Key economic happenings Q4 FY09

Time for a recap on key economic data and the likely scenario emerging in FY10.

a)

• Rupee is likely to weaken in FY10.While currently running at 48-50 to the dollar , the rupee is likely to hit Rs56-58 by the end of FY10.
• Comapnies foreign liablities will haunt them in FY10 hurting their profitablity.Higher debt servicing means higher costs and lower profits ; for companies with positions in currency derivatives (not yet unwound), it will mean losses .Most had hedged the currrency at 42-45 to the dollar .
• Rupees value is exclusively measured by the Foreign ecxchange reserves with the RBI.
• A weak rupee will not attract capital investment in FY10.(lets see?)
• Capital flight throught portfolio outflows would continue .
• All forms of supplier credit likely to dry up.
• Dollar demand from both importers and exporters would continue to rise.

There "was" a company called Satyam........

THE SATYAM "FRAUD" STORY:

In sequel to my last post , today I read the latest ET news which finally led to

rest days of speculation. The final nail has been hit on the coffin.What however perplexes me is the role of auditors who are supposed to scrutinise each and every element of the Balance Sheet, and P&L statement.Their guilt is of a much higher degree than "Raju" who finally had the guts to accept and bring to light the fraud of epic proportions. This was the job of auditors as all stakeholders hold their trust on the financial data they provide. Looks like a repeat of the Lehman Bros case.

But for sure it brings into question the role of auditors and accounting discipline.A least my faith in the accounting norms of all companies has been terribly shaken.Thank God , I did not invest my hard earned money for "such" a fraud company . But I feel really pained for thousands of such minority stakeholders whose money has gone down the drain with little hope of recovery . I have learnt one thing from this entire fiasco : " Dikhawe pe naa jaao, apnee akal lagao..." When audited results cannot be trusted , whom do we trust.......

The ET article dated 7 Jan 09 explains in detail:

Asatya vachan Raju takes Satyam down; stock falls 62%
7 Jan 2009, 1159 hrs IST, ECONOMICTIMES.COM Print EMail Discuss Share Save Comment Text: MUMBAI: Satyam Computer Services Ltd’S Mr. B Ramalinga Raju has tendered his resignation
as chairman of the company. Reacting to the news, shares Satyam's board members of the IT company were down 62 per cent at Rs 64. Also, immediately following the news,
DSP Merrill Lynch has terminated its engagement with the company.
Raju will continue in the position only till such time the current board is expanded.
In a letter to the board of directors, Raju states that Satyam’s balance sheet as on Sep
30, 2008, carries an inflated (non-existent) cash and bank balances of Rs 5,040 crore (as
against Rs 5,361 reflected in the books).
Further, it carries an accrued interest of Rs 376 crore which is non-existent.
An understated liability of Rs 1,230 crore on account of funds arranged by me. An over
stated debtors position of Rs 490 crore (as against Rs 2,651 crore in the books).
For the second quarter ended Sep 30, 2008, the company reported a revenue of Rs 2,700
crore and an operating margin of Rs 649 crore (24% of revenues) as against the actual
revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3% of revenues).
This has resulted in artificial cash and bank balances going up by Rs 588 crore in the
second quarter alone.
The letter further states that the gap in the balance sheet has arisen purely on account
of inflated profits over a period of last several years (limited only to Satyam
standalone, books of subsidiaries reflecting true performance). What started as a marginal
gap between actual operating profit and the one reflected in the books of accounts
continued to grow over the years. It has attained unmanageable proportions as the size of
company operations grew significantly (annualised revenue run rate of Rs 11,276 crore in
the September quarter of 2008 and official reserves of Rs 8,392 crore).
As the promoters held a small percentage of equity, the concern was that poor performance
would result in a takeover, thereby exposing the gap. The aborted Maytas acquisition deal
was the last attempt to fill the fictitious assets with real ones.
To quote: “It was like riding a tiger, not knowing how to get off without being eaten.”
A task force comprising imminent members such as Subu D, TR Anand, Keshab Panda and
Virendra Agarwal and AS Murthy, Hari T and Murli V has been formed in the last few days to
address the situation arising out of the failed Maytas acquisition attempt.
Ram Mynampati would be made the Chairman of this task force to immediately address some of
the operational matters on hand. Merrill Lynch would be entrusted with the task of
exploring some merger opportunities.
In the letter, Raju has apologised to all Satyamites and stakeholders for the current
situation.
Raju says that neither he nor the managing director sold any shares in the last eight
years except a small proportion sold for philanthropic purposes.
A net amount of Rs 1,230 crore was arranged to Satyam (not reflected in the books) to keep
operations going by resorting to pledging all the promoter shares and raising funds from
known sources by giving all kinds of assurances. Significant dividend payments,
acquisitions, capital expenditure to provide growth did not help matters. Every attempt
was made to keep the wheel moving and to ensure prompt payment of salaries to the
associates. The last straw was the selling of most of the pledged shares by the lenders on
account of margin triggers.
Raju also acknowledged that neither he nor the managing director took have benefited in
financial terms on account of the inflated results. He confessed that non of the board
members had any knowledge of the situation in which the company is placed

CSR : Is it only for textbooks : The Satyam Maytas deal.

The Satyam Maytas deal has exposed the academic nature of CSR . People at the top hardly care for the small investors provided their money is safe . Some of the key points of this failed deal were

• Ramalinga Raju was promoter of Maytas Infra and properties .


• Huge cash reserves of Satyam were planned to be used to finance this deal without the approval of shareholders.


• Brings into question the role of the independent directors on Board, were they pimps of Raju?


• Raju says " Wanted to derisk the IT business model." But why invest in an class which is the highest risky in present times viz. real estate and infra.He believed the infra. space would be value accretive in the long term and hence their due diligence suggested putting on the cash into Maytas Infra. Valuation was transparent .


• Reaction was trigggered by discomfort on diversification. Why are they planning to diversify from their core business? Raju says " Decision was correct in the current context."and it was a unanimous decision of the board.


• Satyams promoters hold only 8% stake. Majority stake was held by institutional investors. They were not taken into confidence.

The article from ET explains the goings on in greater detail:

Satyam drops deal to buy construction cos17 Dec 2008, 0830 hrs IST, REUTERS Print EMail Discuss Share Save Comment Text:NEW YORK/BOSTON:

Satyam Computer Services Ltd bowed to investor pressure and canceled plans
to spend $1.6 billion to buy two builders, killing
the deals just 12 hours after they were announced. ( Watch )
The quick change in plans, which was announced late on Tuesday, came after investors
demonstrated their opposition to the deals by pushing shares in India's No 4 software
services company down 55 percent in New York Stock Exchange trade.
Tuesday's unusual turn of events began after the close of India's stock markets when Satyam
said it planned to enter the depressed construction industry by buying all of privately held
Maytas Properties for $1.3 billion and 51 percent of builder Maytas Infra for $300 million.
Satyam founder and Chairman B Ramalinga Raju and other insiders hold 36 percent in Maytas
Infra and 35 percent in Maytas Properties. Analysts questioned the motives of Satyam's top
executives, saying there was a potential conflict of interest because they hold stakes in
both companies.
They also said the acquisitions made little sense at a time when technology outsourcing
companies are preserving cash to help weather the global economic slowdown. The company's
stock recovered some of its losses after Satyam withdrew the offers, climbing 50 percent in
after-hours US trading.
But analysts said that Satyam may not be able to win back the confidence of investors. "The
company has lost investor confidence. Rescinding the offer does not restore that
confidence," said Janney Montgomery Scott analyst Joe Foresi. Satyam's shares, which closed
down $6.85, or 55 percent, at $5.70 on the New York Stock Exchange, jumped 50 percent in
after-hours trading to $8.89.
Even after the evening rally they were still down 28 percent from Monday's close of $12.30.
"There is no victory here because many shareholders lost, getting out of the stock today and
in some cases taking 50 percent losses," said Global Equities Research analyst Trip
Chowdhry.
"The credibility of Satyam's board of directors and its management is at rock bottom."
Satyam executives were not immediately available to elaborate on the company's statement
announcing that the acquisitions had been canceled. "In deference to the views expressed by
many investors, we have decided to call off these acquisitions," Ramalinga Raju said in a
statement.
The two builders work on infrastructure projects including highways, ports and water
treatment systems. Satyam helps develop software for businesses including General Electric,
Nestle and Qantas Airways. Ramalinga Raju originally promoted the deal by saying it would
"de-risk" Satyam's core business in IT services. But analysts responded using unusually
harsh words as investors fled the stock.
"This is outrageous and very frustrating," said Jefferies & Co analyst Sachin Jain. "This
clearly raises questions about what kind of corporate governance you have in other Indian
companies. That could hurt foreign investment." JP Morgan cut its recommendation on the
stock to "underweight" from "overweight" and slashed its price target on the shares that
trade in India to 175 rupees ($3.68) from 475 rupees.
Janney Montgomery Scott reduced its recommendation to "neutral" from "buy," while S&P Equity
Research cut its rating to "hold" from "buy." "They were insensitive to global corporate
governance standards. Their largest shareholders impressed that upon them," Susquehanna
analyst James Friedman said after Satyam quashed the deals.
"It was an error in judgment on their part," Friedman added. "It would have been worse of an
error not to rectify it."

And another one which shows how company money was being planned to be siphoned off for within the family welfare. (ET - 15th Dec 08)

Deal may give Raju's sons room in Satyam17 Dec 2008,

HYDERABAD: Last June, when Rishad Premji, son of Wipro founder Azim Premji, entered Wipro’s
payrolls, ET had quizzed Ramalinga Raju if he had any
plans to induct his sons Teja B Raju and Rama B Raju Jr into Satyam.
And pat came the reply from the doting 54-year-old father: “Even if I ask them, they will
not come. They are running more exciting businesses. They’re definitely not joining Satyam.”
That may not be true anymore. The “exciting businesses” his sons, who are said to be in
their 30s, have been running are Maytas Infrastructure and Maytas Properties, which Satyam
is now acquiring for $1.6 billion in a deal which has slammed by critics as lining the
family’s pockets.
Teja Raju, vice-chairman of Maytas Infra, holds an MS in engineering from the Carnegie
Mellon University, and was among the young entrepreneurs selected to meet George W Bush when
he visited Hyderabad two years ago. Rama B Raju Jr, vice- chairman of Maytas Properties, is
an MBA from the Ross School, University of Michigan. “They are very much like their father,
focused on their businesses and working 24x7. They are not at all flamboyant and prefer to
keep a low profile,” says a Satyam insider.
So does the Maytas affair mean that his sons could occupy Satyam’s corner room? A year ago,
in an informal interaction with ET, Mr Raju didn’t seem to encourage the idea. “We discuss
it (Mr Raju’s succession planning) all the time. And these alternatives could also be
outside the Satyam’s founding promoter group,” Mr Raju had said.
But with the two Maytas businesses now set to be part of Satyam, nobody can be too sure. For
a group that made a “naïve” decision to move into IT from construction and textiles,
anything is possible.
Reacting to periodic speculation about Satyam being a likely takeover candidate, Mr Raju had
categorically denied having either a direct or indirect dialogue of any kind with any
company. “In a world where people are looking at exciting M&As, it is understandable that
there is curiosity, but there is no reality to it,” he had said. As far as investors in
Satyam are concerned, Tuesday’s announcement was more than real: it was surreal.

Snapshot of India's biggest and Mightiest - Circa FY08

Riding on a strong property market and commodity prices , infrastructure and commodity players had a field day in FY08. What will be interesting to watch out for is whether the same players will be able to retain their positions in FY09. My take is : watch out for interest rate sensitive sectors like realty and auto which have already taken a hit as " demand " has simply vanished from the market . Also US being officially in "R " zone , companies exporting to US might take a hit in terms of orders . However the sheer time in which a cold veneer seems to have shrouded our " shining" India is amazing to say the least . Are we really decoupled? The answer is sadly " No." Long live "obama" .

The crisis from Sept 08 : My updates

Some of the phrases that I learnt from the great depression commencing Sept. 08:

a) "Unfettered capitalism is dead , but crony capitalism is alive and kicking ."

b) Capitalism cannot be killed , it can however self destruct by greed and avarice.

c) The prevailing version of capitalism that Milton Friedman propagated and previous Fed Chairman Paul Volcker turned into official policy posited that minimal regulation and easy money supply could spur infinite growth.After the end of the cold war , over zealous failth in capitalism led the west to discard many of the regulationss on raw market forces.This has boosted global growth - nay for a while.Over time , wall street's greed and unchecked power turned unfettered capitalism into crony capitalism.And at every turn , US financial policy has been twisted to suit the demands of Wall Street.But markets , like water find their own level.The 700 billion dollar bailout programme is the worst kind of corporate welfare programme that the Govt has embarked on.The heads of banks and wall street that created the crisis in the first place have got the bulk of this largesse.Ordinary US citizens - struggling to make payments on their home loans and facing large scale unemploement have got peanuts .

d) A bailout is not a feasible solution as we are funding those who have created this mess in the first place. Second it sends a wrong message , that recklessness and unwaranted aggression in selling complex financial instruments will always be "bailed out" by the state in event of failure.

e) Presently no fin insti. in US is willling to lend because of the risk of not being repaid.

f) In the roaring 1920s , unfettered capitalism led to the Great Depression which in turn led to then US president Roosevelt to introduce regulation of the fin. system ( as well as the social security system). The lynch pin was The GSA ( the Glass Stegall Act ) which separated comm banking from Investment banking. The Act broke down the House of Morgans into two halves , Morgan Stanley the investment bank and JP Morgan as the commercial bank.

The plight of Bears Sterns : What are the learnings dear?

What happened to US ' s one of the leading investment banks all of a sudden. Here are the facts of the sudden fall of Bear Sterns

• Sold to JD Morgan Chase at a price of 2 dollars per share .( 236 mn $). Imagine the price was 30 dollars a week before .Thats how ruthless markets are , if you lose your confidence , youi get hammered down
• During a crisis of confidence, earnings, book value and liquidity dont matter. Bears was sitting on a comfortable 80 $ book value of stock at the time of sale.
• The US FED bailed it out from an imminent insolvency . Perhaps US fed wanted to send some sort of positive signal that everything was all right in the US financial markets .It feared the collapse of Bears would have a "Domino" effect on the economy.Alas, bluffs canot be kept under the wraps for long !!!!
• Total reported losses of Bears FY08= 3 bn dollars due to sub prime mortgage loans.
• Has the FED set a wrong precedent by bailing out the firm from insolvency?Perhaps, no.
• What will hapen to the 14K people under Bears rolls is anybody's guess. Perhaps Morgan will absorb them for the time being .
• Did the FED introduce any new measures to prfevent a recurrence of such fiasco? Yes, the term auction facility ( TAF ) and the term securities lending facility ( TSLF).The TSL allows investment banks to enter into repo agreements for upto 28 days with firms . Previously they were overnight obligations.For the term of the repo, this arrangement allows banks and firms to swap their problem assets ( ex: subprime finacial instruments) for good money.
• Bears has still 60 bn$ of debt outsatnding in the repo market.The repo market firms extend and receive short term loans, typicaly made overnight which are backed by securities.
• The Bears takeover is a classic exampe of a "Bank Run" ( stretching poneself too far and thin).The firms short term creditors refused to roll over the loans and long term assets could not be liquidated quickly enough to close the gap.Any institutio that borrows short and lends long term must have sufficient requity cushion to liquidate and repay short term creditors.Unfortunately, this cushion was sadly missing in the case of Bears.

Expectations from Budget: CY 2008

Key issues which the FM must consider while delivering his budget:

• Inflationary pressures arising from the Rs. 2 a litre increase in petrol and Rs. 1 a litre on diesel thereby making life difficult for the denizens of "Bharat."


• Impact of the US Subprime mortgage crisis on the Indian Markets.


• Appreciation of the rupee resulting in erosion of profitability of export oriented units .The rupee has appreciated by 10 % in the last one year.


• Impact of a US recession on the Indian markets.


• How to bridge the widening trade deficit . Imports cheaper while exports are uncompetitive.


• How to revive a moribund agricultural sector which has already sinking into a cesspool with no light visible at the end.


• How to augment Indian manufactoring to take on the chinese threat.

These are some amongst the plethora of issues that come to my mind while penning my thoughts down.Hopefully we shall see a resolution of some of these pressing issues from our dear "Mr. Chidambaram."

The below article from TOI ( dt. 18 feb 08) goes a long way in presenting the dilemna faced by the FM, a populist or an economist budget. Lets get ready for the action folks :)

------------------------------------------------------------------------------------------------

The growing chasm between India and Bharat is taking its toll on political formations in the country. Government policies skewed towards urban agglomerates have seen the electorate teach rude lessons to politicos at the hustings. Four years ago, the NDA was jolted out of its India Shining stupor, while state governments in Karnataka and Andhra Pradesh suffered similarly. Now as the United Progressive Alliance grapples with complex problems, even as it runs the last lap of its five-year term, questions are being asked of its capability to deliver on its inclusive growth plank. Inclusive growth is the new clarion call in the Indian political scenario. As more and more people want to participate in India’s growth story, the young and restless in rural Bharat want to be part of a prosperous India, living as they are, a life diametrically opposite. So, the importance of ‘aam aadmi’ and his well-being are preoccupying the corridors of political minds. A quickly cobbled up coalition with the tricky Left to support it has not managed to make any headway in the last four years. And as the clock ticked by, the UPA was seized with a new mantra - inclusive growth. So, new populist schemes were initiated, but unfortunately corruption at most levels in the administrative pyramid have seen slippages in the percolation of funds. The Comptroller and Auditor General (CAG) slammed the government’s flagship rural employment guarantee scheme. The CAG’s six-month audit of NREGS has left the political class and the nation as a whole in shock. The reality check conducted in 513 gram panchayats in 68 districts across 26 states left behind a mind-numbing statistic that only 3.2 per cent of the registered households could benefit by securing 100 days of employment in a year between February 2006 and March 2007. Siphoning off money through fraudulent cards was a common complaint. First Information Reports have now been filed in Madhubani, Bihar, Dhar, MP and Chamba, HP against those accused of corruption. And this is not all. Ingenious human minds have wreaked havoc on other schemes like Sampoorna Gramin Rozgar Yojana, Indira Awas Yojana, Swarnajayanti Gram Swarozgar Yojana and Pradhan Mantri Gram Sadak Yojana. Corruption and inefficiencies have been part and parcel of these schemes. This has ensured that paranoia and panic is rampant within the Congress party which goes to the polls first in a series of states and then finally in the general elections next year. Its commitment to the poor is under fire. And this has led to the Union cabinet to announce a Rs 43,700 crore financial assistance package for ongoing social sector schemes. So, what of Budget-2008? Will it be devoid of hype and hoopla or will it travel the road of the social and farm sectors? Last year’s budget was a wonderful opportunity missed by finance minister P Chidambaram. With a middling nothing for anybody type of budget, it was akin to a big gas balloon being deflated very quickly. Indications are that this budget will have to zero in on the agriculture and social sectors, for it is likely to be the last budget before the next elections. Indications are that it will be populist and that the government’s economic minds - Prime Minister Manmohan Singh, Economic Advisory Council chairman C Rangarajan, deputy chairman of the Planning Commission Montek Singh Ahluwalia and Chidambaram - will be compelled to go in this direction. Inclusive growth, a tainted by-product of electoral disasters is obviously going to be the only plank. Populist packages like farmers getting loan waivers to the tune of Rs 60,000 crore may feature prominently on the budget marquee. But the government, instead of cooking up knee-jerk proposals, should concentrate on a long-term plan which can deliver credit to the poorest of the poor deep in the country’s hinterland efficiently and effectively. It is only then that Indians, last man standing included, will prosper. Part of the solution to present woes can come from a robust, well-developed and well-designed micro-finance industry. The success of people like Mohammed Yunus in Bangladesh and our own Vikram Akula on a smaller scale should act as a catalyst to bring reform to the doors of the poor. The problem in India is that Bills take a long time to turn into legislation and finally an active scheme which can benefit the poor. Take the case of the Micro Financial Sector (Development and Regulation) Bill, 2007, one of the key recommendations of which is that self-help groups be regulated. After being referred to the standing committee of finance, which made several recommendations, it will now be discussed and debated in Parliament before it is finally passed. Institutional identity to self-help groups will enable them to access and administer credit. If the budget announces a micro-finance scheme with a large corpus, then the Bill can turn into legislation during the budget session and credit can start flowing out to the poorest of the poor. One of the key objectives of the proposed legislation is to bridge the gap in banking services to poor households, who still don’t have access to basic financial services, such as savings, credit and money transfer. At the very kernel of the poorest of the poor’s well-being is a homogeneous micro-finance scheme.