India’s Nasty Surprise
MANY INVESTORS EXPECTED to see a few bush-league corporates bite the dust this year in Asia. Few expected the first contender to be supposedly solid and family-run Satyam Computer Services, which started last week feted as a shining beacon in the outsourcing sector and ended it reduced to a sad cliché: India’s Enron.
The Hyderabad-based information-technology firm, whose shares are listed in Mumbai (ticker: SCS.India) and New York (SAY), once counted such firms as General Electric and Nestlé as its clients. Not for much longer. The revelation that Satyam’s founder and former chairman, Ramalinga Raju, fabricated $1 billion — or 94% — of its reported cash reserves rocked India’s business community. Raju resigned after announcing the fraud to the world Wednesday and revealing that, with his brothers, he’d been cooking Satyam’s books for years.
Suresh Senapathy, the chief financial officer at Satyam rival Wipro (WIT), said it was “impossible to imagine that this could happen. I can’t believe that five or six years’ worth of misappropriated books and accounts missed the scrutiny of auditors.” Satyam’s Mumbai stock plummeted 78% on the news, dragging India’s main index, the BSE Sensex 30, down 7%.
Though Senapathy portrayed Satyam as an “isolated case,” others worry that the rot goes deeper. “This isn’t a one-man show,” says Ram Kolluri, the New York-based chief investment officer at ICICI Group’s private wealth-management division. “I’m afraid of even opening the door. This was a systemic fundamental failure. In my nightmare moment, I would start to worry how many Satyams there are around in the market.”
Not Too Shabby: Most Asian markets advanced, but a scandal bashed India.
The spotlight will fall on Satyam’s independent directors, as well as its banking partners, and chief auditor PricewaterhouseCoopers. Questions will also be asked of the country’s regulators, including the chief stock supervisor, the Securities and Exchange Board of India. Analysts for years had voiced suspicion about Satyam’s figures, but during India’s bull-market years — 2004 through 2007 — doubts were largely overshadowed by investor exuberance.
Investors proved surprisingly lenient to India’s $50 billion outsourcing industry. Mumbai-listed shares of Wipro and Tata Consultancy Services (TCS.India) finished Wednesday almost unchanged, while Infosys Technologies (INFO.India) gained 2%.
Only smaller HCL Technologies (HCLT.India) was blasted; it shed 16%.
Analysts expect the big Indian IT firms, as well as foreign outsourcing majors such as Accenture (ACN) and Cognizant (CTSH), to pick up clients fleeing Satyam. And Wipro’s Senepathy speculates that “many companies” would be interested in buying Satyam, but declines to invoke his own corporation as a bidder. Infosys ruled out bidding for the tainted firm.
As for the overall outlook for India’s information-technology outfits, Girish Pai, co-head of equity research at ICICI Securities in Mumbai, sees their average earnings rising 22% this fiscal year, which ends in March. But he sees their profits up only 7% in fiscal 2010.