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Afterthoughts on Satyam, red flags, a time to act & ethics

Red Flags. In hindsight, we can point to the clockwork 35% EPS growth over a five- year period; continuous, under-the-radar sales that lowered insider ownership from 17.4% in March 2004 to 8.7% in March 2008; the safe distance kept by Mr. Raju’s sons from Satyam; as well as prompt rebuttal of periodic acquisition rumors.

A Time to Act. Satyam has exposed the dark side of Indian capitalism. Were the government to deal with this situation in the same timid manner as 26/11 (Mumbai terror attacks), then FII inflows could well suffer long term impairment. Thus far, we are encouraged by the swift response of various agencies. Due to its high-profile, this case should cut through the massively clogged Indian criminal justice system. Satyam’s own survival rests largely on a rapid liquidity infusion, the loyalty of its fatigued clients and employees, and pending litigation.

Ethics. Wipro was quick to deplore the unsavory maneuverings at Satyam while reassuring the media that this should be treated as an isolated failure. We now know that throughout the recent World Bank vs. Satyam spat, it had been withholding disclosure of its own four-year suspension. The untenable practice of allocating IPO stock to clients could also turn out to be more pervasive than previously thought. Wipro remains overdue for a lift in its operating performance. Based on recent revisions to our calendar 2009 EPS estimates, it has the worst earnings momentum among the top-3 U.S. listed offshoring majors. We also point out that trailing CFFO ($695 million) and margin (13%) continue to lag Infosys ($1,302 million and 28%) despite higher capex outlays ($404 million vs. $355 million).

………….Excerpted from Gilford Securities analyst Ashish R. Thadhani’s recent report to clients on Satyam Computer Services.   Source / via: SeekingAlpha