January 2, 2009

Corporate governance - Satyam and other Indian companies

I think most of you must be aware of what has been happening with satyam lately. I will not go over the details as you can find it on the net easily.

The key events seem to be
- Satyam decided to buy out Maytas infra using the surplus cash on it balance sheet. The logic provided was that the company was trying to de-risk its IT business and diversify
- The market did not like the deal due to the conflict of interest (Maytas is owned by the same management)
- The stock price of Satyam crashed even after the deal was cancelled
- The Rajus (promoters) had pledged their shares against loans taken by them. Due to the price drop, they got into a margin situation and some of their holdings were sold off.
- This drop in the holding has created an interesting situation as the Promoters held around 8% of the stock earlier which may have dropped further. This has put the company into play and there seem to be several other IT companies/ PE players, which are interested in satyam now.

I have been surprised by the above turn of events. However, i am not a bit surprised by the corporate governance fiasco. Does anyone think that this incident was an exception?

I have been reading and analyzing companies for the last 9 years. I can safely bet that almost 90% of the Indian companies have corporate governance issue. One has to search for companies, which are shareholder friendly. There are issues like huge cross holdings, excessive compensation, poor disclosure, diversion of surplus cash to other promoter firms and in some cases pure apathy where the management just sits on the cash and does nothing with it.

These problems are not limited to Indian managements. MNC’s are worse than Indian companies in this respect. Most MNCs have unlisted subsidiaries which are used to launch new products, whereas the listed subsidiary is allowed to just stagnate. Some of these listed subs have huge cash holdings with no clear plans for the cash. In several cases after allowing the listed sub to stagnate, the parent has come out with a buy back offer at a price which is above the quoted price (but way lower than the intrinsic value). I think that is daylight robbery.

The annual reports of most MNC subs and Indian companies are a joke. There is minimal management discussion and analysis of performance. The disclosures are limited to whatever is mandatory. In some cases the companies don’t even care to post their Annual reports and quarterly statements on their website.

I could go on and on, but the key point is that corporate governance in India is very poor. It reflects our overall psyche. People in power, be it politicians or promoters care two hoots about others. The typical promoters thinks that the company is their personal fiefdom and they treat it as such.

The difference this time around has been that Satyam was listed in the US and has large FII and foreign holdings. These investors are not as apathetic as Indian shareholders and reacted negatively to this incident.

Such corporate governance issues happen in foreign markets too. However these markets have more active investors and thriving M&A market. If the market reacts negatively to the company’s performance or its governance practices, the company is put in play. An undervalued company then becomes a target for buyout or takeover. This threat keeps the management in check.

I personally don’t expect much to change after this incident. Our security laws are weak and managements can get away with anything. There is very weak market for hostile takeovers in India and as a result even if the company is undervalued, you will not find too many takeover bids.

There are a lot of undervalued companies in India (i hold several of them). In the US, a value investor can count on a hostile takeover to eliminate the undervaluation, if the management does nothing about it. I don’t expect it to happen in India.

As an investor my approach is to identify companies, which are undervalued and are a bit shareholder friendly (or atleast are not bent on stiffing the minority shareholder). I have given less wieghtage to corporate governance and management quality in the past. Although quality of management is a subjective issue and cannot be analysed with precision, I plan to pay more attention to this factor in the future.

Now this is one cheerful post to start the new year :)

12 comments:

vijay singh said...

hi rohit sir
i am regular reader of your blog. i ofenly want to invest in good undervalue companeys but i have no knowledge about undervalued companeys. here i am trying to see that if you recomending any stock. i wiil be greatful if you took a list of some undervalued stocks. if you not want to disclose that publicly please send a list in my mail id (vijaysigh9415@rediffmail.com). this is my humble request to you. in case i suffered lose i promiss that i never blame you.
thanks


vijay

Anonymous said...

Hi rohit,
If i sell the shares at a loss and thus book the loss.But then buy the same shares back immediately at the same price. Can i claim tax rebate for the losses thus booked considering my only other income is the salary.

Amit

Vic said...

Rohit,

Another good post, nice way to start 2009.

Imagine 30 years down the road..you're still blogging..:-)

Vikas

Rohit Chauhan said...

Hi vijay
you can use the investment idea link on the side bar on the analysis of companies i have posted in the past. i however do not provide recommendation via the blog or via emails to anyone

regards
rohit

Rohit Chauhan said...

Hi amit
i think you can claim the loss, but there should be (i am not 100% sure of the time) is wash rule - time you would have to wait before you can buy the same scrip back. i think you cannot sell and buy the scrip back to back and claim the loss

regards
rohit

Rohit Chauhan said...

Hi vic
30 yrs ...hmmm now that is would be something ..

if however i get into professional investing, i am pretty sure i will not have as much freedom to write about stocks - think the regulations prohibit you from discussing your positions

regards
rohit

Anonymous said...

What does it mean by claiming loss?

as far as i know, any loss can only be offset with profit booked in the same financial year. If

Income from Share market can not be clubbed together with Income from Salary. hence capital market gain has 15% tax while for salary you may pay as per your tax bracket.
Correct me if i am wrong.
This is what i am told by my tax preparer and I am doing the same for last 3 yrs.

rgds
Ani

Vic said...

Rohit,

Well b4 you move into professional investing arena, I hope we're able to get upto speed..:-)

Any chance of getting your book out in 2009? Or having a comprehensive post that gives step by step approach to your methodology?

Thanks,

Vikas

Rohit Chauhan said...

hi ani
i may be wrong on this one. losses can ofcourse be used to setoff profits. i think, not sure though, that losses can be offset against others capital gains and maybe salary too

regards
rohit

Rohit Chauhan said...

Hi vic
move to professional investing could take some time.

i am planning the ebook in the current year ..but lets see how much time i get. also it will have 70-80% of what i have already published on the website.

my own methodology is not really orginal. it is really a mix of my reading and personal experience

regards
rohit

Anonymous said...

Hi Rohit
Company like Satyam has manipulated it's balance sheet. It has been said that Cash is the hardest thing on balance sheet to manipulate and Satyam has done that or Doing that for years.

So how we can improve out DCF model to calculate the intrinsic value of a company? How we could arrive at fair numbers? and how reliable that valuation would be if later we found that figures were wrong?

In my view, we don't have any other reliable source than company's website & sebi's website.

Plus while calculating the FCF we should use most conservative growth rate and most optimistic Rate of return to discount those FCFs. this will bring down the intrinsic value of a company keeping it's value intact.

I am following this with 8.5% growth rate for Owners Earnings (PAT), 10% growth every year for Depreciation & Capex.
and 13% Discount Rate, which brings down the Intrinsic value effectively.

What are your views on this?

Regards
Ani

Vic said...

Rohit,

That's good, we can have more association till then..:-)

Yep. I agree that most of the stuff has already been discussed here. But it is kinda scattered..will be good to have in an organized fashion.
Agree on the methodology part, it is good to have one's own strategy after all the learnings. Each journey is unique.

What would be beneficial for folks like me who're new to Stock/Business picking is a detailed example. You can pick one of your earlier analyzed companies (ideally the one where u spent most of the time and think you covered all..or most aspects).

Thanks,

Vikas