this specific instance it gets grotesque as the auditor-s are unable to come to any opinion on the numerous past accounting entries both on revenue and capital account. (For the matter of record the schedules forming part of the Accounts and the other notes, add up some 37 pages of insufferable verbose prose. One wonders whether the management has even to date got a clue of the full extent of the rot in the company). The management on its part quite unambiguously advances the point that these entries are subjudice and investigations are in progress and such like, and no opinion can consequently be expressed. The disputed figures run into tens of billions of rupees, and given the extent of the carefully perpetrated fraud, and the time span over which it was orchestrated, and add to it the slow moving legal process, one must be prepared for a long duration legal conundrum, which may well make it into the Guinness book of world records. And as if to put a spanner in the works, Raju has now filed counter claims with the company, which itself runs into over Rs 12 billion. Given the convoluted state of affairs, some of his claims may even stick.

Seeing an opportunity of muddying the picture even further, the income tax department has thrown its hat into the ring, and has advanced its own claims of tithes due to the department. Considering that the revenue and capital were inflated and not deflated, it does not stand to reason that there would be any dues to the sarkar. But in any event the department has put its irons into the fire and has directed the company to pay Rs 6.1 bn as back taxes. (It is remarkable enough that the normally lackadaisical income tax department could pull a rabbit out of the hat and even put a finger on a tax due figure). And to drive home the point it issued garnishee orders (seeking to collect the dues either from the company-s bank accounts or from its debtors and such like). For the moment the company has got away by furnishing a bank guarantee for the tax demanded based on a Supreme Court fiat.

Claims and counter claims

The net effect of the claims and the counter claims if and when it materializes is a call which even the almighty would not like to wager on. The company has however very judiciously provided for Rs 12.3 bn (the amount claimed by Raju) as a liability on -Amounts pending investigation Suspense account-. It may also be noted that the total liabilities at year end exceeded total assets by Rs 24.6 bn - up from Rs 23.3 bn previously (this includes the earlier mentioned liability of Rs 12.3 bn). Separately, the balance sheet schedules appear to host provisions on account of doubtful dues of assorted hues running into several billion rupees. It is an Amazonian jungle out there.

The company on the other hand is making haste to settle the foreign claims and has paid out close to Rs 10 bn, with further dues of several billions still in the pipeline. (Is the company entitled to a tax benefit on all these gargantuan claims that it is paying out - or will the IT department put a spanner in the works on the plea that it cannot be treated as business expenditure?) Its anxiety to settle the foreign claims is most understandable. Like all our software biggies it is dependent on North America and Europe for the vast bulk of its succor - a situation which is unlikely to alter in the foreseeable years ahead. For the 12 months ended March 2011, North America accounted for a little over 53% of its geographical revenues while Europe chipped in with another 26.5% - or a cumulative total of 80%. The total revenues from operations in 2010-11 amounted to Rs 47.8 bn against a higher Rs 51 bn previously. One would hardly expect lower revenues to be the fallout of the Chairman-s learned observation of multi year, multi-million dollar wins, deals and contracts and such like. Hopefully the current year will see acceleration in its revenue earnings. The 26% increase in earnings before depreciation, interest and taxes to Rs 7.2 bn was entirely fortuitous, but nevertheless very welcome. More on this development further on in this copy.

Topsy turvy funds flow and some

The funds flow is about as topsy turvy as it can get, and is reflective of the trying times that it is passing through. The gross cash flow from operating activities is a cumulative gainer cum loser of extra large sums amounting to almost Rs 13 bn, just through the modicum of book entries whose composition is decipherable only to the company-s accountants and auditors. But nevertheless it soldiers on. And it is making a go of it too. For sure it is generating net cash flows as witnessed by the cash inflow from investing activities. It is juggling its portfolio as best as it can and consequently generated net cash to the tune of Rs 3.7 bn by year end. Most creditably, inspite of all the past shenanigans that it has to tackle, in addition to working on the task ahead, the debt at year end was a mere Rs 315 m against Rs 420 m previously. The most heartening news of course is that it had cash resources of some Rs 26.5 bn at year end. In addition it has accumulated Reserves and Surplus of Rs 43.8 bn - the entire amount appears to be of the real variety!

And, pray, what do the all important figures tell us? As I had stated earlier, the revenues for the year are down a tad, but other income accelerated to Rs 2.9 bn from Rs 129 m previously. There is no explanation forthcoming for the dip in revenues (from all geographical areas) save a few droppings on the company winning new orders and improving profitability. Besides, the company has availed the exemption not to disclose the amounts and quantitative details of turnover and such like in the Profit and Loss account for the current year. The company states that an exemption is available to it for exporting more than 20% of its turnover for the year. What type of looney bin disclosure exemption is this anyway? The decline in revenues was however compensated for by a fall in personnel expenses which declined over 10% to Rs 32.9 bn. This was due to the cumulative net effect of a decrease in employee count; decrease in forex variations, and in employee handouts. The total headcount at year end was 24,123 associates.

The operational results

The revenues per-se was generated by giving larger dollops of credit than previously. On lower revenues, the trade dues at year end accelerated to Rs 11 bn against Rs 8.5 bn previously. So, in a sense, it was out of pocket on both counts. The higher receivables are after providing for Rs 4.2 bn as bad and doubtful debts against Rs 4.4 bn in the preceding year. The other income was however god sent, and in the main was contributed by three heads of account. Interest on bank deposits hit the high road and clocked Rs 1.3 bn against Rs 521 m previously. There was also the very familiar -below the line entry- being provisions no longer required of Rs 397 m now written back -above the line-. But the biggest game changer was a rather fortuitous one and cannot be relied on for a repeat performance. Providentially enough it took the right call on its forex receivables. The net result was that forex gains chipped in with Rs 573 m against a negative income of Rs 868 m previously. That is to say there was a turnaround of Rs 1.4 bn in revenue accretions on this count.

Going forward

It is very difficult to take a call on this company in the nearer term after perusing the figures that make up the vitals of this company. There is very little meat to go by, for one. The management on its part is very modestly erring on the side of caution by not making any bold and forward looking statements. This is most understandable. It may take years before the management is able to uncover the mysteries of the previous management-s creative accounting. The net effect of the many claims against the company and the provisions that it has made for past ghost entries cannot be settled in a hurry. For the present the management has adopted the right procedure for providing for depreciation in the value of assets where it suspects that there is wrongdoing. Almost its entire investment portfolio in subsidiaries and associates is provided for, as a case in point.

But on the brighter side, the new management appears more than up to the task, and besides, there is the brand equity of the company to fall back on. There is a system in place and the human resources to back it up. At some point it will rise Phoenix like to soar once again. How soon is the moot point.

Disclosure: I hold 900 shares in Mahindra Satyam

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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Equitymaster requests your view! Post a comment on "Satyam: Holding its head above water". Click here!

1 Responses to "Satyam: Holding its head above water"

Dr. Maulik Suthar

Aug 4, 2011

Hello Mr. Luke Verghese.

I like your articles in this column, they shows in depth analysis and are very enlightening.

I have a request to you about the in-depth analysis of the 'Rane Holdings Limited (RHL)' if feasible to have an article about it, especially it's durable competitive advantage and it's huge client base over other market players.

Thanks in advance


Dr. Maulik Suthar
Gandhinagar

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