Afterthoughts on Satyam Computer Services

Excerpted from Gilford Securities analyst Ashish R. Thadhani's recent report to clients on Satyam Computer Services (SAY):

• • •

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 (WIT) 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).

Was Satyam A Solitary Cockroach? We are not launching a global extermination campaign just yet but investors have begun to ask tough questions -- “could the remarkable track record of Cognizant (CTSH) also prove too good to be true?” We certainly hope not. However, what gives us pause is the curious merging of COO/CFO responsibilities and a thirty-something CEO (youngest across the S&P-500). Another disturbing fact: Cognizant traces its origins to a partnership with ... Satyam.

Potential Winners and Losers. We reiterate that Infosys (INFY), widely acknowledged for its exemplary governance standards, could be a primary destination for defecting clients. Non-Indian companies such as Accenture (ACN) and IBM could also pick up market share. Syntel (SYNT) could come under increasing pressure in an environment of greater management scrutiny plus movement toward Tier-I players.

ANALYST CERTIFICATION

I, Ashish Thadhani, certify that all the views expressed in this research report accurately reflect my personal views of the subject companies. I certify that I have not and will not receive compensation with respect to the issuance of this report.

Comments

[Adukes:]

All the red flags mentioned above apply to Ctrip International (Nasdaq: ctrp)!!!

Ctrip not only inflated cash, investments, it also inflated long -term assets, too!!!!

Jan 15 10:04 AM

[Subhankar:]

Wipro has already proved that Satyam wasn't a solitary cockroach. Not sure if Cognizant belongs to the same species. But you may need to call the exterminators when the companies from the realty and infrastructure sectors come out with the Q3 numbers!

Jan 16 10:58 AM