Corporate Fraud/Misdemeanor - Public Domain - India lessons

Lessons from Mr Market
9

Lets start tackling companies listed by Donald…

I start with Tanla Solutions as I had myself invested in this after it had crashed but got out with some losses before it continued its crash journey.

The stock price journey was spectacular after IPO it went to 465 and now in single digits… all the time there were buy recommendations on the stock.

From a BS report…

Tanla Solutions

For this mobile value added service (MVAS) player, which gets over three quarters of its revenues from UK and Ireland, the recession in these markets have dampened the business outlook in the near term.

The company offers telecom infrastructure solutions through its four segments—products, network aggregation (SMS, MMS), professional services (infrastructure management) and mobile payments (smart phones) in about 28 markets around the world. Though the UK market is growing at just 10 per cent, VAS contributes to nearly a fifth of total mobile usage. With a shift to higher usage of 3G and mobile internet on the rise, Tanla with a 5 per cent market share in the UK market should benefit. For Q3FY09, except for the mobile payments segments, all others reported a decline of over 20 per cent q-o-q (sequential) due to a combination of slowing growth, regulatory changes in UK and weakening of the British pound.

The company is expanding into the Indian market and has deployed the 3G platform for MTNL and launched the missed call alert for Aircel among other projects. While Tanla is debt free and sitting on a cash of about Rs 150 crore, its debtors at Rs 278 crore and an increase in debtor days to 119 days in Q3 are causes for concern. The management, however, believes that this will come down going ahead and Ebidta margins, which have dropped (768 bps q-o-q) to 38 per cent, should stabilise on higher transaction volumes and cost cutting efforts. The stock which has corrected substantially over the year and on the back of robust growth prospects should fetch returns of about 40 per cent over the next one year

This was attractive because the company had shown very high growth in the past.

Was operating on the technological edge

Was debt free.

Employed IIt, IIM guys

Had top clients in UK mobile industry.

Could replicate the succes in UK to other markets as well as in India.

Some dose of reality…

Company was initially a dairy company… changed name to tanla Solutions

Acquired businesses in UK, Finland which possibly showed the huge growth until 2008-09

Low promoter holding

Had cash on Balance sheet, but it was raised in IPO and over time this was goin on reducing due to negative cash flows… this realisation was my reason for exit

Had rumoured links to pliticians in Andhra… once politicians out of favour… it became the end of the story.

Links

Employee feedback (or curse actually)

http://www.jobeehive.com/layoff/tanla-solution-limited/hyderabad-india/251

Customer feedback (or complaints actually)

http://www.the-scream.co.uk/forums/t30979.html

http://www.theinquirer.net/inquirer/news/1044586/premium-rate-texts-prove-unstoppable

Links to politician

http://www.indianexpress.com/news/jagan-mohan-reddy-is-worth-rs-16-97-335-crore-tdp/959816/0

The story is also well covered on TED as it unravelled.

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10

Hi All,

Looks like there are lots of ideas floating around! However, I propose that instead of just writing whatever we know, lets try to put this in a structured format. May be we can start with company’s background/financials, How fraud was uncovered, what led to the fraud (accounting gimmickery, money laundering by an individual etc), and finally what were the "red flags"which should not have been ignored. I think the last part is the most important one as it will add significant value to us asonce say 15-20different cases are enlisted with “red flags” , one would always be on look out for these “flags” before making investment decision.

Ideally, Ishould have created onecase out of the 10 companiesmentioned by Donald to make myself clearer but unfortunately, I amout of towntill next week. so I will definitely do so onceIam back.

Best Regards

Dhwanil Desai

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11

Hi Dhwanil,

I guessed you might have got busy; so we let this thread start running naturally. Lets get in more examples, and some of us can collate and present back findings in a structured form.

It will be good to have a structure that focuses on key extractables; Do send in your thoughts by working out one or two examples in a structured form. I am sure others will be able to take that forward.

-Donald

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12

Hi Akbar,

Yes, I also got hit on Tanla and the issue is that it was really tough to make out from the nos if things are fictitious and inflated. The way they were growing, the profile of the management/promoters made me feel this company can do something big. Plus VAS was a sunrise area.

Infact they used to talk aboutsubstantialmarket share in Europe and relationships with biggies like Vodafone etc. So these things used to give credibility.

They also used to do all the investor relation things like - good annual report, timely concalls etc etc. Infact promoters have been buyers from open market for quite sometime despite the fall.

I got out from the stock when it recovered from the first crash and then when I noticed abnormal volumes in the stock, I exited. From the point of our exit, the stock again fell 90%+.

So this even brings us to one more angle - cos with smaller history are RISKY! and hence homework and ground work is important. Since then I have avoided IT cos and prefer to stick to cos with products which can be seen in the market.

Thanks for the details on Tanla.

Ayush

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13

Hi Ayush,

Thanks for your views on Tanla… can you delve further on the “abnormal volumes” that you mentioned?

What was the clue that you got?

Was it the FII exit form the stock?

Best regards,

Akbar

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Hi Akbar,

Usually the volumes were limited in this stock earlier. After the first crash to Rs 20 or so, the stock rebounded to i think 80 levels and then after few days volumes started to take place in lakhs of shares per day. Seeing such volumes on consistent basis, I just exited.

I think abnormal volumes are created to trap public or bigger players by offering trading opportunities etc.

Above is just a inference from experience.

Regards,

Ayush

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15

Friends,

Do read this forbes article on the fraud at Deccan Chargers -http://forbesindia.com/article/boardroom/saving-deccan-chronicle/33693/0

Should be quite insightful and learning.

Ayush

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16

This is a nice one fromMoneylife on Warburg Pincus and it’s investment in Moser Baerhttp://www.moneylife.in/article/warburg-pincus-dud-investment-in-moser-baer-an-honest-mistake/25716.html

Good Learning.

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17

for most of the companies listed, a common thread has been

1). great p&L but very bad cash flows.

2). promoter raising money on a regular basis.

3). lots of loans and advances

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18

Here is a nice update on the Subex story. http://www.forbesindia.com/article/boardroom/the-rise-and-fall-of-subex-founder-subash-menon/34109/1

The company, where i lost 98% of my first investment :slight_smile:

Regards

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19

Here is one more fantastic investigative article on e-tailing and how it might be violating the FDI in retail law.

http://www.businessworld.in/en/storypage/-/bw/fdi-escapades/547796.37489/page/0

Smart money is not so smart after all ? remembering Subhikhsa, SKS Micro Finance and Flipkart etc…

20

One common observation in the list of the companies is that most of them belonged to the kind of business in which the businessenvironment changes suddenly ( moat of the company is not sustainable , the company at first looked a niche and emerging one but things changed very rapidly ). Such things are common with IT telecom and sofware based companies as in thecompetitive age moats gen last for few years only . So how bright the management be themediocre business catches up very soon .

Another part looks like the shady govt and political linked business which have over a period of time proved bad for the minority shareholder like irb infra , anant raj industries ,r com , unitech…list goes on

21

We as investors should preferbusinesseswhich are physical product based along with a brand ( read moat in some cases ) and if possible should be very simple and boring :).

Such business will keep the cash flows coming , growth will sustain and even sub parpromoterwill be good enough to run them .

regards

ranvir

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22

This is a fromMoneylife though four year old but worth reading.

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1). OnMobile

2). IRB Infra

3). Educomp

4). Deccan Chronicle

5). Tanla Solutions

6). Teledata

7).

8).

9).

10).

Akbar and Dhwanil )- role

24

The SKS Micro case clearly shows how even big names cannot make a difference if the underlying business is flawed or fraught with issues. Ultimately the underlying business and its fundamentals should be strong, and it should be run by a decent management. Moreover, when there is a hype or too much of fancy about a company and people chasing it, it would be Overvalued in most cases. In some cases the boosted value would be several times the Intrinsic value of the company.

Trusting the big names on the list of directors may not help much. If the management is strong with core experience in the sector, you will not find glamorous names like above…but the work done will speak for itself.

:))

http://www.moneylife.in/article/4/9883.html Link: http://www.moneylife.in/article/4/9883.html

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25

Hi Samir,

Moneylife is doing a good job of making investors knowledgeable and aware. Coming back to the topic of IPOs, let me tell you that its an open secret (among financial analysts and market experts) that an IPOs prime reason is to provide an exit to PEs, venture capitalists, previous long term investors, etc an exit or sale route so that they can take out their capital by selling it to IPO subscribers. This is a well known secret but wont be obvious.

This is true for any IPO including SKS. Recently we saw a nice positive response to the Just Dial IPO, but by this year end we will know if the financial numbers justify the price or not. In SKS the Murthys and Khoslas make a killing on their exit, and obviously they will not speak or get in to the mess and have smartly washed off their hands from this company altogether. Probably they should focus on their core business and give opportunities to other qualified independent directors who are seeking assignments.

The other big issue is when companies hire name-sake directors who are already on boards of half a dozen or even 20 companies. These people hardly spend time or add value, but just add their personal brand name to get an honorarium or sitting fees. Its time for companies to hire talented people and qualified people who know the ground level workings of the industry in India.

The SKS Micro case clearly shows how even big names cannot make a difference if the underlying business is flawed or fraught with issues. Ultimately the underlying business and its fundamentals should be strong, and it should be run by a decent management. Moreover, when there is a hype or too much of fancy about a company and people chasing it, it would be Overvalued in most cases. In some cases the boosted value would be several times the Intrinsic value of the company.

Trusting the big names on the list of directors may not help much. If the management is strong with core experience in the sector, you will not find glamorous names like above…but the work done will speak for itself.

SKS Microfinance:

:))

http://www.moneylife.in/article/4/9883.html Link: http://www.moneylife.in/article/4/9883.html

26

Talking about corporate misdemeanor/frauds in the Indian context. Here

are two links. These cover 3 companies in the listed space.

https://prudentequity.com/index/proudentdetail/id/6

https://prudentequity.com/index/proudentdetail/id/11

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27

Satyam is missing from this list. There are many others especially in the infra / power space.

1). OnMobile

2). IRB Infra

3). Educomp

4). Deccan Chronicle

5). Tanla Solutions

6). Teledata

7).

8).

9).

10).

Akbar and Dhwanil )- role

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http://www.beyondproxy.com/avoiding-landmines-india