What is the Satyam scam about ?

What is the Satyam scam about?

It is about corporate governance and fraudulent auditing practices allegedly in connivance with auditors and chartered accountants. The company misrepresented its accounts both to its board, stock exchanges, regulators, investors and all other stakeholders.

Is this an accounting fraud, a market manipulation/fraud or both?

It is a fraud, which misled the market and other stakeholders by lying about the company’s financial health. Even basic facts such as revenues, operating profits, interest liabilities and cash balances were grossly inflated to show the company in good health.

Who is to blame here? The promoters?

The promoters are primary culprits, although it is almost impossible to misrepresent such facts without the connivance of the auditors and some executive board members. Independent directors, it seems, were kept in the dark about the actual books of accounts.

What about the auditors?

The role of external third party auditors, who were tasked to ensure that no financial bungling is undertaken to carry out promoters’ interest or hide facts, have also been brought to question.

Anatomy of a fraud

1. Maintaining records


· Raju maintained thorough details of the Satyam's accounts and minutes of meetings since 2002.

· Raju stored records of accounts for the latest year (2008-09) in a computer server called "My Home Hub."

2. Fake invoices and bills

· Details of accounts from 2002 till January 7, 2009 – the day Raju came out with his dramatic, five-page confession - were stored in two separate Internet Protocol (IP) addresses.

· Fake invoices and bills were created using software applications such as 'Ontime' that was used for calculating hours put in by an employee

· A secret programme was allegedly planted in the source code of the official invoice management system creating a user id 'Super User' with the power to hide or show the invoices in the system.

3. Web of companies

· A web of 356 investment companies was used to allegedly divert funds from Satyam.

· These companies had several transactions in the form of inter-corporate investments, advances and loans within and among them.

· One such company, with a paid up capital of Rs 5 lakh, had made an investment of Rs 90.25 crore and received unsecured loans of Rs 600 crore.

4. Why did he need the money

· The cash so raised was used to purchase several thousands of acres of land across Andhra Pradesh to ride a booming realty market.

· It presented a growing problem as facts had to be doctored to keep showing healthy profits for Satyam that was growing in size and scale.

· Every attempt made to eliminate the gap failed.

· As Raju put it, "it was like riding a tiger, not knowing how to get off without being eaten."

· Cashing out by selling Maytas Infrastructure and Maytas Properties to Satyam for an estimated Rs 7,800 crore was the last straw. The attempt failed and Raju made the stunning confessions three weeks later.

PE ratio: How it helps buy great stocks

Have you ever experienced the following scenario: you buy 1 kg of apples at Rs 100 per kg, only to find out they were available at Rs 80 per kg just a few feet away? Aren't you disappointed at having to pay more for the same quality of apples?

The same also applies to stocks.

If you buy a share of company 'A' for Rs 100 and later on find out that the share of company 'B', with better earning prospects, is available for Rs 60, it is bound to disappoint you.

So how do you find quality bargains? How can you decide if the current stock prices make sense? Does the price justify the earning prospects of the company?

The answer to these questions is: Price-Earning (PE) ratio.

Introduction to PE ratio: PE ratio is one of the most widely used tools for stock selection. It is calculated by dividing the current market price of the stock by its earning per share (EPS). It shows the sum of money you are ready to pay for each rupee worth of the earnings of the company.

PE = Market price / EPS

Assume there are two companies 'A' and 'B', operating in the same sector. If PE of 'A' is 30 and PE of 'B' is 22, then 'B' is considered to be a better buy, as the market price has not gone up to reveal the earnings prospects of the company. But 'A' is considered to show higher growth prospects as compared to 'B'.

How does PE help?

Understanding PE gives the investors an idea if the stock has sufficient growth potential. Stocks with low PE can be considered good bargains as their growth potential is still unknown to the market.

If the PE is high, it warns of an over-priced stock. It means the stock's price is much higher than its actual growth potential. So these stocks are more liable to crash drastically. This was evident in the recent market crash when the stocks of all Reliance companies fell sharply.

This will allow savvy investors to sell their holdings before the stock price crashes.

Drawbacks of PE ratio

Interpretation of PE ratio is heavily dependent on comparison of the company with its peers. Also PE that is considered very high in certain sectors can be considered very low in other sectors.

For instance, companies in IT and telecom sectors have higher PE ratio than the companies in manufacturing or textile sectors.

Also PE ratio is not totally neutral. Any major announcement of a major order or acquisition by the company will certainly push up its PE. On the other hand, low PE may not indicate a good buy but could signify more serious issues facing the company. So it is very important to perform a thorough research into the background of the company, before investing.

Besides EPS itself is assumed, as it forecasts future growth based on past performance. However, there is no guarantee that the company can continue to maintain its performance each year. Also the sector in which the company is operating may experience problems as was recently seen for the IT sector.

So PE ratio cannot be considered to be a totally reliable indicator of cheap, good stocks.

Yet, PE ratio remains one of the most important ratios when it comes to stock selection.

10 INTERESTING FACTS YOU MAY NOT KNOW ABOUT INDIAN STOCK MARKETS

1. There are 12 stock exchanges in India. Out of which only 7 are permanent and rest 5 require their license to be renewed timely. 13 other exchanges have already been granted exit by SEBI. Can you recall any names apart from NSE and BSE?



2. The record low Sensex has ever touched is 113.28 points in December, 1979 and after 35 years; it touched the record high at 30024.74 in March, 2015.



3. Do you know U.S markets (S&P500 & Dow Jones Industrial Average) and UK’s FTESE100 contracts can be traded in NSE? It was for the first time, S&P500 were listed on any exchange outside U.S.A



4. BSE is one of world’s top exchanges in terms of listed members. It has more than 5,000 companies on the list.



5. Did you that on Nov, 2014 India became one of top 10 markets in the world by market capitalization? India market capitalization is approx. $1.6 trillion & it is ahead of Switzerland & Australia markets based on Market Cap.



6. Only 2% of Indian household savings are being directed to Equity markets, Indians are so risk-averse!



7. Foreign Institutional Investors (FIIs) are the strongest driving force in Indian markets. Among Domestic Institutional Investors (DIIs), LIC leads the way.



8. The NSE has the second largest volumes in the derivatives market. It ranks second in Index Options, and third when it comes to the Stock Index Futures.



9. The total F&O traded value on 30th April, 2015 stood at Rs 6.27 lakh crore, registering a jump of nearly 8 per cent over its earlier high of Rs 5.81 lakh crore recorded on February 26, 2015.



10. While in Equities segment, record number of trades was done on 16-05-2014 and it was 1.18 Crore

An Indian farmer’s son is now worth more than $300 million after his health care firm’s IPO

By his own admission Arokiaswamy Velumani was born at the bottom of the pyramid

The son of a landless farmer from the nondescript village of Appanickenpatti Padur in Tamil Nadu, Velumani saw through school and college on subsidised funding from the government.

“My parents were very poor,” Velumani said. “They never had the luxury of buying me a pair of chappals (sandals) or trousers. I was born at the bottom of the ten slices of the pyramid. It wasn’t easy. But today, I am at the top of the very pyramid.”

Thyrocare, the company Velumani founded two decades ago, made its debut on Indian bourses, with a valuation of Rs3,377 crore ($505 million), as on May 13. Velumani owns a 64% stake in the company. That makes him worth at least $323 million.

Thyrocare claims to be the world’s largest thyroid testing company, with a network of 1,122 outlets across India, Nepal, Bangladesh, and the Middle East. It also runs one of India’s largest network of health diagnostic labs, processing over nine million samples and conducting over 30 million medical tests every year.

From scientist to entrepreneur

Velumani’s career began with a job as a shift chemist at Gemini Capsules, a small pharmaceutical company in Coimbatore, in 1979. The 20-year-old chemistry graduate earned a paltry Rs150 ($2.25 currently) every month. Three years later, the company shut down and Velumani suddenly found himself without a job.

“That was a blessing in disguise,” he said. “Only when you are pushed hard or thrown out, you want to achieve more.”

Velumani applied to the Bhabha Atomic Research Centre (BARC), one of India’s finest atomic research centres in Mumbai, for the job of a lab assistant. He was accepted. But once inside the prestigious centre—named after Homi J Bhabha, the founder of India’s nuclear energy program—Velumani decided to study further.

He began with a master’s degree in 1985 and eventually completed his doctoral program in thyroid biochemistry by 1995, through a tie-up program that the University of Mumbai had with BARC. “Those days, I was earning and learning,” recalled Velumani, “BARC allowed scientists to study and research further.”

“In 1982, I did not know where the thyroid gland was,” he admitted. “By 1995, I was a PhD in thyroid biochemistry.”

In the meantime, he also rose to the rank of a scientist and was posted at the Radiation Medicine Centre (RMC), a BARC department that focused on the application of nuclear energy in healthcare and agriculture.

But some 14 years after he started work at BARC, Velumani put in his papers. He had decided that he wanted to use his expertise in thyroid biochemistry to set up testing labs to detect thyroid disorders. With the Rs100,000 ($1,500) that he collected through his provident fund, Velumani set up shop in Byculla, a middle-class neighbourhood in South Mumbai, which is a short distance from the Tata Memorial Hospital, a prominent cancer institute. He was 37-years-old then.

Velumani’s wife, who died in February this year, due to pancreatic cancer, quit her job at the State Bank of India to become his first employee. “As with any business, the initial years were difficult,” said Velumani. “But when you are passionate about something, those pains also become a pleasure.”

Thyrocare’s business model

India has a massive thyroid disorder problem.

One in every 10 person in the country suffers from hypothyroidism; women are especially vulnerable. But the detection rate of the condition remains abysmally low, even though the condition results in preterm births, intrauterine growth restriction, respiratory distress and increased perinatal mortality in pregnant women.

With an eye on the huge potential for thyroid testing, Velumani started out with a franchise model where samples would be collected across the country and sent back to the central laboratory in Mumbai. Procuring samples, according to Velumani, was the toughest part since they had to come from different corners of the country, while processing them was much easier.

Thyrocare lab in MumbaiPhoto by: (Thyrocare)

“When we started out, we realised that we needed 25 samples every day to make the business cost effective,”said 57-year-old Velumani. “But, we were in it for the long run. We charged one-fourth of what the market was charging for the testing and built our business.”

While Velumani accepts that there wasn’t much technological innovation that he brought to the table, there was certainly a change in the business model. “Back in the day, no labs could get more than two samples a day,” he said. “I worked on improving the business to business model and introduced the franchise model, which helped increase the number of samples per day, making operations cost effective.”

Over the years, from simply focussing on thyroid disorders, Velumani and his team expanded the business into health diagnostics, including preventive medical check ups, blood tests, and pulmonary function tests. It’s an industry that has grown at a solid clip of over 16% annually in the past three years, and is expected to be worth Rs61,600 crore ($9.8 billion) by 2018.

Today, Thyrocare offers all sorts of health diagnostics, from a sexually transmitted diseases (STD) profile to metabolism, diabetes, cancer, cardiovascular and infertility tests. But the focus on thyroid disorders still remains, with almost 28% of the samples tested by the company annually accounting for thyroid tests. The company has a centralised laboratory in Mumbai, supported by four regional testing labs in India. Over the next two years, the company wants to set up 20 new laboratories across the country.

Thyrocare is also developing a subsidiary to focus on cancer screening through molecular imaging.

Runaway success

Thyrocare’s success in the past two decades had also brought it closer to India’s private equity players.

In 2011, New Delhi-based CX Partners picked up a 30% stake in Thyrocare for Rs188 crore ($28 million), valuing the company at about Rs600 crore ($100 million). Since then, other investors, including Samara Capital, Norwest Venture Partners, and ICICI Bank’s Emerging India Fund, have bought into the company.

In fact, the recently concluded IPO—which saw Thyrocare’s shares being oversubscribed 73 times—was to provide an exit route for the existing investors.

“Our success is mostly due to two reasons,” explained Velumani. “One, in the last 20 years, we have never taken on debt. Second, over the last ten years, we have always kept Rs60 crore ($9 million) aside in cash.”

In 2015, the company’s standalone revenue stood at Rs187 crore ($28 million) while its net profit stood at Rs48 crore ($7.2 million).

But it’s a centralised business model that comes with its own set of risks.

“Thyrocare’s multi-lab model encompasses a fully automated CPL (centralised processing laboratory) supported by four RPLs (regional processing laboratory),” ICICI Direct, a brokerage, said in its report. “Any disruption at CPL and/or RPLs can reduce or restrict sales and materially affect the business of the company. Any delay or interruption in transporting samples to CPL and or RPLs can also hurt the effectiveness of this business model.”

The company is also facing stiff competition from other domestic diagnostic laboratories, which are also vying for market share. India’s diagnostic industry is currently unorganised, with almost 90% of the market controlled by local providers. Thyrocare’s competitors include Dr PathLabs, SRL Diagnostics, and Quest Diagnostics.

Another concern is the growing advancement in medical technology.

“The industry faces risk with changing technology and new product introductions,” HDFC Bank Investment Advisory Group said in a report on April 25. “Its advancement in technology may lead to the development of more cost-effective tests that can be performed outside of a diagnostic laboratory, such as point-of-care tests that can be performed by physicians in their offices. The developments of such technology and its use by customers would reduce the demand for laboratory testing services and negatively affect revenues.”

Velumani, though, is ready to take on all the challenges.

“My entire life has been an upward slope,” Velumani said. “I am 57 now, and I haven’t lost any of the motivation I once had.”

Earnings per share (EPS) ratio & what it means!

Even comparing the earnings of one company to another really doesn’t make any sense, if you think about it. Earnings will tell you nothing about how many shares the company has. Because you do not know how many shares a company has, you do not know how many parts that companies earnings have to be divided into. If the company has more shares, the earnings will be divided into more parts.

For example, companies A and B both earn Rs.100, but company A has 10 shares outstanding, so each share holder has in effect earned Rs.10.

On the other hand, if company B has 50 shares outstanding and they too have earned Rs.100 then each shareholder has earned Rs.2. So you see it is important to know what is the total number of outstanding shares are as well as the earnings.

Thus it makes more sense to look at earnings per share (EPS), as a comparison tool. You calculate earnings per share by taking the net earnings and divide by the outstanding shares.





EPS = Net Earnings / Outstanding Shares

So looking at the EPS ratio, you should go buy Company A with an EPS of 10, right? EPS is not the only basis of comparing two companies, but it is one of the methods used.

Note that there are three types of EPS numbers: 

• Trailing EPS – last year’s numbers and the only actual EPS
• Current EPS – this year’s numbers, which are still projections
• Forward EPS – future numbers, which are obviously projections 

Biggest falls in Indian stock market history

Following are the 10 biggest single-day falls at close:

• August 24, 2015:   1,624.51 points
• January 21, 2008:  1,408.35 points
• March 17, 2008:     951.03 points
• March 3, 2008 :      900.84 points

• January 22, 2008:   875.41 points
  
• February 11, 2008:  833.98 points
• May 18, 2008:         826.38 points
• March 13 2008:        770.63 points
• December 17, 2007:  769.48 points
• March 31, 2008:         726.85 points

Following are the 10 biggest intra-day falls for Sensex:

•     January 22, 2008:   2,272.93 points
•      January 21, 2008:   2,062.20 points
•      August 24, 2015 :   1,741.35 points
•      October 24, 2008:   1,204.88 points
•      October 10, 2008:   1,088.60 points
  
•      March 17, 2008:     1,022.25 points
•      February 11, 2008:  1,007.15 points
•      October 27, 2008:   1,003.68 points
•      October 8, 2008:    954.48 points
•      July 6, 2009:           953.61 points
  

What should you do after a stock market crash?

 Nothing

For long-term investors, the best thing to do when the stock market crashes is nothing.

Take a breath, turn off the news and — whatever you do — don't log in to view your account balances. 

Resist any urge to sell stocks

Selling stocks in panic is the worst thing you could do after a stock market crash. Successful investing is about buying low and selling high. When you sell after a crash, you do just the opposite

And if you think you can just cash out for now and then get back in when the market improves, consider this: You have no way of knowing when the market will swing back. And there is a big cost to missing just a few really good days in the stock market.

 Buy stocks (if you were going to anyway)

The best time to buy investments is when you have money to invest. The best time to sell investments is when you need money for something else.

That said, if you’ve wanted to invest but have been dragging your feet for whatever reason, you might see the stock market crash as a buying opportunity. No, you don’t know if the market is going to go back up or continue to go down. But you do know this: Stocks are about 10 percent cheaper than they were last week.

Summary

A sudden stock market crash is unnerving, but it’s not a sign of imminent financial collapse and it doesn’t mean that stocks are no longer a good long-term investment.

Unless you need cash immediately (in which case it shouldn’t have been in the stock market in the first place), do NOT sell off your stocks after a crash. The best thing to do is nothing. However, it is OK to buy some investments if you have money to do so. After things have cooled off, take time to review your investments and make any adjustments to bring your asset allocation back into balance.

What can we learn from Snakes & Ladders ?

If you ask anyone what game comes to their mind when some one say stock market, pat would come reply – Monopoly. Just because money is involved, many of us assume stock market is like Monopoly game. It is not correct. Monopoly is more like  running a business. I strongly think Snakes and Ladders depict Stock Market situation.

I am sure many of us would have played this game as child.

For those who are new to this game, these are the rules:

All players keep their token at number 1 in the beginning. First one to get to square # 100 wins the game.

Only one dice is used for roll. You must roll number #1 or #6 to leave the #1 square and move on to the game. Until you get #1 or #6, you stay in the square #1.

You move square by square to the count you roll. ( For example, if you roll #3, you move 3 squares). If the square you land has snake or ladder, do as below:

Snake: if a player lands at the tip of the snake’s head, his or her token slides down to the square at the snake’s tail.
Ladder: if a player lands on a square that is at the base of a ladder, his or her token moves to the square at the top of the ladder and continues from there.

First player reaching the square #100 is the winner. You should reach #100 exactly, none more, and none less. You skip your turn if you don’t get exact roll to reach #100.

What does this game teach Stock Market Investor ?

First it teaches about the risk and reward. Risk is like the snake and Reward is like the ladder. While dice is in your hand, the outcome is not !

In the same way, in stock market, the investor can control the risk, but the reward ( or portfolio return) can’t be predicted.

When a single roll can decide between ladder and snake, players get tensed up.

For example, in the board in the figure-2, if a player is at square #75, he can roll 2 and move to #77 and catch the ladder to end up in #95 OR roll 5, and get to #80 and catch the snake with nasty smile, to get all the way down to #2.

Facing this situation, I see children praying to all kind of Gods, before rolling the dice. They are not praying for Ladder, they are praying for the Snake not to catch them. Same goes for the stock investor.

In real life stock market the risk and rewards are not as clear as this board game. Nevertheless we pray to God when the risks are too high for our tolerance.

Smart players of this game know that catching ladder is not as important as missing the snakes. Since roll of dice always push you forward you tend to move up slowly, you will get to the target anyway, just avoid snake heads.

Like wise, Stock Market has upward bias. Smart investors know time is on their side, and helps them in getting compounded return, if they just hang on in the market !  Important lesson for the investor is missing snakes or missing the downside of the market. I am not talking about timing the market. But investor should learn to control the risk of the portfolio so much that they don’t get to lose the capital or large negative return in any year. Just like avoiding snake heads !

Any one looking at the figure-2 closely will see most dangerous snake is the Green one that has its head in #99. That can drag you down to #7. I saw kids caught by this snake throw their token and quit the game in disgust. Some of them so much frustrated, vouch not to play this game again ! But kids have short memory and within 24 hours, they will return to play – eager to take revenge on the snake.

But we grownups have problem. We have good memory. “Once bitten twice shy” is written with us in mind, and not the children.

A retiree saving and investing his portfolio should take enough precaution to safe guard his assets and slowly shift the money to safe fixed income instruments just before retirement. This is very much necessary. Investors risk tolerance does not matter in this case. They MUST do this adjustment to the portfolio couple of years before the retirement.

After all, portfolio safety is what matters, investor’s risk tolerance is not, just before retirement. Remember Risk can show up unexpectedly. If the capital is destroyed completely, few years before  withdrawal, risk tolerance of the investor, can’t get the capital back.

Any retiree who fail to do this adjustment due to ignorance or innocence or arrogance will taken down by the Green snake.

Another interesting square is #4. That ladder takes you to #79 in blink of an eye. A Lucky player rolling #3 at the beginning of the game tastes this success in one roll. It happens some time.It is not impossible to get. Look at this other way, out of 6 players, one has the probability of getting this lucky roll ! Not a bad probability. This roll gives lot of confidence to the player and he starts thinking he in invincible on that day and assume he would be the winner because Lady Luck is playing for him !

The same thing happens in the stock market too. Few investors gets lucky and they make money quickly and that boost their ego and they attribute this luck to their stock picking ability and enter the stock market with lot of arrogance and they get humbled in few rolls.