Riding a Tiger Called the Market Capitalization

26 01 2009
 The valuation of wealth of individuals and companies is no longer done by adding up the value of the physical assets like land, property, jewellery or even bank balance. The valuation is done on the basis of market capitalization. Market capitalization is a simple multiplication of the share price with the number of shares owned by the individual.Forbes prepares its annual lists of the wealthiest businessmen in the world on the basis of market cap of the shares owned by them. They simply ignore all the other assets, because they consider them insignificant in comparison to the market cap of shares. In 2007, four Indian businessmen figured in the top 10 list of world’s wealthiest individuals. In 2008, none of them figure. In fact, Anil Ambani has the dubious distinction of having lost the largest wealth in the world in 2008, about US $ 30 Bn. Thus when the stock prices are high, the wealth is high, when the markets are down, the wealth is low.  If businessmen and companies start basing their identity and targets to the market caps of their companies, they have begun riding a tiger. Market cap is based on the share prices and number of shares. To increase market cap, the share prices have to keep rising constantly and or keep issuing more number of shares. Using the fundamental analysis principles, the share price is a function of earnings per share (EPS) and P/E multiple. Whereas EPS is based on profits, P/E multiple is a function of the perception the investors have about the company’s growth prospects and future margins.

In order to get a higher P/E multiple, companies and their managements make a lot of efforts to look progressive, transparent, growth oriented and put their best forward particularly with the analysts. If for some reason, they are unable to get a high P/E multiple with respect to the competitors, in order to keep their share price high, they have to get a higher EPS. Higher EPS is possible only if the business is generating higher profits.

If the business is not generating higher profits, then EPS will be low. In effect, the share price will not go up or worse it will go down. That is the point at which, the top managements are faced with the temptation of artificially cooking up the profits, so as to jack up the EPS.  The dilemma is whether to report the EPS honestly and face the prospect of share price going down and thereby personal wealth going down or cook the balance sheets and increase the market cap.Several managements resort to this occasionally, with the hope that they will make it up in future quarters. Even the legendary Jack Welch of GE was accused of smoothening the earnings occasionally.

The Chairman of Satyam, Ramalinga Raju.  when faced with such a dilemma, has confessed that he had chosen the path of cooking the balance sheets, not once or twice, but over several years. He mentions in his resignation letter that “It was like riding a tiger not knowing how to get down, without being eaten.” 

Businessmen and companies focussing on market cap are like batsmen batting with the eye on the scoreboard rather than the ball. Instead if they focus on their core business and satisfy their customers, they will be better off in the long run. Distributed dividend from profits earned in the core business should be the source of real wealth. The virtual wealth generated by increase in share prices is too fickle and a factor on which the company or the management have very little control. Focussing on controlling this virtual wealth can lead to disasters like Satyam. Satyam might well be the most recent and the most talked about case, but is certainly not the only one who met with this fate, in trying to ride the tiger of market cap.  

– G. Mohan





Profile of an Andhrapreneur

21 01 2009


Business Outlook carried out a cover story on the several successful entrepreneurs who have emerged from Andhra Pradesh in recent times. These entrepreneurs from Andhra were aptly called Andhrapreneurs. These included the men behind GMR, GVK, IVRCL, LANCO, Nagarjuna Construction and Maytas.



Since the last week of December ever since the Satyam-Maytas fiasco and the arrest of K.S.Raju, came to fore, AP businessmen are in the news for all the wrong reasons. Hyderabad is acquiring a bad reputation, so much so, that on the day when B Ramalinga Raju made his confession, six of the Top 10 losers in the stock exchange were from Hyderabad.



There is a certain common thread which runs through when one looks at the strategies and success of these Andhrapreneurs. Most of these companies are floated by first generation entrepreneurs. They started small as construction contractors and cut their teeth in two major projects of AP, namely Nagarjunasagar Dam and Visakhapatnam Steel Project. From construction, they have graduated into bigger construction projects such as roads, irrigation and airports. Power sector is another sector where several of these companies are engaged in either as an operator or as a EPC contractor. From construction to real estate was a natural extension and most of these companies are engaged in real estate projects. And this is where, the fairy tale gets a twist.


The construction, infrastructure, power or real estate  industries have a strong link with the government. These Andhrapreneurs have all developed and benefitted from the strong political connections they have nurtured and built in order to further their business interests. They also could scale up fast by virtue of the easy money available through private quity and the IPO route. Showing a huge order book, land bank and accounts (dubious?) , they all catapulted their market valuations several times during the boom period from 2003 to 2007. In 2008 stockmarket crash, most of these companies were hit really hard.



To look at the profile and lifestyle of a typical Andhrapreneur, look no further than L.Madhusudhan Rao, the Chairman of  LANCO Group. He is the brother of L.Rajagopal, the Founder Chairman who is now a Congress MP from Vijayawada. He is an M.Tech from India followed by an MS from USA. Here are excerpts from an interview to Hindu Business Line in May 2008 :



Thanks to their boss’s penchant for fancy cars, at least 10 chief executives of the Hyderabad-based Lanco Group enjoy the luxury of driving Mercedes-Benz cars. As for the boss himself — L. Madhusudhana Rao, Chairman of the fast-growing Lanco Group — a Rolls-Royce Phantom is the latest jewel in his collection of fancy cars.

Formula 1 racing and the latest cars are a major draw, but cricket is a strict no-no, except for keeping abreast of the latest developments in the game, says Rao, 42, who steers the fortunes of the diversified infrastructure group with a turnover of over Rs 1,600 crore (FY 2007).

A film a day keeps a lot of tension away, could well describe Rao’s self-prescription, going by the appetite he has exhibited for the celluloid world. “Initially, I would watch about 250 films a year as a student of engineering. They were mostly Telugu and a few from Bollywood and Hollywood,” he says. His favourite stars are Krishna and NTR. Incidentally, his brother L. Sridhar is a film producer.

Family holidays are a must on his list and the family has visited some of the most exotic locales and resorts around the world. Terming himself a ‘family man’, he says, “Even when in Hyderabad and engaged in handling the tough challenges of running a large corporate, I reach office at 10 a.m. and manage to go back to the family by 7 p.m.”

In 1991, Lanco was born, and riding on the platform of economic reforms, the company’s turnover galloped from a mere Rs 3 crore in 1992 to a robust Rs 1,600 crore in just over 10 years. The mantle of leadership fell on Rao when Rajagopal took to full-time politics in 2002. The prime focus of the company was power at that time, he recalls.

“In 2012, when I complete a decade at the helm, I would like to see the Lanco Group (which aims to reach the Rs 3,000 crore mark in FY 2008) as a Rs 40,000-crore asset base company, which is among the top-three companies in power generation. The group will emerge from being a family-run company of the 1980s and 1990s into a professionally-run enterprise,” he says.

He says, “While most businesses in India are still run on the family model, we want to run our business very futuristically, though we also started on the traditional family model. We will put the family culture behind. People should forget Lanco as a family-run company.”

Having been groomed in the Lanco Group, which grew from transport service to contracts executed for large irrigation projects, with its big break coming with the Visakhapatnam Steel Plant, Rao feels the time is right for entrepreneurs to get into sectors ranging from retail to infrastructure. Funds are easy with many private equity and venture groups having entered the scene”, he says.

” What is required” , he adds, ” are good ideas, commitment and passion for entrepreneurs to turn into successful industrialists.”

Another important trait of the Andhrapreneurs is to tom-tom their company’s Corporate Social Responsibility and Corporate Governance. In LANCO’s web-site they mention :

A member of UN Global Compact, Lanco Infratech is recognised for its Good Corporate Governance and Corporate Social Responsibility initiatives led by the Lanco Foundation.



Professional qualifications, strong political connections, family ties, gigantic ambitions, weakness for fast life, passion for films, pretensions to professionalism, lip service to  both corporate governance and philanthropy – these are some the common attributes that seem to characterize an Andhrapreneur.



– G. Mohan

If B Ramalinga Raju were to Write a True Confessional…

10 01 2009
Imagine the following  as a letter that B.Ramalinga Raju could have written to his wife on 9th June just before his arrest.
Dear Nandini,
I am writing this mail sitting in this farmhouse, outside of Hyderabad , waiting for my arrest. I know the events over the last one month, have been so overwhelming, that we haven’t been able to have any meaningful conversation at all.
Even you must be wondering about the actions taken by me and also the sharp reactions from the media and the world around us. For someone like you, who had got used to basking on the reflected glory from me, it must be a huge shock. Probably, you thought fame was a one-way street. Even I thought so.
Let me tell you that though I am not demonstrative about my love to you or to our sons, the family’s interest was always paramount while I took my decisions. I thought how I could protect our family’s interest and minimise the damage as much as I could, given the mess I had got into.
In simple terms I want to explain the mess to you. Actually, Satyam was doing quite well. We were making decent profits. We had good clients also. But, it was a little too staid and boring. So, I kept reducing my stake in Satyam progressively from 30 odd percent to 8 percent.
You know I am not really a computer guy. I can barely manage to read and write emails. Also, I can open and scroll down powerpoint presentations made by my juniors. I was not really the software pro, I was made out to be.
At this point, one man I really hate is Babu (Chandrababu Naidu). He wanted  Hyderabad to compete with Bangalore on IT. So he wanted some homegrown entrepreneur from AP to take on Bangalore . In his mind, Satyam was the competitor to Infosys. Although heart of heart  I knew, I was no match for Narayana Murthy. I enjoyed all the attention and favours I got from Babu. You remember, how happy you were when I made a presentation for 45 minutes in front of Bill Clinton.  
Then our boys joined business. I advised them that rather than wasting their time in Satyam , they were much better of getting into more exciting businesses. I thought real estate and infrastructure was where the action was. So I asked them to inject life into Maytas, which was passive for a long time. I can leverage my connections in the political parties and the government to get them good contracts and land deals.
Couple of years back, I even began to believe that what I did in 20 years in Satyam , our sons have achieved it in two years in Maytas. So that is where the future of our family lies. The real estate boom in and around Hyderabad gave me hope that we can multiply money much faster in real estate than in software.
However, I was identified very strongly with Satyam. I realised that in public mind Satyam was me and I was Satyam, even though my heart lay elsewhere. With a meagre stake of 8 %, I wanted to control Satyam. It gave me access to ready cash whenever I needed it. I had put a team of yes-men (all are from our place) who were running it without much hassles. I had put that clerk, Vadlamani as the CFO,as he was ever ready to do whatever I asked him to. 
The plan started to unravel in 2008. I did not realise that the correction in the stockmarkets in January was unlike the previous years. I had in the past pledged Satyam shares and taken loans and invested in land and stockmarkets. Even when the shares used to go down , they used to recover soon. In 2008 it did not. I wanted to do an IPO of Maytas Properties and get some money by fooling the public, but I could not. Simultaneously, the real estate market also collapsed.
When the real estate and the stock market collapsed simultaneously, I realized I was in serious trouble. I had pledged a lot of our family holding and also taken a lot of cash out of Satyam to buy a lot of land. On top of that the Satyam results also were poor.
In September 2008, if I had reported poor results, the stockprice of Satyam would have gone down, which means I would have margin calls from the debtors for my pledged shares. So I decided to doctor the results big time. Honestly, earlier I had cooked the results once a while, to meet the guidance or to just look that we are nearly as good as Infosys, but nothing like what I did in September 2008.
The real estate and the stock market refused to look up and the December results were round the corner. So my only hope of retaining control of Satyam and Maytas was to merge them. Whereas, all our Telugu-vadu board members accepted it without any murmurs, I did not realize the investor and media reactions would be so sharp. Actually, I and Satyam were too high profile for pulling of such a thing. Many others manage it beautifully, but they maintain low profile.
After that event, the investigations started and I knew that time was running out. I consulted a lot of our Raju community people and even told them that there is a problem. They assured me that they will help me out. They even told me you resign, but do not confess. I thought, quite a bit, should I confess or not. Should I confess about siphoning Satyam money or cooking results ? My lawyer told me that confessing about cooking results would get you a maximum of 10 years in jail. Knowing the judicial system in India and our political connections, I thought I would confess it in India .
By taking the entire blame on me and Rama (MD), I wanted to shield you and our sons. I decided to dump that clerk Vadlamani by not even mentioning his name. Anyway, he might have made more money than he had ever dreamt.
The real estate market is down now, but it will recover sometime soon. Then it will all be fine. The next half of our life we will have to live fighting cases and in ignominy. It is OK.
I took a little too much risk. I counted too much on our political connections and community support. It did not work out. My kshatriya pride also came in my way. Otherwise, I could have clearly focused on money and pulled off this, just like many other Indian businessmen.
Please do not get too sentimental about the 50,000 odd Satyam employees. The good ones will find job elsewhere. The majority of the others are half-baked engineers from third-grade colleges. They should be grateful to us for enjoying the high salary and the foreign tours for all these years. If they believe that they are software pros, it is their problem. They cannot speak a few lines of correct English and cannot write proper software code. I will not be surprised if they go back to tobacco cultivation and chilli trading in Guntur and other places where they came from.  
I know still there are a lot of unanswered questions. I have sneaked in my Blackberry, I will write to you from wherever they keep me in custody. We are still in our 50s only. Even if they put me in for 10 years, I still look forward to our retired life together in Bhimavaram on the banks of Godavari .
Take care.
Disclaimer – This is an imaginary letter and any resemblance to persons living or dead is purely coincidental.

Ram Rajya at Satyam?

10 01 2009

The hero of the epic Rama or Ram in Ramayana was a paragon of virtue. He was considered a Model person, a Model King. He was referred to as “Maryada Purushottam” . He was an epitome of dignity and a man of his word. To keep his father’s word to his step-mother he left for 14 years of banishment. When a washerman cast aspersions on his wife Sita, he asked her to leave the palace. His reign of Ayodhya was considered a utopian administration, hence anything close to ideal management is often called “Ram rajya.”

Parents often keep their sons name as Ram with the hope that some of the ideal man’s character and personality will rub-off on the son by naming him “Ram”.

In the now disgraced top management of Satyam, there was not one or two, but four Rams. First, the Founder and Chairman (resigned), Ramalinga Raju. Second, his brother and MD(resigned) , Rama Raju. Third, the Independent Director who chaired the controversial board meeting of Satyam-Maytas merger, Prof M.Rammohan Rao. Fourth, the current Interim CEO and an Executive Director in Satyam for last several years Ram Mynampati. None of them could live upto their name, given so fondly by their parents. Instead of delivering Ram Rajya, collectively they have delivered Ravan rajya at Satyam.

Just hope that the other Ram Rajyas at TCS ( Ramadorai) and Mastek (Sudhakar Ram) do not turn out to be like Satyam.  

Hey Ram !!

– G. Mohan

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