Satyam's case: Now that we know Raju has defrauded the shareholders, on his own admission, it's time to face facts.

Raju "overstated" cash by 5040 crore, meaning that money does not exist. Interest of 376 cr. on that non-existent cash, also does not exist. Naturally. Satyam needs to pay someone 1,230 cr. because Raju took the money, or so he says. And they're supposed to get 490 cr. not 2651 cr.

If Satyam were a bank, they would call it an "asset-liability mismatch". Most likely the US government would buy its bad assets (replace the non-existent cash, for instance) and take over the loans it was never supposed to have.

But Satyam is not a bank. (Hint: Maybe apply now?)

So what happens? There is no money, so how do they pay salaries? Employees are quite likely to look for other jobs - and understandably so. Satyam has 53,000 employees, and if you take the cash - at what, 400 cr. (not accounting for the liability) - that's about 80,000 per employee, but I assume they will need to pay electricity bills, rent etc., so it won't even be that much.

But this is a bad job market, and 53,000 resumes aren't going to be absorbed just like that. Still, customers will be wary; and may withhold payments or even abort contracts.

That would normally be a positive for Infosys, Wipro and TCS, but corp governance of India is under question here. Corporate fraud of this nature does not unwind easy; everyone will be suspicious.

With Raju behind bars soon, and no trust in the top management, and no cash, Satyam is likely to go under. No more acquisition crap - no one will want that. So bankruptcy will be the only way to go. If they owned any land, you can bet your last dollar it was mortgaged to the hilt - or, conveniently transferred to promoters and rented to Satyam through back-dated agreements, like we've seen in other cases.

So the impact, for employees, is sad. A company they work for, that they believed was fair, is going under for no fault of theirs; and indeed, no one other than the board, the auditors and the management is liable. In all likelihood the company is bust, and the shares are worth ZERO.

This is horrible for a lot of sectors. Real estate, in Hyderabad for one. The number of payment defaults will be massive, I imagine, plus the rentals should fall dramatically. Consider also that Maytas Infrastructure is run by Raju's son, and is likely a co-player in the whole deal - and that company was supposed to build the metro and all sorts of infrastructure projects.

Banks - both those working with Satyam (53,000 account monthly credits will be gone), and those that have lent to employees (personal, credit card and home loans). Who? We'll have to find out. ICICI bank is down 10% as we speak, HDFC 4% and a number of other banks are hurting.

Auditors: The audit of Satyam was down by PriceWaterhouse Coopers. Their report as of 17th August states believed the last results "give a true and fair view of the net profit and other financial information". It's now obvious they didn't even verify cash and bank balances - so were they in the know? Time will tell, but now every company audited by PWC is suspect.

Corp governance in general will be looked at carefully, so foreign money might fly out. I say "might" because there is much more fraud happening in the US and Europe, so one can't say for sure.

Lastly, the shares are likely to go to zero. This will cause payment issues at brokers who have them on margin or whose clients went long after that sudden 50% upmove.

In all the impact is negative, very negative. Unless there is some serious action taken in the next 24 to 48 hours, our markets are hosed. (I don't know what we can do, but the powers that are must know)

Labels: Satyam

To the Board of Directors
Satyam Computer Services Ltd. Dear Board Members, It is with deep regret, at tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:

1. The Balance Sheet carries as of September 30, 2008
   • Inflated (non-existent) cash and bank balances of Rs.5,040 crore (as against Rs. 5361 crore reflected in the books)
   • 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. 2651 [cr.] reflected in the books)
2. For the September quarter (02) we 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 Q2 alone.

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 (annualized revenue run rate of Rs. 11,276 crore in the September quarter, 2008 and official reserves of Rs. 8,392 crore). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations — thereby significantly increasing the costs.

Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over; thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.

The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas’ investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed. But that was not to be. What followed in the last several days is common knowledge.

I would like the Board to know:

1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years — excepting for a small proportion declared and sold for philanthropic purposes.

2. That in the last two years a net amount of Rs. 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances (Statement enclosed, only to the members of the board). Significant dividend payments, acquisitions, capital expenditure to provide for 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 share[s] by the lenders on account of margin triggers.

3. That neither me, nor the Managing Director took even one rupee/dollar from the company and have not benefitted in financial terms on account of the inflated results.

4. None of the board members, past or present, had any knowledge of the situation in which the company is placed. Even business leaders and senior executives in the company, such as, Ram Mynampati, Subu D, T.R. Anand, Keshab Panda, Virender Agarwal, A.S. Murthy, Han T, SV Krishnan, Vijay Prasad, Manish Mehta, Murali V. Sriram Papani, Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts. None of my or Managing Director’s immediate or extended family members has any idea about these issues.

Having put these facts before you, I leave it to the wisdom of the board to take the matters forward. However, I am also taking the liberty to recommend the following steps:

1. A Task Force has been formed in the last few days to address the situation arising but of the failed Maytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam; Subu D, T.R. Anand, Keshab Panda and Virender Agarwal , representing business functions; and A.S. Murthy, Han T and Murali V representing support functions. I suggest that Ram Mynampàti be made the Chairman of this Task Force to immediately address some of the operational matters on hand. Ram can also act as an interim CEO reporting to the board.

2. Merrill Lynch can be entrusted with the task of quickly exploring some Merger opportunities.

3. You may have a testatement of accounts’ prepared by the auditors in light of the facts that.I have placed before you.

I have promoted and have been associated with Satyam for well over twenty years now I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries. Satyam has established an excellent leadership and competency base at all levels. I sincerely apologize to all Satyamites and stakeholders, who have made Satyam a special organization, for the current situation. I am confident they will stand by the company in this hour of crisis.

In light of the above, I fervently appeal to the board to hold together to take some important steps Mr T R Prasad is well placed to mobilize support from the government at this crucial time. With the hope that members of the Task Force arid the financial advisor, Merrill Lynch (now Bank of America) will stand by the company at this crucial hour, I am marking copies of this statement to them as well.

Under the circumstances, I am tendering my resignation as the chairman of Satyam and shall continue in this position only till such time the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible.

I am now prepared to subject myself tothe laws of theland and lace consequences thereof.

(B. Ramalinga Raju)
Copies marked to:
1. Chairman SEBI
2. Stock Exchanges

Corporate Fraud comes to light.

Labels: Satyam

Satyam stock is down 28% from the 185 levels I talked about in my last post, a few minutes back!

Update: Ramalinga Raju, the CEO, has resigned. He has sent a letter saying he cooked the books. DSP-Merrill Lynch, a firm retained for corp. governance, has terminated its association with the company.

This is horrendous. Horrendous. Stock down 50% now.

Labels: Satyam

Livemint: Satyam founder holding falls again

The holding of the Raju family in Satyam Computer Services Ltd fell to 3.64% after IL&FS Trust Co. Ltd informed the stock exchanges on Tuesday that it had sold 24.52 million of the firm’s shares that had been pledged with lenders

More: Satyam looks for merger with HCL or Mindtree, Tech Mahindra makes it an offer, there's a hearing for the UPaid case on Jan 7, and the board meeting is on Jan 10.

The stock, meanwhile, is at 186, a good 50% off it's lows of 120.

Labels: Satyam

Gilt yields have gone berserk - up to 5.75% today. ET says its because the government is borrowing 50,000 cr..

But come on. 50,000 cr. is 1.25% of GDP. This is not a reason for bonds to lose nearly 4 rupees - or 3% - of their price. There has to be some other explanation, my idea being profit booking in general.

Let's see - prices come first, reasons come later. I still see rates at 4% later this year, so I'm holding.

Labels: Gilts

I'm moving out of HDFC in the Short-Only Strategy. The price has moved up sharply and I don't buck the trend.

Now, it's time for results and a lot of positions will emerge after results and weakness thereafter. The positions in Bharti and Nifty remain.

At this point, we're still doing a 10% return, over four months. Not exciting but I need to really understand weakness - it will be in individual stocks, not the index.

Labels: ShortOnly

I was in Bangalore yesterday and the flight back to Mumbai was booked by a friend I am working with. The airline, Indigo, requires a copy of the credit card that was used to book the ticket - if you haven't used your own card.

I only had a copy of the front of the card - and the call center told me I would not be able to board. I was halfway to Devanahalli, I decided to take my chances. At the Indigo counter, the lady told me that it was good enough - all they were told was to ensure they had seen something where all the numbers were visible.

She also told me an interesting story: A customer had shown her a photograph of a card taken on a mobile phone! And that was fine, she said, because it met the rules. Hey, a reasonable use for technology to solve problems, despite regulation.

Labels: Technology

After a request from Ashu in another post, I have finally gotten to adding a comment feed for this blog. Now you can subscribe to comments on RSS, through this link:

Subscribe in a reader

Thanks very much for all your comments. I may not get the time to respond to each one but I do read all of them. Keep posting!

So into the 5L virtual portfolio come three stocks:

Hero Honda: Strength in auto is evident in this counter. This is largely a technical buy of a strong stock in a beaten down sector: Auto. I have strong hopes for rural auto buys, especially with dropping fuel prices, better roads and lowered interest rates. Hero Honda is a strong stock, and while the fundamental reason for the strength isn't evident, I'm listening to the price. 10% on this stock at 792.

Gold Bees: I'm just a sucker for this commodity - 10% exposure at 1339.

Aftek Infosys: This company trades at half its cash. With Rs. 30 of cash in the bank, and half yearly EPS of Rs. 9, it's tough to imagine the worst is yet to come. Still, the cash is parked in Portugal (of all places) and there is the danger of a shady past (involving Ketan Parekh and all). So, let's do a 2% bet on this stock at 14.20, with plans to scale in as we cross 16, 18, 20.

Yeah, this is a little unfair coming a day after a stimulus package and all. But I've actually bought these myself, and I have suggested them for accounts where I consult, and we've been buying for the last few weeks. So huge-ass disclosure: I'm quite hugely invested in these stocks.

Disclaimer: Do not follow this portfolio - it is virtual and while I do have positions, they do not reflect proportions I mention here. This is not advice. This is not meant to be for you - it is only an expression of my opinion for me. I know you already know this, but it's the legally correct thing to do.

Labels: 5LakhPortfolio

(Hat Tip: Market Folly)

Sadly he didn't make enough money from his predictions. But then, neither has Taleb I think (if you add up all the past years) and look where that got him. Interestingly, people seemed to be outraged and laughed at Peter, all while he was making sense: I can bet that the guys (and girls) who laughed at Peter on TV will not apologise or admit they were bullshitting - because they will say "hoocudanoode!" ("who could have known") Certainly, someone on their show did know, and they laughed.

Also read: Of Arrogance and Humility.

We have yet another stimulus package!

Rate cuts: The RBI has cut rates by another 100 bps - repo is now at 5.5% and reverse repo at 4%. (These are rates banks pay to borrow from the RBI and get from the RBI for keeping cash there)

The Cash Reserve Ratio - percentage of deposits kept with the RBI - is now down another 50bps to 5%. Should add 20,000 cr. to the system, but that is just theory.

Bond yields fell off the charts - the 10 year yield is at 5.07%. My Gilt fund investment is now up 14.5% in two months.

Interestingly, the RBI says that while it has cut repo from 9% to 6.5% since mid September 08 (now 5.5%), PSU banks have only cut their PL from about 14% to about 12.5%. The pressure is serious.

The full text of the monetary stimulus shows RBI is no longer concerned with inflation; more emphasis is given now to the IIP negative growth figure, a slowdown in services and lack of business confidence.

India's Subprime: RBI also has "relaxed" the classification of certain loans as NPAs. If a loan to Commercial Real Estate or equity market or personal loans is distressed, it can be restructured to make it look better. But some freedom's been offered to a working capital loan - which earlier needed to be fully secured with collateral, and will now not require such collateral; the bank will only require to have 20% of it provisioned.

Plus, banks acn implement a restructuring within 120 days of starting it (and it has to be started by Jan 31). That's a 30 day extension.

Amounts to basically saying we have distressed loans, we will restructure and perhaps back-load payments (charge no interest for a while and later charge higher). Further we may not require to have collateral that is valued as much as the loan. Uhm. Where have I heard this before?

Steel and Cement: There's duty on TMT bars and cement, brought back after inflation forced the government to take em off. Yet, these prices are likely to fall at least 40% more this year, I think.

Bond easing: FIIs can now invest in rupee based Indian corporate bonds upto $15 billion (up from $6 bn earlier). That's good, but hey, these guys aren't even investing in AAA bonds in their home countries. So we'll just to wait and see.

Some other areas include some recapitalisation of PSU Banks - to the extent of 20,000 cr. and some ECB usage permissions for real estate.

This isn't much, again. The government is seeing serious revenue losses but is balking at borrowing more (look at these bond yields! Might as well borrow when people are buying) Granted, our debt is at 90% of GDP or so, but we can scale it to 100 or 120% in these times; everyone else is doing it. Get a 500,000 cr. package and that will be worth it. The measures - except the rate cuts - are of little significance.

After my Short-Only strategy, here comes a strategy for both Long and Short, a Virtual Five Lakh Rupee portfolio, part of Kaushik's site.

Fundas

• It's a way I would manage 5 Lakh Rupees
• I may be long stocks, long/short futures or long/short options.
• Each buy/sell will be documented in a blog post
• It's virtual, but there may be real money behind it. I will disclose my personal position, but not of any other people whose money I manage.
• If you follow any of the positions, it's at your own risk. I am not dispensing advice; this are my opinions only.
• We reserve the right to charge for this in the future.
• Twitter posts will happen.
• Kaushik Gala and Arjun Ashar have their own virtual portfolios on the site as well.

I'll create a status page on this blog also with twitter posts specific to the portfolio (so you can comment).

This page will evolve. Welcome, 2009.

Note: the Short only strategy will continue.

Labels: 5LakhPortfolio, ShortOnly

Wish y'all a very happy and prosperous 2009.

For me the new year will bring along some happy and sad news. Moneyoga.com, the web site Kaushik and I started has now reached a logical end - we are going to shut it down.

What a year, was 2008. I started off moving to Navi Mumbai, and the big kahoona crash happened in January, right around my move, and I ended up making enough to pay for the move and a little bit. We had the web site on, and went and did the VC rounds, and I'm now thankful they didn't invest - we knew the market was going down, but not that everything related to the internet in India and traders in general too. That part came as a realisation only in April.

We then stopped work on the site - it continued to be updated till yesterday - and we scaled our way into algorithmic trading. That went on to two months of discretionary trading, then getting intraday data, building systems in Wealth-Lab, testing and refining in Excel, running real money for over 6 months on it, working with a potential deal, watching the deal fall through after a long discussion, trading another client's money, understanding how the "system" works and eventually, realising this will take us a while longer.

Having done only the site and some trading for a year and a little bit, I've found, like Kaushik, that I've learnt a lot: a bear market, trading the short side, working with client funds, understanding the importance of sentiment. I wish I could say I became rich along the way - but I didn't. This business is about making money, but you gotta have enough to start with - and I'm undercapitalised that way.

Yet, there is hope and there is always opportunity. Trading systems is what I love and I will continue it - 2009 will be about working to build a great trading system company. How to do it is a challenge; but what's life without a few challenges?

So I'll add a new one to the mix. I'm moving to Delhi. Gurgaon to be precise. That's where my wife has opportunities - I know I've asked for her career to be sidelined as I went on to Mumbai, but Gurgaon will let her do what she wants. (she's lived there, I've grown up in Delhi - so it's not unfamiliar territory)

What next? I don't know. There are opportunities that I will have to explore. Some come in the area of system trading, others in wealth management. There is perhaps a way to combine them both. More details in Feb, when I will know the exact path ahead; and I have exactly two choices.

Whatever happens, this blog will continue and if anything I will get more consistent in the quantity of posts.

So again, I wish you a happy 2009. Some of you have patiently read my raving, ranting posts about everything. Some of you have joined recently and signed on. Some of you have asked questions I haven't answered, and some of you have issues I am not quite qualified to solve. I thank you all for your patience, for reading in, and I hope I'll continue to be relevant. And I hope I'll be able to help more people understand this crazy world of financial markets, and yes, I hope I'll make a lot of money in 2009. It's going to be a fun year!

(Bonus: The worst predictions of 2008. I hope I don't make that grade in 2009!)

Satyam's recovered a lot and I'm moving it out of the Short Only Strategy - one contract, about 10 bucks as a loss, which is around 6,000 Rupees. Not too bad, and the stop loss was the entry price, which was crossed today.

We are still at 11.87% on the SoS, for about four months. The next year should be good for shorts. Am eagerly awaiting results season.

Happy New Year everyone. Shall make a fresh post tomorrow. Meanwhile, stay safe.

Labels: ShortOnly

I've been tracking the RBI's Negotiated Dealing System all day today and it's unbelievable. All G-Secs have risen HUGELY in price, from yesterday to some obscene levels.

The yield of the 10 year G-Sec, a benchmark in a way, is at 5.27% as per Reuters.

Indian federal bond yields tumbled to their lowest since May 2004 on Tuesday as expectations grew the central bank would cut rates, while speculation of a reduction in fuel prices lifted sentiment for debt.

The benchmark 10-year bond yield closed at 5.27 percent after touching an intraday low of 5.25 percent, its lowest since May 2004. It had closed at 5.55 percent on Monday.

I want to chart this stuff - I think the prices are at all time highs for the 2018 bond and the 2036 bond. Not only have the 10 year bond prices risen (by 1%), the rise in prices of the longer term bonds is spectacular - nearly 2%. This kind of move is an earth shattering event usually, but we all know that these are not usual times.

Gilt funds should go strongly up. I've already got a 10% return on my (phased) investment into the ICICI Prudential Gilt Plan, in 1.5 months. I'm holding for another 20-30% return within a year.

Note: I have been told by two people now that ICICI's mutual fund arm is pushing it's "income plan" whenever they want to invest in the Gilt fund. The income plan has much higher costs (the fees are 2x the Gilt plan, nearly) and invests a good chunk in corporate bonds too. Now they say corp bond yields will come down as well, because the spread is too high. If you look at the US - a much more developed market - corp bond yields are still very high and gilt yields are at all time lows. The spread need not ever come down, and in India we will see our share of corp defaults.

Plus the income fund has a 2% exit load (versus only 0.75% for the gilt fund).

So I would never go with the income plan - I'd stick with the basis. Gilt is gilt, and only gilt.

Labels: Gilts

Satyam has hired DSP-ML to "look at available options to enhance shareholder value". DSP will also review the composition of the remaining board (after four directors have resigned).

But DSP-ML has Raju's shares pledged to it and is looking to sell them to cover margin calls.

DSP-ML is everywhere! Kothari must be proud.

Labels: Satyam

The RBI weekly supplement for the week ended 26 Dec 08 shows that the forex reserves of the country is 254 billion dollars, up $3.6 billion from last week.

And in rupee terms, we are at 11.98 lakh cr. versus 12.20 lakh crore last week, a loss of 22,000 cr. The loss is probably due to the rupee's gain of around 2%. But it's an irony - you gain dollars, you lose rupees.

Also it seems like Government securities have had a huge inflow - over 200,000 cr. in the week ended 19th Dec. Has gone up considerably from the 100,000 cr. or so average of the last four weeks.

From ET:

Mangalam Srinivasan, a US-based academic who has been a director on the board of India's fourth-largest software exporter since July 1991, said she was resigning taking moral responsibility for voting in favour of the controversial acquisitions, a copy of the resignation letter made available to ET shows.

At least someone's taking responsibility.

Satyam's stock meanwhile has done well for the day, ending at 136. It's pretty badly beaten up since the acquisition notice and withdrawal, though.

Disclosure: No positions.

Labels: Satyam

Inflation has now reached 6.61% for the week ended Dec 6. It is likely to go lower, from reduced petrol prices, interest rate cuts and drop in global crude prices ($36 and not quite counting).

Here's the inflation chart - the current WPI index, with some trend lines.

The Index has shot up dramatically in the l year, and in the fourteen years of collected data I have never seen deflation. Yet, it looks more and more evident now.

If the index drops below it's last-year number, we are looking at deflation; and if prices continue to drop at the current level the earliest we will see deflation is March 2009.

If the index recovers to the long term trend we are still likely to see some period of deflation, sometime around May 09.

But if we continue at this pace, we are likely to see deflation for a substantial part of 2009, going on towards 2010.

What can reverse this trend? The rupee depreciating substantially against the dollar, making our imports very expensive in rupee terms and thus, raising prices. With the printing presses running at full speed in the US, this may not seem likely - but this market doesn't care about "likely" anymore, so there's one inflationary risk.

(Also inflation could happen due to a commodity price spike. Commodities are lower than they have been in a long time; but there's not much reason for them to rise until we are past the global recession)

Second, that our RBI cuts rates and rate cuts DO stimulate the economy. I do hope this does happen. The current situation looks very bleak - we are looking at a MASSIVE number of white collar jobs going out of business.

But if this does happen, expect massive dollar inflows - the world is likely to stay in recession for a long time, and money will flow to wherever there is the best return. Any which way we look we are going to be faced with white collar job losses, and an increasingly bleak outlook on the global front.

One thing that will change everything, and I don't know which way: A war. Now *that* is very likely.

Labels: Inflation

Wife has malaria. Malaria is a bad bad thing. Do not get it. I am serious. And its worse when you're a mom. As if childbirth wasn't enough. This is one of those times I keep saying, "Why not me?"

I am learning how difficult the job is to manage a 1 year 10 month old, and how much fun it is too. Sudden big respect for wife has happened. We will have small pause in blogging.

Some business news:

• Gilts have lost a few percentage points after that heady gain. But interest rates are coming down, and I still think we see the 4% target in a year.
• Satyam told to stay away from World Bank. All bad news comes together. Not malicious, just the bad part of the news.
• Oil is below $40. Deflation, here we come.
• Someone sent a hoax SEBI letter to Pyramid Saimira, saying they gotta do a buy back offer at Rs. 250 a share. Some pissed off trader, that was.
• First you lose 77% in one fund and then, 67% in another fund. So you shut them both down. And then, you start, gasp, a third fund. Say hello to Jeffrey Gendell of Tontine capital. (Luckily, investors in the existing funds can participate and not pay performance fees until their losses are recouped.)

Stay safe.

China slashes rates again (Bloomberg):

China cut interest rates for the fifth time in three months to support the world’s fourth-biggest economy after trade growth collapsed because of recessions in the U.S., Europe and Japan.

The one-year lending rate will drop by 0.27 percentage point to 5.31 percent and the deposit rate by the same amount to 2.25 percent from tomorrow, the People’s Bank of China said on its Web site. The central bank also reduced the proportion of deposits lenders must set aside as reserves by 0.5 percentage point.

Five times in three months! And on "reduced" growth estimates of only 5%. This is surreal - a huge bailout package, massive rate-cuts and still, nothing. Let's see how it goes.

Labels: Crisis2008

The Short Only Strategy has done miserably this month, and I've made a few mistakes of not cutting positions earlier (though I did do well cutting HDIL) and not having specific stops in place.

I'm also "virtually" rolling over this month to Jan. This is an early rollover, and in the process I will add a few fundas.

First, I keep the Nifty position the same - a short strategy must have some kind of short on the Index. Implied volatilities on options are attractively low but the time to expiry is still too high (for Jan), so I might do puts in early Jan.

I'm stopping out of DLF. My mental stop was 320, but I should have maintained a trailing stop - after all, the stock was at 190! If I'd done a 20% trailing loss, like I did with HDIL, it would have saved some grief. As a penance of sorts, I'm getting out of DLF, though I continue to be bearish on the real estate sector. I'll take this short again later when the stock shows weakness.

I'm cutting position sizes on HDFC and Bharti. HDFC hasn't gone up or down, but a trailing stop would have helped - at this point it's got to be around 10% - or 1700. For Bharti, since I got in around 650, I'd keep the SL at 740; very close, but I have only one contract on.

I'm adding Satyam. It's a small position, just one contract. I'm bearish on IT for the short term, and Satyam is by far the weakest in the pack - it is likely to get impacted by any sort of negative US/Europe news, any issues with customers it will face due to the Maytas fiasco, any regulatory action. Positives for it are a buyback news, and any takeover attempt - have to cut losses quickly on this: Stop loss, 190.

Here it is then. It's done about 10% since inception, nothing dramatic, and unleveraged. The drawdown from the peak (which was +22%) is now nearly 12% - not good, and I must improve on it.

Disclosure: Don't take this as advice, please. The strategy is not something I expect anyone else to follow. It is only virtual and I have no positions on the above, other than some system-based positions on the Nifty which are both long and short. I am not responsible for any losses if you do follow this - and you shouldn't be, please do your own research. (There is enormous risk in shorting)

Labels: ShortOnly

"Satyam Seeks to Build Future for Its Family", screams a Motley fool headline. Berating Satyam for attempting to line it's promoter's family pockets with the hard-earned, interest-earning cash Satyam owns, Rich Duprey at Motley Fool calls it "ludicrous for Satyam to be purchasing the distressed assets of the chairmans sons', even if Maytas Properties and Maytas Infra would de-risk the core business."

But such deals are not uncommon, says Duprey.

Last year, for example, home decor outlet Bed Bath & Beyond (Nasdaq: BBBY) bought baby-goods retailer buybuy Baby from the sons of its co-chairman. They rationalized the purchase by saying that since women shop for home goods, selling pregnant women and new mothers baby stuff was a natural extension. Although the deal "only" cost $67 million, they might as well have opened an auto parts store since women drive cars, too.

Gap (NYSE: GPS) also doles out cash to family members, typically using the construction company of its founder's brother to build its new stores. Maybe it's the recession or a slowing of the number of new store openings, but Gap paid only $300,000 to the brother last year, down from $21 million in 2005. Quiksilver (NYSE: ZQK) is another example of a company that had to take big losses for its purchase of ski-maker Rossignol in a bid to help out a family friend.

An example in India was in Reliance Power Limited, where the Chota Ambani did some merger magic and ended up with about half the ownership of RPL for an investment of 1000 crores, the other half being owned by Reliance Energy (now called Reliance Infrastructure), a public company. The RPL IPO valued the company at 100,000 cr. which has now fallen to 30,000 cr. - and Reliance Energy, which obtained the 24,000 MW orders of power projects based on its experience and inexplicably handed them all over to Reliance Power, owns only 42% of it. The rest is shared by Anil Ambani's personal company (42%) and the rest of the world (16%). The promoter's ownership in RPL is worth Rs. 12,500 crores, for an investment of 1,000 cr., in about a year. Sweet, and only at the cost of Reliance Energy.

Meanwhile Reliance Energy, now called Reliance Infrastructure, has dropped in market price from 2500+ in Jan 08, to Rs. 620 today.

No one really cares because this stuff is common. And it seems to be so all over the world. Yet, once in a while, shareholder activism wins, and it's a hope for a new wold.

Labels: Satyam

From sources I have found that Maytas Properties, the unlisted company that Satyam wanted to buy, had reported a turnover of Rs. 280 crores, and a net profit of 19.7 crores.

Satyam intended to pay Rs. 6500 crores for this company - which would be a P/E of around 325. (Slightly high, one might think, but in these times one does not think, apparently)

Maytas Properties, in it's balance sheet, shows "Unsecured loans" of 600 crores. These are listed later as "Compulsorily Convertible Debentures" issued in 2007-08 - that would mean they get converted to shares.(Out of this 360 crores is in cash, the rest is some "unbilled revenue", and "advances to subsediaries and other companies")

We don't know who owns the debentures. The dilution seems to be only 10% - meaning someone had invested at a potential value of 6,000 crores fairly recently.

So why didn't the Satyam non-exec directors see all of this? It's because, they say, a big-four company they won't reveal who did the valuation. And of course they can't be expected to spend so much time valuing a deal - wasn't management was paid for that?

Sandeep Parikh has written about the directorial compensation - here's the figure from their annual report:

Also, he writes, the Maytas Properties land bank of 6800 acres is largely unverified.

This whole thing stinks. It's not less stinky than, say, the Reliance Power stake transfer, or the Vedanta restructuring - they all stink, just the procedure is different. Reminds me of BOGUS - Bend-Over-Grease-Up-Stupid.

Sure, it's over and behind us. And Satyam's offered a buyback. At about 168 the market cap of Satyam is 11,000 cr. and a 10% buyback (the maximum allowed) will cost them 1200 crores. And is unlikely to mean much to anyone; customers will still be wary, business will stay affected, Maytas will have to pay back those loans and investors. It would perhaps be in their interest to offer every shareholder Rs. 50 per share as dividend - that will cost about 3600 crores, but then it gives every shareholder the right to invest, gasp, in infrastructure and properties themselves.

Sucheta Dalal mentioned it in an article in May 2000:

On Friday, Indiainfoline.com reported that Satyam Computer, one of the more popular IT companies in the country had failed to be entirely transparent about its disclosures. Nearly two years ago, in the course of putting through a set of complex mergers, the management had allotted a large number of shares at par to the brother-in-law of Satyam's main promoter, Ramalinga Raju. The benefit to him is estimated at over Rs 1500 million and had he sold the shares at their peak value of over Rs 7000 just over a month ago, the benefit could have been as high as over Rs 5000 million.

The report was picked up by television channels and led to a pandemonium at the company's annual general meeting at Hyderabad on Friday when angry shareholders demanded an explanation. The share price dropped 12 per cent on Friday and continued to fall on Monday when the management failed to come out with a credible explanation for its actions.

Anyone have a link to the online version of the India Infoline article? I have the content through a group post.

Labels: Satyam

Satyam clients likely to re-evaluate contracts: BS

Around six to eight strategic clients of Hyderabad-headquartered IT services major Satyam Computer Services are understood to be thinking of re-evaluating their contracts as they are "no longer satisfied with the intent and focus of the company".

Maytas Infra continues free fall: ET

Satyam had planned to buy 31 per cent in Maytas Infra from the promoters at Rs 475 a share and make an open offer for an additional 20 per cent stake at Rs 525 per share. It also planned to buy out Maytas Properties, spending a total $1.6 billion on the deal.

Shares in Maytas Infra halted 20 per cent down at Rs 388.25 each on [Wednesday] and the downside continued on Thursday, with the stock losing 12.94 per cent to Rs 338.

Current trading (Thursday) at 308, no buyers, lower circuit. Tsk tsk.

Hostile bid threat?: ET

The dramatic developments since the deal was announced and the 30% slide in the stock on Wednesday, seem to have shaken up some members of the senior management. “We cannot rule out anything, including a hostile takeover bid at this juncture, especially given the valuations now,” said Ram Maynampati, a whole-time director. While hostile bids are rare in India, the possibility of institutional investors paring their holdings has strengthened such perceptions.

With 8% promoter holding and such blatant cash-siphoning, what else would you expect?

IL&FS to negotiate Hyderabad metro funding with banks: ET

Infrastructure Leasing & Financial Services Ltd (IL&FS) has begun negotiating with banks and financial institutions to raise money for the Rs 12, 132-crore Hyderabad metro rail project.

The move comes after Satyam Computer Services has dropped its plan to pick up a 51% stake in Maytas Infra, which is executing the rail project with other consortium partners, including IL&FS.

WTF? Why should the Satyam deal impact this funding plan? Satyam was going to pay the owners of Maytas infra, not the company itself, which would see NO CASH BENEFIT of the deal. It's not like oh, Satyam paid the shareholders 1500 cr., so it will someone find another 12,000 crore for us. How silly.

Satyam's chequered history: Moneycontrol

Satyam has always had a chequered history. It was one of Ketan Parekh’s, or K10, stocks. A couple of years ago the company was not in the ranking of the top IT companies that one was picking up. But over the past three years, with its consistent performance, it has moved up the ranking of being one the top three picks by most portfolio managers.

...

It may come as a surprise that Satyam has won the Golden Peacock Global Award for Excellence in Corporate Governance for 2008. This award was presented on September 23. Investor Relations Global Rankings (IRGR) rated Satyam as the company with Best Corporate Governance Practices for 2006 and 2007. It also won the Golden Peacock Award for Excellence in Corporate Governance from the Institute of Directors in New Delhi in 2002.

Really? In 2002, the Department of Company Affairs accused Satyam of squandering funds and compiling incomplete accounts. The Golden Peacock award is full of crap.

Satyam in 2000: Another "relative" favoured? : Hindu

NOISY scenes prevailed at the 13th annual general meeting of Satyam Computers Ltd (SCL) here on Friday. A section of shareholders insisted that the company management had ``deprived'' and ``defrauded'' them by issuing shares to one of the promoter's fami ly members at a significant discount to the market price.

...

The scheme of amalgamation of Satyam Enterprise Solutions Ltd (SESL), Satyam Renaissance Consulting Ltd (SRCL) and Satyam Spark Solutions Ltd (SSSL) with SCL was approved by the shareholders in the court convened meeting held on May 28 last year and subs equently sanctioned by the Andhra Pradesh High Court. Pursuant to the scheme of amalgamation, eight lakh shares of Rs. 10 each of SCL were issued to the shareholders of SESL in the ratio of one share of the company for every one share held in the erstwhi le SESL.

According to the online report on Friday, a few months before the merger SESL issued rights at par. SESL's equity based increased from Rs. 3.1 crores to Rs. 4.12 crore consequent to the rights. Satyam Computer, however, picked up only four lakh of the 12 lakh shares offered on right basis. The remaining eight lakh shares were renounced in favour of Mr. C. Srinivasa Raju, a director of erstwhile SESL, who is now the Executive Director of SCL. The subsequent allotment of SCL shares (consequent upon merger ) to the SESL shareholders in the ratio of 1:1 enabled Mr. Srinivasa Raju to acquire a significant holding in SCL at Rs. 10 per share as against the then prevailing market price of Rs. 1,700 per share.

There's a lot more about that case in this online group post though the articles referenced are of 2000, and are no longer available.

Essentially, at that time, C. Srinivasa Raju (Ramalinga Raju's brother) purportedly benefited from a merger of some companies into Satyam (and everyone was named Satyam at the time, it seems). It was a surreptitious purchase into those companies by Brother Raju, 6 months prior to their acquisition by Satyam, that seemed to anger shareholders.

This is a nightmare beyond imagination. It's either time to evict the Rajus from their management positions or for the shareholders to press the eject button. It's not that this kind of muck does not happen - but when it happens a second or third time, it's a mess beyond imagination.

Even if you tell me the whole of Indian business is corrupt - if we don't stand up to this kind of blatant misuse everytime it happens, and make a scapegoat suffer, we aren't going to grow as an economy. Reliance power has suffered and will suffer more, and Satyam should pay the price for keeping its current CEO and board in place.

Labels: Satyam

Late yesterday Satyam's founder Ramalinga Raju, who has been looking at the company's war chest sitting idle when there are good uses of the damn money, decided to take action. The best thing to do, he and his board decided, was to buy companies named the mirror-inverse of Satyam, i.e. Maytas.

For $1.6 billion, Satyam would buy Maytas Properties ($1.3 bn) and Maytas Infra ($0.3 bn) and get into the "infrastructure" space, building ports and roads and buildings and all that. You might wonder why a software and IT company would do this, but Raju's personal input was helped by the Satyam questionnaire for new recruits:

1. Can you code Java or C# or C++ or indeed any programming language? (Check all that apply)

2. If there is no programming project availa