Mahindra Satyam reports losses in 1st earnings statement since India’s largest corporate fraud

Mahindra Satyam posts heavy losses post scandal

MUMBAI, India — Indian outsourcer Mahindra Satyam said Wednesday that it posted heavy losses in fiscal years 2009 and 2010, missing analyst expectations in its first earnings statement since the company’s founder confessed to the largest fraud in Indian corporate history.

For the year ending March 2010, the company’s net loss was 1.25 billion rupees ($27.8 million) on revenues of 54.8 billion rupees ($1.2 billion) under Indian accounting standards, it said.

For the year ending March 2009, its net loss was 81.8 billion rupees ($1.8 billion) on sales of 88.1 billion rupees ($1.96 billion), the company said.

The losses were due largely to exceptional fraud-related expenses.

This is the first time the company, formerly called Satyam Computer Services and once India’s fourth-largest outsourcer, has presented results since its founder Ramalinga Raju confessed in January 2009 to inflating company assets by $1.5 billion — a number government investigators later said was understated by at least $1 billion.

“Other than Enron I don’t think anyone came close to the complexity and magnitude of fraud as we have here,” said Vineet Nayyar, chairman of Mahindra Satyam.

“When we took the company it was a bit of a black box, but I must say I’m a bit surprised at the magnitude of exceptional items,” he added.

The financial statements will allow the company, whose books have been tainted since 2000, to bid for new contracts, pave the way for a merger with parent company Tech Mahindra — and possibly unleash pending class action litigation from angry investors in the United States who now have a better sense of just how much they can sue for, analysts say.

“Unless you have audited financials, you can’t compete … for most new clients,” said Sandeep Muthangi, an analyst at Mumbai’s IIFL Capital. “They’re essential to get new business.”

Analysts say the planned merger with Tech Mahindra would create India’s fifth largest outsourcer with revenues of more than $2 billion a year, but some express skepticism that the merger will be quickly concluded given litigation threats. The company also has to announce its results for the first two quarters of this fiscal year, which it expects to do by Nov. 15, before the merger can proceed.

“Our finances may not be comparable to the best in the industry but given the trauma we have been through, I think we have made remarkable recovery,” Nayyar said. “You will have to be patient with us.”

The numbers leave key questions about the strength of the current business unanswered.

“There are still a lot of dark clouds out there,” said John McCarthy, principal analyst for Forrester Research. “What do numbers from ongoing operations look like? Are they significantly wounded? Are clients treating them as a third tier vendor or are they regaining some of their cachet?”

The head count has fallen from 45,000 in 2009 to 27,000 today, while the number of active clients falling from 500 to 350 — 44 of which, including MasterCard, came on board after the scandal, company executives said.

On the up side, it is hiring and has managed to pay back most of its debt and accumulate cash and bank balances of 21.8 billion rupees ($485 million).

Muthangi estimates that Satyam’s revenues are down 35 percent from pre-scandal levels. He expects revenue growth to lag competitors’ and margin recovery to be delayed as “opportunistic” clients put pressure on prices and wages escalate in India.

He said Wednesday’s revenue number was disappointing and that revenue growth this year “looks tough,” though margins were slightly above his expectations.

The company also may not have leached all fraud-related liability from its books. Muthangi sees the possibility of an additional 12 billion rupees ($267.3 million) of pending claims, plus untold potential damages from class action suits.

Last week, the company said it would voluntarily delist its American Depository Receipts from the New York Stock Exchange and trade in the over the counter market because it couldn’t meet the deadline for filing its fiscal year 2009 annual report. Executives said Wednesday that they hadn’t yet decided whether to re-list.

Wednesday’s postings are the result of a massive exercise in forensic accounting, which investors have eagerly awaited, driving the stock price up nearly 24 percent this month.

The company hired 100 investigators to pore through 100 Terabytes of data, 2 million e-mails, 300 computer drives, 7,000 contracts, 7,500 inflated invoices and transactions on 200 bank accounts. But ongoing criminal investigations prevented Mahindra Satyam from getting access to everything it wanted, including the computer records of the former chairman, managing director and chief financial officer.

The total impact of the fraud on Satyam’s profit and loss statement was 68 billion rupees ($1.5 billion), Nayyar said.

“That was fictitious profits shown based on fictitious revenue which was not earned,” Nayyar said.

The Satyam fraud revealed profound weaknesses in Indian corporate governance. While the company’s new owners seem to be doing their best to scrub Satyam clean, critics say too little has been done to redress systemic flaws in Indian auditing practices, lack of oversight of related party transactions and ineffective boards that don’t stand up to powerful controlling shareholders.

“Regulators have not fully addressed any of the problems that were highlighted by Satyam, instead opting for voluntary corporate guidelines,” said Sharmila Gopinath, research manager of the Asian Corporate Governance Association. “Yet even these guidelines do not address some of the deeper issues that Satyam brought to the fore.”