Cover Story

SHOW ME THE

!
Satyam may not be the only company that has siphoned off cash from its balance sheet. Some cases where the numbers look suspicious
Sanjay Bakshi
n December 4, 2008, more than a month before Satyam blew up in our faces, I received a mail from an exstudent about a company by the name of Aftek Ltd. The ex-student wrote: I have been looking at a stock recently and was wondering whether the thought process I have used in analysing it is right or not. I would be grateful if you could read through what I think and comment on it. He provided me with the following data:

Cash on hand as on March 31, 2008: Rs 339 crore Market cap as on December 3, 2008: Rs 111 crore Borrowings as on March 31, 2008: Rs 78.7 crore Current liabilities as of March 31, 2008: Rs 54 crore Net cash value after paying all external stakeholders (Rs 339 - Rs 78.7 - Rs 54) = Rs 206.3 crore
This amount is almost twice the market cap of the company! he wrote. He pointed out that the business model of the company seems undifferentiated and without any competitive advantage, and that the promoters have a spotty track record having been debarred from dealing with capital markets for one year by Sebi in 2004. He also wondered whether this was the

kind of business that Benjamin Graham believed was worth more dead than alive, and he sought my views on angles that he may have missed and that were factored in by the market. A cash bargain is one of the most extreme situations in the stock market. This occurs when the market values an entire company for less than the amount of the cash it holds on its balance sheet. Ben Graham, the father of Security Analysis, loved such situations because buyers of such stocks were effectively paying nothing for the remaining assets. Such stocks were bargains indeed! Afteks stock had been popping up as a cash bargain for a number of years. So I forwarded the message from the ex-student to my students and asked them what they thought about it. Within hours I received a reply from one of them. Sir, I think theres a problem with the cash. Its in Banco Esa, a bank in Portugal. (See table to right) I asked the student some questions. Tell me how much was the cash over the last three years? How much is it earning? Have you heard of this bank where the money has been parked? And if the money is actually there, then where is the treasury income? What does the company do? Where did it get the cash from? It says it has a search engine. Whats the name of it? Google it! My student got back in a short time

AFTEK
Bal with non-sch banks in deposit a/c* Deposit a/c (in Rs cr) Mar08 Banco Efisa, Portugal Mar07

100.36

105.94

(Maximum balance outstanding at any time during the year Rs 105.94 cr) {Previous year (Rs 111.12 cr}

Investec Bank AG, Switzerland

Time deposit Demand deposit

11.86 1.18

19.42 -

(Maximum balance outstanding at any time during the year Rs 22.54 cr) {Previous year Rs 23.78 cr}

Current accounts Banco Efisa, Portugal

197.88

168.64

(Maximum balance outstanding at any time during the year Rs 268.84 cr) {Previous year Rs 245.92 cr}

Investec Bank AG, Switzerland

0.3

(Maximum balance outstanding at any time during the year (Rs 1.05 cr) {Previous year Rs 3.56}

Total

339.83

301.01

*Afteks stock had been popping up as a cash bargain for a number of years. It had money parked with a Portugal bank for many years

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23 January 2009 Outlook PROFIT

Cover Story

When Outlook Prot asked Aftek GTL saw a substanCompanies about the money parked with a tial rise in its cash respond reserves between March bank in Portugal for so many years, Nitin Shukla, CFO of Aftek said: What we have 2007 and March 2008. V Ravi Kumar, is a collection account, where we collect the revenues company secretary of GTL Infra, says: The increase from our European businesses, the details of which I in cash reserves is on account of the funds raised by the will be able to give out only after talking to my company company in FY2007-08 to nance the greeneld rollout secretary. We have had this account for the past eight of 23,700 towers at an estimated capex of $1.81 bn. years and weve taken RBI permission for this every Around $84 mn was raised through a rights issue and year. The account is audited. Any further de$300 mn through FCCBs. Warrants worth $264 mn were tails, like the account number and so on, I will issued to the promoters, IDFC and other institutional have to check with my company secretary. investors. The company also availed a part of the term loan extended by a consortium of Indian banks depending

A few companies which have cash balances kept outside India

Name Rajesh Exports HTMT Global Aftek GTL Infrastructure Maharashtra Seamless

Price Stock (Rs)

Cap market (Rs cr)

Cash reported (Rs cr)

Cash as % of Auditor market cap

Chairman (Audit committee)

23 135 13 30 160

575 277 120 2,324 1,127

5,002 625 340 1,373 254

870 P K Rungta & Co 225 PriceWaterhouse 283 Walker, Chandiok & Co 59 M/s Chaturvedi & Shah M/s Yeolekar & Associates 23 Kanodia, Sanyal & Associates

Shiva Shankar Anil Harish V J Masurekar Prakash Samant U C Agarwal

saying that the cash has gone up from Rs 300 crore to Rs 330 crore. But in reality I think that the cash has really gone up only in 2005 when it issued GDRs and FCCBs. The question is whether it really has the money? The treasury income is Rs 4.9 crore on deposits of about Rs 250 crore. Thats just 2 per cent, which is suspicious. The student had done a search on Banco Esa, but found nothing of signicance, except that it had some Bernard Madoff exposure. Finally, it was a Ketan Parekh run stock. It touched a high of about Rs 4,500 or so. I am not

GTL INFRA
Balances with foreign banks*

(in Rs cr)

Bal as on Mar 31, 2008

Max bal during the year

On current a/c Barclays Bank Bank Julius Baer On call a/c Bank Julius Baer 398.27 398.27 *In GTL Infrastructure, the companys cash was found to be parked with a Swiss bank 0.04 108.91 0.04 108.91

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Outlook PROFIT 23 January 2009

able to put some facts together, but I will not run after this stock as it seems suspicious, he said. I wrote back to the student, telling him that he had done enough work on this company to conclude that one cannot rely on its nancial statements. All the red ags you have pointed out are very relevant. This stock is not a Graham cash bargain. Your connection of the absence of adequate treasury income with the presence of so-called cash on the balance sheet was good work. Its safe to keep away from such companies. When Outlook Prot asked the company about the money parked with a bank in Portugal for so many years, Nitin Shukla, CFO of Aftek gave his side of the story. (See box: Companies respond) While it pays to be skeptical when analysing nancial statements, the Satyam scandal shows that there is nothing like too much skepticism. For, it is no longer sufcient to rely on the supervision of illustrious independent directors and reputable auditors. Its no longer prudent to rely on the accuracy of nancial statements just because the company in question is the recipient of prestigious awards for corporate governance. Its no longer sufcient to reconcile earnings with cash ows, and blindly rely on the closing cash balance as correct even if it has been certied by the auditors. If a reported cash balance of $1 billion in a single company certied by

the auditors is, in fact, found missing, is it unreasonable for investors to be suspicious of companies which have large stated cash balances on their balance sheets? So, as I write this column in the spirit of the man who said that there is never just one cockroach in the kitchen, I ask you to closely look at companies that claim to have large cash balances and to pay particular attention to companies where such reported cash balances constitute a large percentage of their market capitalisation. I also ask you to look closely at companies where such cash balances are kept outside India, sometimes deposited in accounts with little known and highly secretive banks. (Check out the list above.) Take the case of Rajesh Exports whose latest available balance sheet reports a cash balance of Rs 5,002 crore. The companys auditor notes in the audit report, The term loans raised by the company were applied for the purpose for which they were raised. However, a portion of the amount raised by the company by way of FCCB issue is parked abroad with banks for future. However, the cash and bank schedule in the balance sheet does not mention any money lying with a bank outside of India. In the case of GTL Infrastructure, most of the companys cash was found to be parked in a Swiss bank (See box bottom left), whose CEO committed suicide recently. (Check out the report

on the requirements for the rollout of the project. The cash reserves in the overseas account amounted to Rs 1375.6 crore in March 2008 from nil in March 2007 as a result of the proceeds raised through the FCCB issue. When asked why the company chose a German bank (DEG), Kumar said DEG nanced infrastructure projects in developing countries. The company secured a loan at Libor+200 bps which was disbursed and deployed in India. Despite having a high Ebitda margin of about 50%, the company was still incurring nancial losses at the net level on high levels of depreciation and interest cost. The company was unable to declare dividends at this stage.

HTMT has deposited cash in Mauritius. When asked about keeping its money outside India, Anand Vora, CFO, said: We have been getting a lot of queries, because PwC is our auditors and have a considerable amount of cash on our books. We dont want to comment till we get a clearance from our legal team. So, while your questions (on overseas accounts and account balance and cash on books) may not be very sensitive issues, we will still like our legal team to go through it.

GTL INFRA
at http://tinyurl. com/7rlmap) Why does an Indian listed company deposit its money in a secretive private Swiss bank? Interestingly, the company has not mentioned the name of this bank in its list of bankers in its annual report. Its fascinating to observe that the companys auditors are unable to offer their services to the company due to pre-occupation. (Check the strip reproduced above from the original) Preoccupation? Hmmm... HTMT Global has a cash balance of Rs 625 crore deposited in an account in Mauritius. The market

MAHARASHTRA SEAMLESS
Cash and bank balances (in Rs cr)

Cash in hand Bal with sch banks FD a/c Cur a/c Unclaimed div a/c Unclaimed pref share redmpn a/c Unclaimed NCD redmpn a/c Unclaimed debenture interest a/c

0.08 252.20 0.99 1.32 0.25 0.01 0.01 254.86

0.06 318.55 1.48 2.84 0.26 0.02 0.01 323.22

* Maharashtra Seamless balance sheet makes no mention of the reputed international bank it claims to have put the money

given separately of, (a) balances lying with Scheduled Banks on current acvalues the debt-free company at Rs 277 counts, call accounts, and deposit accrore. When Outlook Prot asked the counts, (b) the names of the bankers company about this cash, Anand Vora, other than Scheduled Banks and the CFO, HTMT Global, brushed aside the balance lying with each such banker question saying that they needed clearon current accounts, call accounts and ance from their legal team to respond. deposit accounts and the maximum (See box: Companies respond) Earlier, amount outstanding at any time durin a conference call, when asked why ing the year from each such banker. the company didnt bring the money The notes to accounts in back to India, Vora had the companys annual resaid: Yeah, but we have Always take port states that the comcertain constraints that pany has money kept with we have mentioned in the a close look a reputed international past, because these are at companies bank. The companys funds existing in Maurithat claim to balance sheet, however, tius and if we bring them makes no mention of the into India we will be subhave large name of this bank. (See jected to 33 per cent tax cash balances box left bottom). These exand as you are aware, we amples are illustrative of are aggressively pursuthe problem too much cash in relaing opportunities for acquisition. tion to market capitalisation and too We believe that it is best to keep the little market condence in that cash. money there for our acquisition stratIn the super-hit lm Jerry Maguire, egy, you know. there is this much-mentioned scene Pay the tax Mr Vora and give the in which Jerry (played by Tom Cruise) money back to the stockholders. tries very hard to be retained as an Even after paying tax you will end agent for a popular baseball player. Afup paying your stockholders a speter much talk about what Jerry can do cial dividend of Rs 300 a share, as for his client, the baseball player deagainst the current stock price of mands from Jerry, screaming, Show Rs 135 a share. Your stockholders me the money! It is time for auditors, will applaud you even if you havent directors particularly independent grown, but have paid high taxes, as it ones chairpersons of audit commitwould have still made them so much more richer! Dont blame an irrational tees and investors to demand the same stock market for valuing your compafrom companies. Please, show us the ny below cash. It has been doing that money. p for quite some time now. The market is saying, Show Me The Money! Sanjay Bakshi is professor at the Maharashtra Seamless also appears Management Development Institute to be in violation of the law. The Indian in Gurgaon. Ankur Jain and RavikiCompanies Act requires disclosure of ran Aranke also contributed to this bank balances as specied in Schedule report. Company responses collated VI of the Act. This states that in regard by Gargi Banerjee and Arundhati to bank balances, particulars are to be Bakshi-Dighe
23 January 2009 Outlook PROFIT

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