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Sunday, January 11, 2009

Companies that may cook books!

After the Satyam debacle it would be better idea to stay away from markets for few days.

DLFs non-DAL revenues declined 44% QoQ to Rs22.5bn and around 40% of sales have been to DAL, a group entity. 44% of debtors are DAL and of total debtors, the share of DAL has increased during the quarter with DAL receivables increasing by Rs14.5bn QoQ.
During 1QFY09, sales to DAL were Rs15.6bn, which is marginally higher than the increase in receivables from DAL. We would like to add that DLFs high level of transactions with group company DAL and high level of receivables has been a point of debate since it went public.
Dr Reddys Labs:Dr. Reddy's has adjusted mark to market losses on outstanding US$250m of hedges in balance sheet, while P&L reflects forex gains realised. The company also reclassified its contract manufacturing business (CPS) revenues into API and Formulations, which makes it difficult to analyse its segmental performance.

HCL Tech:
HCL Tech has normally had a very large hedge position compared to its revenue base. While the rupee was appreciating, the company reaped benefits of this and reported US$79.2m in Forex gains in FY07. The company has always maintained that it would prefer to lock-in a constant INR/US$ rate through hedging rather than suffer from the currency volatility.
However, the company unwound US$540m of hedges in Jun-08 and booked large Forex losses. We find this change in Forex policy surprising and the company has likely brought forward its potential FY09 FX losses to 4QFY08 through this change in policy.

JP Associates:

Jaiprakash Associates did not provide for FX losses on outstanding FCCBs of US$400m through its P&L and plans to provide for the FX losses/ gains at the end of the year.

Jet Airways:

Jet Airways changed its depreciation policy from WDV to SLM, and thereby wrote back Rs9.2bn into its P&L, which helped the company to report profits during the quarter. It also helped Jet to report higher net worth, which will help in keeping reported gearing low. This is a one-time exercise. Jet also capitalised Forex loss of Rs6.2bn on Forex debt and adjusted it against carrying value of fixed assets.

Prajay Engineers Syndicate:

Hyderabad based developer, reported a loss in its fourth quarter results against expectations of a profit. The company "lost" records for a project worth 40% of its annual revenues at the site office.
The company in its press release said - "After the year end, basic records relating to sale agreements / revenue and construction expenses of one of the Projects of property development were lost at the site office, Vishakhapatnam. The auditors in their report have stated that they were not able to verify the books and records relating to income of Rs1437.71m and relevant construction cost of Rs752.654m. Management is making all efforts to locate/ retrieve the lost records."


Pharma major has mark to market losses of Rs9.09bn on forex derivative contracts, which have not been provided for because the company believes "the gain on fair valuation of underlying transactions against which the derivative transactions were undertaken amount to Rs10.3bn." This argument is against the principles of conservative accounting wherein mark to market losses are being offset against assumed future profit.

Reliance Communications:
Telecom Company has adjusted short term quarterly fluctuations in foreign exchange rates related to liabilities and borrowings to the carrying cost of fixed assets. The company adjusted Rs1.09bn of realized and Rs9.55bn of unrealized Forex losses in the above manner.
In addition, the company has not recognised Rs3.99bn of translation losses on FCCBs, since the FCCBs can potentially get converted, although the FCCBs are out of money. Adjusted for all the above, the company would have virtually no profits in 1QFY09.

Reliance Industries:
In continuance of its policy, adjusted "foreign currency exchange differences on amounts borrowed for acquisition of fixed assets, to the carrying cost of fixed assets…which is at variance to the treatment prescribed in AS11." Had AS11 been followed, profits for 1QFY09 would have been lower by Rs9.4bn (23% of reported net profits).

Sobha Developers:
South Indian developer changed its accounting norms in 1QFY09 for revenue recognition which facilitates revenue being recognized earlier in a project cycle. According to its press release, if the accounting policy had not been changed, the company's 1QFY09 PBT would have been lower by 20%.
Excerpts from the company's press release: "With effect from April 01, 2008 the Company has changed its accounting policy for revenue recognition for sale of undivided share of land (group housing) on the basis of certain minimum level of collection of dues from the customer and / or agreement for sale being executed rather than criteria relating to the project reaching a significant level of completion to align it with revenue recognition policy for sale of villa plots.
This has been resulted in additional revenue recognition and higher profit before taxes of Rs321m and Rs150m respectively during the quarter ended June 30, 2008.

Tata Motors:

Company has transferred 24% stake in Tata Automotive Components (TACO), a company with revenue of US$675 in FY07, to Tata Capital, a group company, and booked profit of Rs1.1bn in 1QFY09. Management has declined to disclose the valuation methodology.
Senior management of Tata Motors, in a conference call with analysts, said, "I would not be able to share with you the specific valuation methodology, except to say that the things are done by an independent reputed firm and based on the company's track record and the future business opportunity."
Tata Motors has also changed its methodology for calculating provisions for doubtful receivables, which resulted in higher reported EBITDA to the extent of Rs507m (10% of EBITDA).


The software major increased its depreciation policy on computers from 2 years to 4 years. As a result, 1QFY09 PBT was higher by an estimated Rs500m (c.4% of net profit in 1QFY09). TCS follows cash-flow hedge accounting and till FY08, it used to recognise hedging gains on effective hedges in its revenue line, thus boosting the reported revenue growth and EBIT margin.
In FY08, TCS had Rs4.21bn from hedging gains, of which, Rs1.37bn was included in the revenue line. However, from 1QFY09, TCS will report all Forex losses/gains below the EBIT line in other income. Thus the losses it had on its hedge position will no longer be booked in the operating line.

Zee Entertainment:

Media company withdrew its buyback offer "for the time being" without assigning any other reason. This happened after SEBI made it mandatory that companies will have to complete the entire buy back within the stipulated time, if the stock is trading below the maximum buy back price at the end of the buyback period and the buyback amount has not been completed.

DP DISCLAIMER: This is a individual opinion - please do your own research. This was a forwarded message with a intention to spread panic :-)

Weekly Stock Picks - Jan 11 2009

Buy Infosys

Buy Dabur India


Buy IVRCL Infra

Buy Maruti

Weekly Newsletter - Jan 11 2009

Show me the money. That’s what everyone will demand as the much awaited result season gets underway. Infosys will once again be in action as it declares its results on Tuesday and with the Satyam revelations, investors and analysts will try to micro-probe companies even further. The IIP numbers on Monday will kickstart the proceedings for the week and global cues will just about dictate the start and end of each session. Result-specific activity will be the order of the coming weeks. Any further bombshells in terms of disclosures and insider activity in shares will hurt the already battered sentiment further.

Financial crisis presents opportunity for Asia: Jeffrey Sachs

The global economic crisis should be viewed by Asia’s policymakers as an opportunity to expand investment in "desperately" needed public goods, economist Jeffrey Sachs told an ADB audience.

Professor Sachs, director of the Earth Institute at Columbia University and a special advisor to UN Secretary General Ban Ki Moon, was speaking at ADB Headquarters today as part of the Distinguished Speakers Program.

In a lecture titled "Achieving Global Cooperation on Economic Recovery and Long-Term Sustainable Development", Prof. Sachs said that with the drop in external demand for Asian exports, the region will "have to rely on public spending," such as infrastructure, health, education and energy reforms.

"Asia needs all of that desperately," Prof. Sachs said. "This is still the region of the world with the fastest urbanization, with the most dramatic need for pollution control, for cleaning up the energy sector, for cleaning up the rivers, for sustainable urban development, for accommodating the migration of hundreds of millions of people from rural areas to urban areas. I like to view this crisis as an opportunity for Asia given the chronic underinvestment in public goods. Public spending has a very high social return and also has a very high macroeconomic purpose right now."

He said that with around $4 trillion in foreign exchange reserves, large current account surpluses and low inflation, Asia is well placed to expand public spending.

Strikes cripple normal life...

The nation was hit by a couple of potentially crippling strikes - one by transporters and another by oil sector officers. The PSU oil officers' agitation for higher pay lasted three days, and hit fuel supply to both individual consumers as well as industries. Petrol stations across the nation witnessed long queues with pumps reporting shortage of fuels. This led to several thousand vehicles staying off road, causing inconvenience to daily commuters. Air traffic was also affected due to shortage of jet fuel. The Government called the strike illegal and invoked laws that forbid obstruction of supply of essential commodities. The home minister said the Government would take firm action against oil company officials to end the strike while an oil ministry official said the army may be asked to help restore fuel supplies. The strike entered its third day on Friday after talks failed late on Thursday between the Government and officials of state-run firms that dominate the county's energy sector and control almost the entire supply of transport fuels, natural gas and domestic crude. HPCL did not join the strike but its operations were affected by the truckers strike. By Friday evening, the striking workers from other oil PSUs were back to work.

Separately, the truckers' strike that began on Monday added to the Government's woes, with supply of essential commodities hit partially. Some states invoked the Essential Services Maintenance Act (ESMA) to maintain availability of essential commodities and prevent prices from escalating. Warning the striking truck operators of more arrests under ESMA, the Government said it plans to run 15-20 lakh vehicles in the next few days for uninterrupted supply of essential commodities. The vehicles would be arranged by impounding trucks and allowing other private vehicles for transportation of commodities without permit, said Transport Secretary Brahm Dutt. He also said that a few truckers have been arrested under ESMA and more arrests would follow shortly. Describing the stand of the truckers as irresponsible, Dutt said he is in touch with the transporters but they are holding on to their demands. The truck operators are asking for a Rs10 reduction in diesel prices, waiving the toll tax, interest on truck finance for six months, and free movement of trucks across the country without state permit

Satyam Computer Services Limited

Satyam Computer Services Limited

Reliance Industries, Reliance Petroleum

Reliance Industries, Reliance Petroleum

India Real Estate Sector

India Real Estate Sector

HDIL, Indian Oil, HPCL

HDIL, Indian Oil, HPCL

Results Calendar - Jan 12 - Jan 18 2009

Jan 12 2009 Fertilizers & Chemicals Travancore Ltd
Jan 12 2009 Jay Bharat Maruti Ltd
Jan 12 2009 R S Software (India) Ltd
Jan 12 2009 Sical Logistics Ltd
Jan 12 2009 South Indian Bank Ltd
Jan 12 2009 Srinivasa Hatcheries Ltd
Jan 12 2009 Welcast Steels Ltd
Jan 13 2009 CMC Ltd
Jan 13 2009 Geojit Financial Services Ltd
Jan 13 2009 Motilal Oswal Financial Services Ltd
Jan 13 2009 Nitta Gelatin India Ltd
Jan 13 2009 Sanghi Polyesters Ltd
Jan 14 2009 Capman Financials Ltd
Jan 14 2009 Chase Bright Steel Ltd
Jan 14 2009 GRUH Finance Ltd
Jan 14 2009 Honda Siel Power Products Ltd
Jan 14 2009 Indian Bright Steel Company Ltd
Jan 14 2009 NIIT Technologies Ltd
Jan 14 2009 PSI Data Systems Ltd
Jan 14 2009 SBI Home Finance Ltd
Jan 14 2009 Sheetal Bio-Agro Tech Ltd
Jan 14 2009 Supreme Industries Ltd
Jan 15 2009 Automobile Corporation Of Goa Ltd
Jan 15 2009 Bajaj Auto Finance Ltd
Jan 15 2009 Bharat Seats Ltd
Jan 15 2009 Hindustan Oil Exploration Company Ltd
Jan 15 2009 IndusInd Bank Ltd
Jan 15 2009 Infotech Enterprises Ltd
Jan 15 2009 JK Lakshmi Cement Ltd
Jan 15 2009 KDDL Ltd
Jan 15 2009 Maharashtra Scooters Ltd
Jan 15 2009 Modern India Ltd
Jan 15 2009 Rallis India Ltd
Jan 15 2009 Sarang Chemicals Ltd
Jan 15 2009 Shree Rani Sati Investment And Finance Ltd
Jan 15 2009 Sirpur Paper Mills Ltd
Jan 15 2009 Sonata Software Ltd
Jan 15 2009 State Bank of Bikaner and Jaipur
Jan 15 2009 Tilaknagar Industries Ltd
Jan 15 2009 Zyden Gentec Ltd
Jan 16 2009 BNK Capital Markets Ltd
Jan 16 2009 Camlin Fine Chemical Ltd
Jan 16 2009 Can Fin Homes Ltd
Jan 16 2009 Eastern Silk Industries Ltd
Jan 16 2009 ETC Networks Ltd
Jan 16 2009 HB Portfolio Ltd
Jan 16 2009 HB Stockholdings Ltd
Jan 16 2009 Munoth Capital Market Ltd
Jan 16 2009 Standard Industries Ltd
Jan 16 2009 Sudal Industries Ltd
Jan 16 2009 Vimta Labs Ltd
Jan 16 2009 VST Industries Ltd
Jan 16 2009 Zensar Technologies Ltd
Jan 17 2009 Alufluoride Ltd
Jan 17 2009 HB Estate Developers Ltd
Jan 17 2009 Indo Green Projects Ltd
Jan 17 2009 Industrial Investment Trust Ltd
Jan 17 2009 Jaypee Hotels Ltd
Jan 17 2009 Kewal Kiran Clothing Ltd
Jan 17 2009 PNB Gilts Ltd
Jan 17 2009 Samtel Color Ltd
Jan 17 2009 Sanghi Corporate Services Ltd
Jan 17 2009 Sasken Communication Technology Ltd
Jan 17 2009 Yuken India Ltd
Jan 18 2009 Nucleus Software Exports Ltd
Jan 18 2009 PTL Enterprises Ltd

Rural Electrificiation Corporation

Investors with a low-risk appetite can consider taking exposures in the State-owned Rural Electrification Corporation (REC) stock as it is trading at attractive valuations. High demand for funds on the back of huge capacity-addition targets, a relatively low cost of funds as it can float tax-free bonds, advances secured by government guarantees and zero mandatory reserve requirements are key investment positives.

At the current market price of Rs 76, REC trades close to its book value and six times its expected FY-09 earnings. It trades at a substantial discount to peers PFC (12 times) and IDFC (11 times).
Strong Business

REC was recently awarded Navaratna status, endowing it with greater managerial autonomy and access to more funds, without the government’s prior approval. REC was primarily set up to fund State electricity boards for electrification of villages, especially in energising agriculture pumpsets, but has since expanded far beyond its original mandate and is now a broad-based power financier similar to PFC.

Power generation companies (to which it started lending only from 2003) accounted for 33 per cent of outstanding advances as on June 30, 2008 and their share is expected to go up to 50 per cent in future quarters. REC is also diversifying its disbursement by lending to private sector projects (now 6 per cent of total advances).

The power-for-all programme (which envisages major investment in rural electrification and generation) is expected to add additional 92,000 MW in the Eleventh Plan (2007-2012) and lending to state utilities for upgradation, renovation and maintenance of existing projects, to new projects in generation and for 100 per cent metering, all offer scope for advances growth. REC expects to lend Rs 1,00,000 crore in the Eleventh Plan. Additionally, REC is acting as a nodal agency for the Rajiv Gandhi Grameen Gruha Vidyutikaran Yojana (RGGVY), which has an investment outlay of Rs 33,000 crore, of which 90 per cent is given in the form of grants by the government and 10 per cent is funded by REC.

REC will disburse around Rs 3,300 crore under this programme. It will also get commission of 1 per cent — Rs 330 crore over a five-year period.

REC’s advances have grown at 19 per cent CAGR for last five years, while operating profit grew at 13 per cent in the same period.

Net profit for the first half of 2008-09 has, however, jumped 41 per cent on the back of higher advances growth. Even as advances may continue to grow at healthy rates, profitability may grow at higher rates than the historic rate; as cost of funds fall even as loans have been locked in at higher rates.

As of March 2008, secured bonds constituted 67 per cent of the total borrowings for REC. The gap between cumulative disbursements (Rs 75,000 crore as on March 31, 2008) and amounts sanctioned (Rs 1,79,526 crore), suggest room for growth in advances even without any fresh sanctions.

The company’s asset quality appears good given that by March 2008, 98.4 per cent of the disbursed amount was recovered as per schedule. Non-performing assets stood at 0.8 per cent in March 2008. Most of the disbursements are long dated with three-year and 10-year reset clauses. REC’s ‘other income’ is currently low, but new subsidiaries such as REC Transmission and Distribution may have potential to increase this component.

Fresh sanctions apart, the Rs 1,00,000-crore gap between sanctions and disbursements point to healthy growth in the loan book. REC’s lending rates have not yet been revised in proportion to the falling rates in the market (the rates last hiked on October 1, 2008 and lending rate ranges between 12.75 per cent and 14.0 per cent). Though existing loans have been locked in, fresh lending may require REC to reduce rates to some extent, failing which borrowers may choose to wait.

REC plans to buy equity stake in coal-rich power projects which will help in diversifying from core-lending business. It also plans a joint venture with companies and expression of interest (EOI) was issued. It has already ventured into consultancy and transmission businesses.

REC may gain access to overseas funds with the recent RBI measure of removing cap on the external commercial borrowing (ECB) rate. ECBs can be raised at lower rates compared to domsetic bond issues, with the libor falling to 0.1 per cent. The sovereign rating for REC’s foreign currency bonds are also a help though rupee volatility may be a risk.
Risks and concerns

SEBs, which account to more than 90 per cent of their loan book, are not showing any signs of turnaround and still have a long way to go in up-gradation of transmission and distribution equipment.

For now, REC is protected by government guarantees, Escrow accounts are maintained to shield against the losses incurred by SEBs. In future, unbundling of SEBs and their privatisation could lead to the government stepping away from the present system of guarantees to back up SEBs. Any slowdown in commencement/execution of the projects may also delay the payments. The possibility of REC coming under RBI purview may also lead to more stringent capital adequacy and provisioning requirements.

Tulip Telecom

Investors with a two-year horizon can buy the shares of Tulip Telecom, a data connectivity provider in the domestic market, considering its strong business prospects and attractive valuations. At Rs 430, the share trades at a modest valuation of seven times its likely 2008-09 earnings. Tulip has maintained healthy growth rates in its business over the last three years, including in the first half of the current year. Its revenues and profits have grown by 52.2 per cent and 37.1 per cent respectively. Strong technical advantages in its operations and continuing engagements with high-value clients with big technology spends give Tulip an edge in the domestic market.

Tulip offers wireless last-mile connectivity for its Virtual Private Network services. ‘Last mile’ here refers to the connectivity between the company’s point of presence in any city to the client’s premises in that city. The Internet Protocol VPN market is estimated to be Rs 3,343 crore in size by 2013, growing from the current Rs 1,200-crore levels, according to Frost & Sullivan. Tulip is estimated to have a market share of 37.8 per cent in this segment. Further, the domestic enterprise data market is put at Rs 13,393 crore by 2013.

Tulip has over 900 clients across 1,300 cities in India across BFSI, retail, government and telecom segments, and is well-placed to make further inroads into this market. Data-intensive industries such as banks, large corporates and government are also likely to ramp up their investments in branch connectivity, spelling a further opportunity for Tulip. Considering that data connectivity means offering higher bandwidth, the company has also started building its own fibre network. This process is nearing completion in key business districts of top metros across the country. This will enable the company to offer a blend of fibre-based and wireless data connectivity, a larger addressable market.

The company is trying to bring down the low-margin network integration business to 20 per cent from over 40 per cent currently, by taking such deals only as a part of a complete managed services deal. This may help improve the margins for the company. Tulip has been able to secure a host of e-governance deals to enable offering government-to-citizen services, and range between Rs 50 crore and Rs 95 crore. This also allows Tulip to cross-sell its VPN services. Competition from Bharti Airtel, Reliance and Sify in the VPN market and players such as CMC and HCL Infosystems in hardware-intensive deals create pricing pressure for the company.

Satyam - what should investors do ?

The Satyam fiasco has been written about from several angles — corporate governance, auditor omissions and commissions, and the plight of the employees. But with a depletion of 82 per cent in the stock’s value from the time the (aborted) Satyam-Maytas deal was announced, what should hapless investors do? Should they hold on to or buy the stock in the hope of a recovery? An analysis suggests that it may be best to stay away. Doubts about the very size and scale of the company’s operations, its murky financials and worries about how the company will raise cash even to fund its near term operations tilt the risk-reward ratio against any long term investor. A takeover of Satyam’s business in its entirety also seems unlikely.

Can’t be taken at face value

First, where does Satyam Computer stand relative to the top software companies, in terms of financials? That’s difficult to say, as Mr Raju’s disclosures have called into question almost every facet of Satyam’s financials and operations.

If his statements are to be taken at face value, Satyam’s revenues, and as a direct result, its operating profits were inflated by a fictional sum of Rs 588 crore (amounting to 22 per cent of reported revenues and 90 per cent of operating profits) for the September quarter. Shorn of this sum, Satyam’s operating profit margins would stand at 3 per cent, instead of 24 per cent as reported (OPMs for top tier software companies now stand in 25 to 35 per cent range).

But these numbers cannot be used to arrive at any meaningful “fair value” for Satyam’s business, for three reasons. One, given that he has admitted to falsifying numbers for several years, the veracity of the numbers provided by Mr Raju in his confession is subject to some doubt. Two, these disclosures pertain to just one quarter. Even if true, they represent only the most recent picture of Satyam’s performance; they may not represent the sustainable picture over a year or several years. Further, it is not clear if prior-period adjustments have also been taken into account in reckoning the “overstatement” in the books for this quarter. Clarity on these aspects may emerge only after a thorough investigation and audit of Satyam’s financials for the past several years.

Cost structure

Nor do the numbers in Mr Raju’s statement tally with Satyam’s reported operations. As per its quarterly financial disclosures, Satyam Computer operates in all the segments that the leading IT companies are in. The company’s September financials stated that the company had as many as 690 clients. This is much higher than Infosys, despite Satyam being half its size in revenue terms. This suggests a very large number of small clients.

Unlike Infosys, TCS or Wipro, Satyam does not have too many clients who are billed over $100 million a year, which may make for a less efficient allocation of resources, greater churn in the client base, and lower annuity-based revenues.

As much as 45 per cent of its revenues are claimed to come from enterprise business solutions and package implementation services which usually offer higher margins. Satyam again reports among the highest utilisation factors (nearly 85 per cent) among the software majors. The onsite-offshore mix is also very similar to most IT peers, indicating a reasonable cost structure.

But if the business mix is indeed as above, Satyam should be enjoying over 20 per cent operating margins, which its peers enjoy. That is at variance with Mr Raju’s claim of a 3 per cent margin for the latest September quarter.

The explanation could be that Satyam offered hugely discounted billing rates to its clients, in a bid to bag deals. Its utilisation factor could have been much lower than stated. Or worse still, it may have reported revenues from some verticals that have simply not materialised.

Either way, it is clear from these disclosures that Satyam has indulged in sizeable dressing up of both its revenues and profits, making it quite impossible for an investor to guess the actual size of the business, as it stands today!

The prospects

While Mr Raju’s disclosures have called into question Satyam’s financials, the company still has a strong business, isn’t it? After all, it does claim to have a large client base comprising of 185 Fortune 500 companies.

Let’s examine this aspect. A portion of Satyam’s ongoing projects that are fixed-price based (over 30 per cent of reported revenues) especially those nearing completion, may not be in trouble, as clients may prefer to stay on till completion to avoid disruption to schedules. But what of contracts that are billed on a “time and material mode”? Reports that Satyam does not hold sufficient cash as on date to meet working capital requirements create uncertainty about how continued operations will be funded; but the replacement of Satyam’s Board with a government-appointed one may ensure continuity of the business for the time being.

But even with a new Board in place, investigations launched by a slew of regulatory authorities, including the Ministry of Corporate Affairs and SEBI, also suggest that “business-as-usual” will not be too easy for Satyam. All this suggests that new clients, or those that are yet to commence with mission-critical projects such as those in infrastructure management services, may weigh a switching option.

Several large global IT deals over the last couple of years have been awarded to multiple IT vendors, who work on the project in tandem. Such clients have a ready option to reapportion existing projects among Satyam’s rival vendors.

Even otherwise, transition to other large Indian vendors such as Infosys, TCS, Wipro and HCL Technologies will be an immediate option available to clients. Their recent acquisitions display their commitment and continued interest in the IT sector — a test that Satyam failed.

A migration to global players such as IBM, Capgemini and Accenture is also possible. But if lower costs, relatively lower billing rates and established track record are the key criterion, Satyam’s Indian rivals may clearly fit the bill.
Takeover candidate?

With the stock beaten down to a fraction of its original value, will a potential suitor turn up for the business? For now, this appears unlikely for the business in its entirety. After all, what makes a company attractive for a takeover is its stock trading at a substantial discount to its intrinsic value or the assets in its books.

Going by Mr Raju’s letter, it appears that the company’s reserves and surplus may be insignificant. Apart from the share capital of Rs 137 crore that the company reports, everything else is subject to investigation. Of the total assets of Rs 7,381.3 crore in the 2007-08 balance sheet, there is an overstated cash and bank balance of Rs 5,040 crore, a non-existent interest accrued of Rs 376 crore.

Together with an overstated debtors position and understated liabilities a staggering hole of Rs 7,136 crore arises in the balance sheet. The land and plant and machinery on the books amount to about Rs 424.5 crore, making up only Rs 6.3 per share.

The other question raised is if a competitor may seek to take over the company for its domain expertise or execution skills. That would vest mainly with Satyam’s 53,000 employees.

This looks difficult again. With the world economic environment, especially in the US and Europe, in deep trouble, the business outlook for IT companies is challenging. Most large software players are looking at ways to optimise their existing employee base by tapping into bench strength and improving utilisation.

Under these circumstances, even large players may not be keen to take over the entire employee base of 53,000. They may see better value in adding to their talent pool by making selective offers or by buying out specific divisions of Satyam that appear attractive— such as its enterprise solutions offering.

A takeover will also inevitably bring with it integration and merger issues, which companies may wish to avoid in a challenging environment.

In this respect, the legal suit that hangs in balance with Upaid, a UK client, the class action suits now being filed against Satyam in US courts and the termination of the World Bank contract, all do not help matters. Upaid alone is seeking $1 billion plus in compensation for patent infringement, and the final judgement is awaited.

Considering all the above facts and with no clarity on what the real balance sheet numbers are, it may be too risky for a serious investor to bet on Satyam’s fate.

Salvaging whatever is left and exiting may be a better option

via Business Line

Weekly Watch - Jan 11 2009

The Sensex plunged 551 points 5.5% during the week gone by and the Nifty slipped 174 points or 5.7% to finish at 9406 and 2873 respectively.

The sell off actually came during the last two session, on breaking of the Satyam story on the news channels.

Readers would recall the October 27, 2007 and 2nd December 2007 trendline. The Sensex has now closed marginally below the trendline at 9406. The bearish story for the Sensex, however, gets confirmed only if it breaks the 9162 low formed on 29th December.

The Nifty is now in a confirmed downtrend. It has closed below the trendline drawn for the same dates as above for the Sensex and has also broken the low seen on 29th December.

We closed the week on a bearish note.

Satyam developments

On Friday evening after the markets closed came the news that the Government has suspended the Board of Satyam Computers. The Government will announce a new board of directors.

From a shareholder's perspective , this move augurs well. Unless the board is led by some one of the stature of Mr Murthy or Mr Premji , it will not enthuse the market, though the suspension of the earlier board itself would be good enough to propel the stock higher.

The move by the regulators to get the quarterly results of Sensex and Nifty constituents reviewed by an expert panel is aimed at improving the confidence in the numbers reported but may create a flutter Monday when the markets reopen.

The markets are likely to punish most stocks in the indices. My sense is that at this point of time, the markets have no appetite to take additional risk and investors are likely to vote with their feet. Having seen values decline swiftly in Satyam on Wednesday and DLF on Friday, no one would be wanting to take chance.

It will be market that will shoot first and ask questions later. Brace for a very sharp fall in the coming days, in which lower lows will be formed. Don't tell us, we didn't warn you.

Weekly Technical Analysis - Jan 11 2009

As the markets were attempting a break-out last week, it had to deal with major negative news in form of the Satyam fiasco. The Nifty, which made a promising start, faced resistance at 3,150, the upper-end of bollinger bands as mentioned last week.

From a high of 3,147, the Nifty slipped to a low of 2,810, down 337 points from the week’s high, on the back of deep cuts in Satyam, realty, metals, energy and telecom stocks. Interestingly, other IT stocks saw selective buying interest. The Nifty finally ended with a significant loss of 5.7 per cent (174 points) at 2,873.

From near an upside break-out, the index is now nearing a downside break point, with support at 2,835. A sustained stay below the 2,835 level is likely to trigger an accelerated down move.

Bollinger bands have now narrowed down to a range of 3,135 to 2,835. While the short-term trend is still up, as the short-term (20-days) moving average at 2,985 continues to remain above the mid-term (50-days) moving average at 2,866. However, the unfolding Satyam story and corporate earnings are likely to dictate the terms going forward.

The probability of a downside break-out seems more likely than that of an upside break-out. Hence, one can assume that the index is likely to meet stiff resistance around the 3,135-3,150 levels in case of an upmove.

This week, the Nifty is likely to face resistance around the 3,000-3,040-3,080 levels, while support on the downside could be around 2,745-2,705-2,665.

In case of a downside break-out, the Nifty may test either its quarterly or yearly support levels as mentioned last week. As per fibonacci calculations, 2009 could see the index move in a broad range of 1,400 to 5,500. In between, support could be around the 2,050 level, while resistance around the 3,800 to 4,500 levels.

The quarterly chart, for the January to March period, indicates a range of 1,900 to 4,050. While the monthly chart, indicates resistance around 3,165-3,230-3,300, support on the downside is likely around 2,750-2,690-2,625.

The BSE Sensex, slipped 5.5 per cent (552 points) to 9,406. The index moved in a range of 1,219 points, from a high of 10,470, the index tumbled to a low of 9,251.

Among the index stocks — Satyam was the major loser, down 87 per cent at Rs 24. DLF, Reliance Communications and Jaiprakash Associates slumped 22-28 per cent. Reliance Infrastructure, Ranbaxy, Larsen & Toubro, Reliance, Bharti Airtel and SBI shed 9-18 per cent. On the other hand, Grasim soared over 12 per cent. Mahindra & Mahindra, TCS, Maruti, HDFC, Hindustan Unilever and Infosys gained 6-8 per cent.

The Sensex is likely to find considerable support around the 8,600-8,650 levels. This week, the index is likely to face resistance around 9,870-10,015-10,160, while support on the downside could be around 8,940-8,800-8,650.