Cover Story


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! Aftek’s 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 there’s a problem with the cash. It’s in Banco Efisa, 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. What’s the name of it? Google it!” My student got back in a short time

Bal with non-sch banks in deposit a/c* Deposit a/c (in Rs cr) Mar’08 Banco Efisa, Portugal Mar’07



(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



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

Investec Bank AG, Switzerland



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




*Aftek’s 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

23 January 2009 Outlook PROFIT

” When Outlook Profit asked the company about the money parked with a bank in Portugal for so many years.9 crore on deposits of about Rs 250 crore. (See box: Companies respond) While it pays to be skeptical when analysing financial statements. Any further de$300 mn through FCCBs. The question is whether it really has the money? The treasury income is Rs 4. and blindly rely on the closing cash balance as correct even if it has been certified by the auditors. where we collect the revenues company secretary of GTL Infra. That’s just 2 per cent.324 1.373 254 870 P K Rungta & Co 225 PriceWaterhouse 283 Walker.700 towers at an estimated capex of $1. says: “The increase from our European businesses. I wrote back to the student. as I write this column in the spirit of the man who said that “there is never just one cockroach in the kitchen. Nitin Shukla.04 108. It’s no longer prudent to rely on the accuracy of financial statements just because the company in question is the recipient of prestigious awards for corporate governance. However. Warrants worth $264 mn were tails. If a reported cash balance of $1 billion in a single company certified by the auditors is. 2008 Max bal during the year On current a/c Barclays Bank Bank Julius Baer On call a/c Bank Julius Baer 398. Nitin Shukla. We have had this account for the past eight of 23.81 bn. is a collection account. But in reality I think that the cash has really gone up only in 2005 when it issued GDRs and FCCBs. sometimes deposited in accounts with little known and highly secretive banks.” years and we’ve taken RBI permission for this every Around $84 mn was raised through a rights issue and year. (Check out the list above.” The student had done a search on Banco Efisa. CFO of Aftek gave his side of the story. but I will not run after this stock as it seems suspicious.04 108. found missing. I also ask you to look closely at companies where such cash balances are kept outside India. but found nothing of significance. It’s no longer sufficient to reconcile earnings with cash flows. the cash and bank schedule in the balance sheet does not mention any money lying with a bank outside of India. except that it had some Bernard Madoff exposure. The company’s auditor notes in the audit report. For. whose CEO committed suicide recently. the company’s cash was found to be parked with a Swiss bank 0. It touched a high of about Rs 4.91 0. 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 finance the greenfield rollout secretary. I am not GTL INFRA Balances with foreign banks* (in Rs cr) Bal as on Mar 31. The account is audited.002 crore. This stock is not a Graham cash bargain. like the account number and so on. the Satyam scandal shows that there is nothing like too much skepticism. it is no longer sufficient to rely on the supervision of illustrious independent directors and reputable auditors. which is suspicious. a portion of the amount raised by the company by way of FCCB issue is parked abroad with banks for future. telling him that he had “done enough work on this company to conclude that one cannot rely on its financial statements. V Ravi Kumar.” he said.Cover Story “ When Outlook Profit 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. Chandiok & Co 59 M/s Chaturvedi & Shah M/s Yeolekar & Associates 23 Kanodia.” 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. CFO of Aftek said: “What we have 2007 and March 2008.27 398. is it unreasonable for investors to be suspicious of companies which have large stated cash balances on their balance sheets? So. IDFC and other institutional have to check with my company secretary. in fact.127 5. It’s safe to keep away from such companies. Your connection of the absence of adequate treasury income with the presence of so-called cash on the balance sheet was good work.” However.” investors. All the red flags you have pointed out are very relevant.) Take the case of Rajesh Exports whose latest available balance sheet reports a cash balance of Rs 5.91 44 Outlook PROFIT 23 January 2009 able to put some facts together. “Finally.500 or so. 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. In the case of GTL Infrastructure. (Check out the report . “The term loans raised by the company were applied for the purpose for which they were raised.27 *In GTL Infrastructure. I will issued to the promoters. 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 2.002 625 340 1. it was a Ketan Parekh run stock. most of the company’s cash was found to be parked in a Swiss bank (See box bottom left).

This states that in regard by Gargi Banerjee and Arundhati to bank balances. It has been doing that money. however. Anand Vora.99 1. the baseball player deagainst the current stock price of mands from Jerry. call accounts.01 0.. (a) balances lying with Scheduled Banks on current acvalues the debt-free company at Rs 277 counts. 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 0.86 0. we amples are illustrative of are aggressively pursuthe problem – too much cash in relaing opportunities for acquisition.55 1.” “ ” HTMT has deposited cash in Mauritius.” (Check the strip reproduced above from the original) Preoccupation? Hmmm. com/7rlmap) Why does an Indian listed company deposit its money in a secretive private Swiss bank? Interestingly. tries very hard to be retained as an Even after paying tax you will end agent for a popular baseball player.84 0.” The cash reserves in the overseas account amounted to Rs 1375. (See jected to 33 per cent tax cash balances box left bottom). and deposit accrore. When Outlook Profit asked the counts. CFO. Anand Vora. the company didn’t bring the money The notes to accounts in back to India. call accounts and ance from their legal team to respond. tius and if we bring them makes no mention of the into India we will be subhave large name of this bank. will applaud you even if you haven’t directors – particularly independent grown. show us the ny below cash. These exand as you are aware.” ” GTL INFRA at http://tinyurl.02 0. Ankur Jain and RavikiCompanies Act requires disclosure of ran Aranke also contributed to this bank balances as specified in Schedule report. because these are at companies bank. When asked about keeping its money outside India. because PwC is our auditors and have a considerable amount of cash on our books. Afup paying your stockholders a speter much talk about what Jerry can do cial dividend of Rs 300 a share. other than Scheduled Banks and the CFO. “Show Me The Money!” Sanjay Bakshi is professor at the Maharashtra Seamless also appears Management Development Institute to be in violation of the law. It’s fascinating to observe that the company’s auditors are unable to offer their services to the company due to “pre-occupation. “The company secured a loan at Libor+200 bps which was disbursed and deployed in India.25 0. 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. the company was still incurring financial losses at the net level on high levels of depreciation and interest cost.20 0.32 0. HTMT Global.. particulars are to be Bakshi-Dighe 23 January 2009 Outlook PROFIT 45 . So. Please.6 crore in March 2008 from nil in March 2007 as a result of the proceeds raised through the FCCB issue. but have paid high taxes.22 * Maharashtra Seamless’ balance sheet makes no mention of the ‘reputed international bank’ it claims to have put the money given separately of.” 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. Vora had the company’s annual resaid: “Yeah. as it ones – chairpersons of audit commitwould have still made them so much more richer! Don’t blame an irrational tees and investors to demand the same stock market for valuing your compafrom companies. The company was unable to declare dividends at this stage. Despite having a high Ebitda margin of about 50%. Company responses collated VI of the Act. Your stockholders me the money!” It is time for auditors. p for quite some time now. brushed aside the balance lying with each such banker question saying that they needed clearon current accounts. “Show Rs 135 a share. The Indian in Gurgaon.48 2. screaming.26 0.01 254. deposit accounts and the maximum (See box: Companies respond) Earlier. egy. amount outstanding at any time durin a conference call. We don’t want to comment till we get a clearance from our legal team. we will still like our legal team to go through it. When asked why the company chose a German bank (DEG). as for his client.01 323.08 252. The market is saying. tion to market capitalisation and too We believe that it is best to keep the little market confidence in that cash.06 318. while your questions (on overseas accounts and account balance and cash on books) may not be very sensitive issues. you know. Kumar said DEG financed infrastructure projects in developing countries.on the requirements for the rollout of the project. HTMT Global has a cash balance of Rs 625 crore deposited in an account in Mauritius.” The company’s funds existing in Maurithat claim to balance sheet. (b) the names of the bankers company about this cash. money there for our acquisition stratIn the super-hit film “Jerry Maguire”. when asked why ing the year from each such banker. said: “We have been getting a lot of queries. the company has not mentioned the name of this bank in its list of bankers in its annual report.

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