Satyam -- The Story

Satyam—The Scandal

The begining of the present crisis which shook the confidence of investors began with Satyam board’s decision on December 16 to acquire Maytas (Satyam spelt backwards) by paying $1.6 billion. On the day following the announcement, the prices of Satyam shares fell abnormally. The uproar created by the announcement led to immediate withdrawal of the proposal by the Satyam board. In order to support the price of Satyam shares, Mr Ramalinga Raju, chairman of the board of Satyam and promoter of the company announced that the considerable cash available with the company would be used to aggressively buy back shares of the company. But later on, the disclosures made by Mr Ramalinga Raju, to the Satyam board added a new twist to the story. The explanation provided in the communication by Mr Raju for absence of cash with the company is that Satyam’s profits had been artificially inflated. Mr Raju claims that the margin earned by Satyam in the quarter ended September 2008 was just 3% and not 24% as reported in the results. The communication also implies that Satyam’s margins had always been much lower than what had been reported for years. This mis-reporting had resulted in hugely inflated accumulated profits over time and the resulting large fictitious cash balance. This explanation appears far too facile and unbelievable. Here though one question arises which will have answer once the whole issue is resolved. While all IT companies (top) enjoyed high margins (about 25%), but Satyam reported much lower and those too were inflated.
As per the letter of Raju to board following are the misappropriations in Satyam:
1. The Balance Sheet carries as of September 30, 2008, a) Inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected in the books); b) An accrued interest of Rs 376 crore, which is non-existent c) An understated liability of Rs 1,230 crore on account of funds arranged by Raju; d) An overstated debtors' position of Rs 490 crore (as against Rs 2,651 reflected in the books)
2. For the September quarter(Q2) we reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore(24 per cent of revenue) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenues). This has resulted in artificial cash and bank balances going up by Rs 588 crore in Q2 alone.

What Next:

Now that the new board is constituted and new CEO at the helm of affairs, they would rather sell Satyam. But why should one buy Satyam, one does not know the internal of financials?
A few reasons,
1. Satyam has one of the best of IT brains and best service practices.
2. The ballparks in industry about the margins are clear hence post deal those would be there.
3. Satyam assets are still unpledged.
4. At this time of slow down and with Satyam at its low (range bound at rs 45), would be a good buy for the ones to pitch into the IT stream.
But Still, investors and clients are going to want answers. For instance, they're demanding to know how Satyam's auditor, PricewaterhouseCoopers, endorsed the company's accounts. And to regain the confidence of Investors, something should be done and it should be in Hurry. The competition sure is trying. Already, Satyam customers are getting calls from other Indian IT providers offering their services. And life could get tough for Satyam's thousands of engineers and employees. Despite their valuable skills, IT companies are hiring fresh college grads over the more expensive, experienced hands. Still, with the IT business already suffering from the global downturn, a large competitor out of the way could mean more deals for Satyam's rivals—if they can overcome new doubts about the reliability of the country's IT industry.