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What’s an economic stimulus plan, really? Is it a cure for the corporate illnesses and rotting losses? No, it isn’t. It’s just an analgesic to kill pain for sometime. Then what is the cure – go to a doctor-seek advise (consulting), change your lifestyle (corporate planning), and let your immune system kick in.

Pumping in billions of dollars by various federal governments is nothing but aggravating the problem. It will only encourage corporate showing dismal numbers and making a beeline to have a pie of the cake. If today a Lehmann Brothers or a Citigroup or a GE is in trouble then there are reasons for that- in a level playing field. If WAMU and Barclays are in similar domains of work then it is imperative to discuss why WAMU failed and Barclays remained afloat. ICICI while reporting a huge M-to-M loss has to look into its portfolio to investigate why it find itself in a soup.

Risk reward ratio is a complex game, the riskier it get higher the rewards. The investment banker plays with the riskiest of assets class sometimes riskier than even the bad named hedge funds. They made merry when the going was good, why cry when the screws got tightened. People who kept money in fixed deposits were considered morons while the investors who parked money with headline making ‘sizzling’ fund-managers laughed all the way to the bank during the hay days in which the Indian Sensex kissed 21000. Of course, the story has reversed by 180 degrees now.

Sub-prime mortgage is more of excuse then a valid reason for the plight of the present economic downtrend. Any bank which gives away loans to individuals needs thorough reading of the credentials of the individual. Home loans are a long term engagement, payment of which runs into decades. ICICI in India offers you the disbursement cheque in a matter of 72 hours. A similar size nationalised bank in India might take months – there lies the strength of due diligence. The down trend should give the opportunity to banks and financial institution re-visits the way they handle their business. Its not the time to cry and blame external forces.

Depleting the government coffers can only mitigate the problem in short term – in the long run, it will result in a very disturbing set of fiscal numbers. A wide current account misery can have drastic repercussion and US for instance is sitting on that bubble.

A 13 trillion dollar economy cannot afford to have a 10% CAD where it stands now and more rescue measure will leave nothing to play with when economy goes deep. India can learn a lesson or two of its own mis-adventure in early 90’s with a bad set of GDP and fiscal numbers and a horrible BoP situation.

Equity and derivative markets will remain a risky business and thus the return are bound to be lofty. Funds from government treasuries composing of federal revenue collection is no way to save those who indulged in riskier business unless there exists a provision by which they paid a higher differential tax during their hay days.

All these macroeconomic factors boil down to two questions:

(1) Can the government stay idle? And (2) On broader side, have we seen the worst of Capitalism? Answers, to these questions can’t be a firm “YES” or a “No”. It’s a shade between the two.

India, has often been blamed for two much protection and we are still long way from convertibility and easing of FDI investment norms. During these down trends- exactly this is what is reflecting as robustness of Indian economy. The downtrend has come and stayed but the flight of capital is still under control and not many companies have unfolded. A CRR here, a SLR there have ensured that portion of the funds remains un-utlized but safe. These are small bargains a country needs to do be safe then sorry. Non-existent convertibility on capital account have ensured that the global companies India wing continues to do decent business while their parents in advanced west economies are gasping. This is apparent from the retrenchment number of a company like Yahoo when, one compares the numbers of Americas and India.

Let’s also examine what is happening by virtue of these bailout packages. Well it is reverse privatization or globalization as one may call in simplistic term. When US treasury bailed out Citigroup it came with the rider that Citigroup gets this cheque and pledges this much of right to federal authorities.  This is bringing the US banks organized like those of Indian banks, which has a big RBI to live by.

Probably, this is the right middle path where the risk reward is safe. Bail out to a GM Inc. would mean a similar structure like a Maruti Suzuki. Our school of thought believes that this is probably the way to go as long as federal intervention is related to corporate governance and proper usage of funds rather than intervening in core operations.

Is the rescue package necessary – Yes!! Now that many have handled operations in the risky way and are down to the surgery table, they albeit deserve a second chance. It was easier for these corporate to grow in an environment with close to double digits GDP growth and ample liquidity and believe that it will be same always – but reality bites and gravity exists for sure.

Banks have to now believe that there is nothing called a sub-prime lending in the near term. Lending has to happen at PLR and round about and those who cannot get a loan because of a bad credit history needs to wait. As growth plateaued even a low earning individual working in an un-organised sector with no decent job security went for a loan – and a bank gave him, without accessing the risks in an elaborate way. Now this is a recipe for disaster in simple common sense terms.

Obama has announced a lofty bailout package and many other governments are following suit. Being a welfare state this is need of the hour, but at the same time the respective government needs to quickly put in place a watch dog which monitors the use of these funds. Obama has already told that monitoring will be tough – but so be it. If time has given Obama the opportunity to do a recovery of magnitude post the “The great depression of 1930’s, then he has the opportunity to be a Hero for the generations. Victory for Obama can be a renaissance for the globe in terms of economy pull back – while on the softer side, it will ensure that dark side of globe does not get any darker.

Some may argue that by giving big rescue packages probably the respective governments are not saving for the rainy day…but come on “its already raining heavily out there”!!

IT industry after the Satyam saga looks vulnerable , and the big question on many minds is this: Is the IT dream over?

We don’t think so!  The Indian IT industry has established itself as one of the front-runners in ‘real’ profit margins, and IT players like Infosys, TCS  and Wipro have taken the standard of corporate governance to  the top.

This industry has set examples to other sectors and let’s accept it – it lies beneath the foundation of so called rise of “The India Inc”. So one scandal can’t turn this industry into ruins. In fact today’s market showed that it seems the rivals companies are likely to gain on account of Satyam fiasco.

The investors are reacting to the fiasco and shifting to its peers. In the short term the Indian IT sector may be affected by this episode but it will finally come out on winning node – at least that’s the long term story we can think of which is self sustainable.  

Some changes and improvements will happen as accounting and auditing will get tighter and customer confidence levels will need further checks and balances but all said and done, all is not lost as far as this darling sector is concerned.

However, companies need to work constantly on their reputation, should be more transparent in their disclosures to regain the confidence of domestic as well as the overseas investors and clients. FDI and FII investor might hold for few weeks may be months but ultimately they will make a beeline for these companies esp. now that these companies are at very decent valuations – down significantly from its lofty days.

It is being discussed in various parlays – that is Mr. Raju’s confession of 3% gross correct. No way. For a company whose significant portion of revenue (in excess of 40%) comes from its Enterprise Solutions (SAP) practice – which is relatively high margin service – the confession is another big lie from the Satyam’s basket.

It might be an accounting juggernaut to however find out whether the delta money of the actual and confessed margin was siphoned. As billing rates got reduced, thanks to the economic downturn – there has been a hit on gross margin by a couple of percentage points but in no way the magnitude as stated in the confession note.

Today, an Infosys or a TCS is sitting on decent networth with abundant cash reserves to seal M&A deals. This was evident from Infosys (a zero debt company) going for an all cash acquisition of AXON. It is another thing that the deal finally went to its competitor HCL who benefited from the due-diligence done by Infosys, and offered a higher price (funded by debt), but at least such attempts show strength in Infosys balance sheet.

So, we believe that investors should hold on to their positions to this beaten down IT sector, which has only one way to go now – North!

However another defining questions needs to be answered: What should Satyam investors should do? Hold. Stay invested!

Because what more can one lose? Satyam’s  big investors like Aberleen , Swiss Financial, Fedility, Morgan Stanley have completely exited the stock. Today the stock fell to its nadir. It touched the intra-day low of 6.30 but then we saw some buying and it finally settled on to 24.

This move is solely based on common sense and not on any numbers per se – because there aren’t any “reliable” numbers out of the Satyam books anymore –unless complete recast of financial statements is for the last 5 years, and that will take time for sure.

We are of view that since the Satyam stoc is already ruined and nothing can come out of this stock, so why should we sell it? When the investor has taken the loss of nearly 90% they can’t lose further so keep the remaining stocks it can go upward only, condition if only it is bailed out by government itself or some other company – which we think it will be, especially in an Election year when the federal government has to show its helping hand towards the 53k hapless employees and their families.

The caveat however lies that should Satyam disintegrates into pieces and vertical wise take over starts to happen then probably the existing shareholders get nothing – but anyway what they are holding to is anyway around 5-10% of the investment. It is worth the gamble and should a Big name company decide to associate itself with Satyam at scrap price then the very foundation of Satyam “could” potentially leap frog the stock to three digit levels in the medium term.

Our advice to retail investors is to stay invested BUT do not even think of adding new money on various news and rumors on this company because we believe there will be aplenty. Brokers and Traders will aim to profit from this stock may till the air of doubt settles on the scandal. So don’t add any new investment.

The Message we want to communicate through this post is that – One Satyam should not shake an investor who might still believe that equities as an asset class is the best way to riches.  

In wake of what happened at Satyam, it is imperative to state what is corporate governance for investors.Jargons apart this in my opinion is “Truth”- 100% and nothing else. Reporting the facts as they stand (loss or profit).

Investors save in their fortune in blue chips because they have faith in the professionals who run the show. They believe that they can handle their money better than the investor themselves.However when these messiah act in any in-appropaite way as they do - it is not mere a trust or a bond which is broken but is much beyond that – “a monumental loss”. For someone who has invested his fortune in them - believing a words for a word might collapse under shear weight of the loss.

Satyam killed India Inc to say the least if not at least took it to  the intensive care  unit.  How the company will rebound is minsicule as compared to the big question of how - India corporate governance recovers from this lockjam.

What is disturbing in the present case is that this inflated number and non-existant numbers were being reported for years in a line - this points towards malafide intention at its origin. A company which probably was created to siffon out funds for those who run it. It sometime may happen that someone who has a bad time - does something unethical to get out of it, but this was not the case with Mr. Raju. He has been doing it for years and during the best of Satyam times as well.

Mr. Raju has resigned after his confession (read ’suicide note’) because of the way he has taken all by himself and dis-associating his family and friend from the fiasco — by leaving virtually no option for company to recover. A bad book, zero liquidity, non-existant board, no-suitors, a million law suits and more importantly a total erosion of goodwill. No one wants to touch this tainted company- as exemplified through recent utterances by NRN and who will - because anyone who shows interest doesn’t get just the asset side of Balance Sheet but also the liability side - which is an unpacked horror.

The only asset which the company has is its skilled but suffering workforce - who apart from  diligently doing their job are exposed to a lagging job market with unsurety where their next pay check will come from. They remain prey to market predators at this torrid global downturn time. One can only pray for 53k  Satyam employees and their dependents who have to support and pay loans - and eat food as well. Any replies Mr. Raju?

It is sad to learn that this tainted man represented NASSCOM as its chief - fail to understand how can one accept certain dignified position with guilt imbibed within - also how can one accept the Global corporate governance award when your conscience knows what actually is corporate governance!! These are disturbing questions which probably do not have a ready answers - but hard soul searching.

Who is to blame?- Mr. Raju alone? NO WAY!!!!!. Such scams of mega propostion cannot be a play of one man alone - independent BOD cannot disassociate from their roles, nor the market regulator nor the stock exchanges and for sure not the auditors. As a simple investor too - why a question was never put forward to the company as to why such huge cash is showing in current account for years could have been put forwards?

The whole machinery has failed and better it responds loud and clear sooner the better.

Indian Stock Market Analysts like us can spend hours and days together - statistically analysing the numbers which we take as gospel truth and think that we are taking informed decisions -but what if the numbers themseleves are not right? What if I am the last one to know about cooked books after all the big guys have made their money and exited? 

Investor confidence in the Indian Stock Market Governance is badly damaged… ours surely is.

If SEBI can’t smell foul play in a large-cap industry leader (and constituent of Sensex), do you think it can spot fraud in a mid-cap or a small-cap stock — No Way!!!!

For now, it is time when the Indian legal system responds and not that we would like to see US regulator solving the Satyam fiasco sooner and India following suit. India has to wake up beyond “a bad apple” and respond in the most professional way - disparaging all political contacts of the who’s and who and the normal delays which prevails in Indian judicial system.

And for God’s sake, please no committees and sub-committees to be set up accounting standards - because if the US GAAP can fail all such standards can fail as well.

However bad the scam can be - it has a silver lining.

It throws into light the general health of IT industry. There are some difficult questions. Forget the hiding of numbers etc by Satyam. If the new numbers as per the confession letter are even partially true - then 3% margin over a 2000K crores of revenue is a “SHOCK”. This sector is believed to be working at a 30% gross and around 20-25% net. A 3% gross would mean an under water net. Is the IT honeymoon finally over? Is the golden duck killed? Or is it another gospel lie by the outgoing chairman - whoes any utterances including his confession will be taken with a pinch of salt. May be the delta of a 3% gross and 30% gross is already pocketed by him and his henchmen.

At Indiastar.biz we will continue to analyze the numbers with thorough belief in the India growth story - just that our analysis will be beyond numbers. This is our take from the ASATYAM SAGA.

If you liked this article, please bookmark our site, and visit again tomorrow. We aim to share one new post every day. We have reason to believe that the Indian Stock Market market may actually make us write even more often!

Sharing our views with you is the least we can do to help fellow investors, short of offering a a slot in our private fund, which is currently unavailable. So take your time to read some posts, and share your comments. We will try to reply soon.

For a reason not very clearly described, the Indian Financial markets are closed today (Thursday, 8thJan) for a holiday. Trading resumes on Friday. So don’t worry if your ICICIDirect screen returns an error and says please check again later.

Today (7th Jan 2009) the Sensex fell 749 points (over 7% drop) - a huge drop wiping out billions of dollars from the market.

Investors in Satyam Computer Services lost Rs 9,400 crore after the stock dropped 78% following Mr Raju’s disclosures about inflated numbers: bank balance, revenues and net profit figures for several years including the last quarter ended September 30, ’08.

The Satyam debacle has stunned the corporate world and investors with its fraud disclosure. Given the magnitude of the accounting fraud, it has raised serious concerns over the quality of corporate governance and accounting practices followed by Indian corporates.

Following Satyam revelation, investors also dumped many other companies as well from various sectors, which are not known to good/clean corporate governance practices. Most impacted among them were Real Estate Stocks (which are perceived to complex/unclear books and asset valuation).

Traders and Brokers said shares of companies with registered offices in Delhi and Hyderabad were sold-off in large numbers because of market perception that companies incorporated in these cities do not strictly follow good practices of corporate governance.

Overall, we are now going to see reduced valuation (P/E) by for  many mid-cap stocks where similar risks are a possibility.