Indian Stock Market Blog

Silverline What Now!! September 30, 2006

Now that stock of Silverline has gone well above my buying price(https://stockstorm.wordpress.com/2006/09/01/silverline-technology-buy/) and investors who have bought this stock at recommended price want to know more on this company specially those who had lost hugely in past(6 years ago) in this stock. Here are some amazing details tht I had found on the web.

Silverline’s case is a classic example of the havoc that can be unleashed if a company makes some big mistakes on the acquisitions front. (You will find many such examples soon, even if you are new investor, looking at speed at which M&A are being done in some of the companies.)

What Made Investors Invest in Silverline….Or what was so silvery about it??

Silverline was considered as Blue Chip (also the first Indian firm to list on the venerable NYSE), with export revenues of Rs 709 crore, and ranked by Nasscom in the number six slot of top software exporters for the year 2000-01, sank to a level that he is unable to comprehend. Investors are not the only one on the long list of people affected by Silverline’s current woes. Employees, bankers have all been burnt by the flames of doom that seem to be raging at Silverline, with no relief in sight.

So what Suddenly went wrong ~

The company, in a bid to boost revenues and grow faster than the others, went on a reckless acquisition spree in the year 2000. In a span of six months, the company acquired three companies, and in hindsight it does seem almost no thought was given to integration issues, and perhaps the due diligence exercise wasn’t as strict either. In April 2000, Silverline’s wholly owned subsidiary, Silverline Technologies Canada, acquired CIT Canada, a software development firm in Toronto, for approximately $4.2 million in cash. In September 2000, the company acquired Megasys Software Services for $6.2 million in cash. This was followed by the acquisition of Sky Capital International, a Hong Kong-based information technology consulting firm, for $22.0 million in cash. This was the beginning of Silverline’s problems as analysts started doubting the quality and capabilities of the management. Questions about the deals started emerging because normally acquisition deals were a combination of stock and cash and not all-cash deals.

Then came the high profile deal that supposedly delivered the knockout punch to Silverline. The acquisition of SeraNova, valued at $39.24 million, has been acknowledged by Silverline’s chairman Ravi Subramanian as the deal that landed Silverline in the current mess. Take this extract from Silverline’s US SEC filing, which states: “Due to substantial slowdown in the STI (US) and SeraNova Inc. a major portion of goodwill, accounts receivable and fixed assets were written off. Such expenses were $95.7 million (Rs 445 crore) and $52.6 million (Rs 244 crore) for the years ended March 31,2001 and March 31,2002.” However, there seems to more than what meets the eye. All the analysts Express Computer spoke to were highly sceptical and say they do not buy this story. Analysts allege Silverline has never been transparent in its dealings and say that writing off such a huge amount for a software services company is unheard of in the industry.

After Such Mistakes Let’s see what Management says!! (Why Invest!!)

While most have written off Silverline and believe the company does not stand even the tiniest of chances of making a turnaround, Kumar Subramanian is still hopeful. Perhaps, just as hopeful as any investor who invested in his firm. Says he, “We will stand by our commitments to our employees and bankers. Today there are many MNC companies who are looking to set up base in India and as we have our own development centres, there are different options we can explore with these companies to pay off our employees and bankers.” Subramanian does not rule out the option of a joint venture too in order to stave off the current financial crisis.

Recent Developments:

~The board of Silverline Technologies Ltd, at its meeting held on September 19, 2006, reviewed the successful completion of the restructuring process. The board thanked M/s. firstcall Equity India Pvt Ltd, India for having stood with the company during testing times and for having structured the one-time settlement for and on behalf of the company with the institutions. Earlier in mid-August, the company announced that the one time settlement, which has been worked out by the restructuring advisors, Firstcall India Equity Advisors has been successfully completed with the non convertible debenture holders (NCD holders) i.e. institutions and banks. The company`s promoters have also decided to increase their stake in the company through the creeping acquisition route. (As On 20-Sep, 2006.)

~Silverline Technologies completed a strategic alliance with Mainstream Partners, a management consulting, business services and funding company headquartered in Ontario, Canada. Under the terms of the MOU, the company will be the global shared services provider working strategically with Mainstream Partners. The company will leverage its facilities in Mumbai to deliver on these initiatives. Ravi Subramanian, chairman of the company said, `This strategic tie-up is the first announcement on the company`s growth strategy. The relationship will enable aggressive growth in the SME marketplace. Silverline is in the final stages of planning similar strategic tie-ups for Fortune 500 clients. Silverline will announce its strategies in the near future.` The tie-up is a part of its small and medium enterprises (SME) market penetration strategy across North America.

~Silverline Technologies has announced that the one time settlement, which has been worked out by the restructuring advisors- Firstcall India Equity Advisors, has been successfully completed with the non convertible debenture holders (NCD holders) i.e. institutions and banks. The company promoters have also decided to increase their stake in the company through the creeping acquisition route. It must be recalled that in the month of May 2006, the company had announced its turnaround plan with focus mainly on streamlining operations and encouraging value driven businesses. The three vital growth drivers identified by the company were (a) Increased shareholder value and increased transparency; (b) Clearance of all outstanding issues with all who had contributed to the success of the company in the past, and, (c) laying emphasis on businesses driven by vertical markets and led by proven leadership in the areas of information technology and business process outsourcing. The company shall enhance its focus on growth energies in the business process outsourcing and IT consulting areas of business through the organic and inorganic growth strategy. The company has planned the launch of its infrastructure technology outsourcing (ITO) Practice. To jumpstart the ITO practice, the company has forged a strategic relationship with a leading Canadian firm, Millennium Care. The company will also market and deliver the ITO solutions in Asia, the Middle East and Europe markets.

~Silverline Technologies Ltd has planned the launch of its Infrastructure Technology Outsourcing (ITO) Practice.
To jumpstart the ITO practice, the company has forged a strategic relationship with a leading Canadian firm, Millennium Care Inc.
The company will also market and deliver the ITO solutions in Asia, the Middle East and Europe markets. The ITO market is USD 162 billion, which is virtually untouched by the Indian companies. Millennium Care has been delivering ITIL-based service management solutions for over 8 years to 500 clients worldwide and government organizations across a large spectrum of industry segments – (Gas and Electric) utilities, natural resources, financial services, entertainment, publishing, transportation, high-tech, municipal departments within state governments.

~Silverline Technologies bagged a multi-year contract to reengineer and maintain a service management software from a North American company. As per the terms of the agreement, Silverline Technologies will undertake the transition of the IT Infrastructure Library (ITIL) based software to its development center in Mumbai. The scope of the initiative is to redesign the product for new Microsoft platforms and customize it for markets other than North America. The two companies agreed to promote the sale, integrate and support the product for new clients in markets currently not addressed. These include Asia, the Middle East and Europe. As part of this plan, the company will also set up a technical support center which will support the clients outside of North America, followed by supporting the company`s current clients in North America. The contract is expected to expand Siverline`s foothold in IT consulting practice as well as lay the foundation for its technical support practice.

~Silverline Technologies has crafted a turnaround plan with focus mainly on streamlining operations and encourage value driven businesses. The three vital growth drivers identified by the company are (a) Increase shareholder value and increased transparency; (b) Clear all outstanding issues with all who had contributed to the success of the company in the past, and, (c) lay emphasis on businesses driven by vertical markets and led by proven leadership in the areas of Information Technology and Business Process Outsourcing.
The company shall enhance its focus on growth energies in the Business Process Outsourcing and IT Consulting areas of business through the organic and inorganic growth strategy.
The company seeks to cement its strategic relationships in the following areas of business:
– IT Software Development & Maintenance and Product Lifecycle Management Solutions;
– Business Process Outsourcing in the areas of Finance & Accounting, Legal, Human Resources, Engineering & Architecture, Knowledge Management, Animation and Media & Entertainment;

So What can be dangerous:

Thanks to the company’s seemingly dodgy financial history and lack of confidence in the markets thanks to these issues, Subramanian may not find it easy to convince others to join hands with Silverline. It must be said that while there many other companies like Silverline, who have seen a huge dip in their revenues and profitability due to wrong market decisions, Silverline is an aberration simply because the management is not transparent, compared to company such as Infosys. The Silverline case and the resultant fear regarding IT companies in some sections of the markets should also be reason for industry organisations like Nasscom to ensure that IT organisations should adhere to a corporate code of conduct and governance. Only this will ensure that investors, employees and partners are not left in the lurch again.

Check Stocks of Poultry. September 24, 2006

A unique Indian project involving poultry litter has been registered at the UN as a clean development mechanism to earn carbon credits. The project, which is to be commissioned in November at Pochampally village (near Hyderabad), envisages producing electricity from poultry litter.

SLT Power and Infrastructure Projects Pvt Ltd, the company driving the project, has entered into tie-ups with 16-17 poultry farms in the 35 km radius of plant site for supply of 37,872 tonnes of poultry litter per annum.

“The litter, along with some amount of rice husk would be used as raw material in the 3.5 MW power plant set up by the company,” Mr Vijay Bhaskar Reddy, Managing Director, SLT Power and Infrastructure, told Business Line.

Slashing methane

The project envisages reducing emissions of methane, which would be equivalent to about 65,794 tonnes of carbon dioxide per annum. The project document for the UNFCCC approval for earning carbon credits was prepared by Ecosecurities.

The company has entered into litter sourcing contracts with farms such as Narayan Reddy poultry (which has 3.8 lakh birds), Sri Lakshmi Narasimha poultry (3.1 lakh), Ratnam poultry (3.2 lakh), Suvarna poultry (1.2 lakh), Mandakini research farms (1.5 lakh), Sri Rama Agriculture and poultry (1.9 lakh). The farms would be paid Rs 250-300 per tonne of poultry litter, depending on the moisture content in the litter. With transportation and other costs, SLT Power would get each tonne of litter for Rs 640 at the power plant site, explained Mr Reddy.

On the electricity production side, the company has entered into a tie-up with Andhra Pradesh Transco for power supply at the APRC price. For setting up the 3.5 mega watt plant, the company has spent “in the range of Rs 4.5 crore per mega watt,” he said. Given the large number of poultry around Hyderabad, Mr Reddy plans to replicate the project and put up another 7.5 mega watt plant on similar lines.

Media Buzzzz… September 18, 2006

The media broadcasting space is abuzz with a lot of news flows, and few stocks have been making good moves. Experts tell moneycontrol the stocks they are most bullish on from this sector and the road ahead for this space.

As per analysts who track this sector closely, it is a relatively newer space to look at, but it is definitely poised for good gains ahead. A lot of initiatives related to government policy and regulations, which if implemented as per schedule, could act as positive triggers for media stocks.

Regulation to benefit broadcasters:

News on CAS or conditional access system has been doing the rounds for the past few years. But according to the latest Telecom Regulatory Authority of India, TRAI, ruling CAS should be implemented by December 31, 2006.

While, TRAI has tried to put a ceiling on what broadcasters should demand for each channel, but definitely this system will bring the highly unregulated cable TV market under regulation. TRAI has directed that basic service be provided at not over Rs 77 per subscriber per month excluding taxes, and must include 30 free-to-air (FTA) channels. It also said paid channels will not be allowed to charge more than Rs 5 per month per channel in CAS areas.

Also, services like DTH (direct to home) offered by Dish TV and Tata Sky are catching up alongside traditional cable TV. Most channels will now be paid their dues, under the cable TV system subscribers are always under reported.

Sumit Rohra of Antique Stock Broking says, “I am very bullish on this space, I believe the CAS regulation will help. Just like what happened to the telecom sector a few years back, that is what’s happening to media now, it is growing and coming under regulation. Broadcasters will benefit, since there will be revenue sharing.”

He adds that it’s not just the cable TV guy who will earn, now broadcasters will be paid as well, as per each user. “With the TRAI regulation I think broadcasters will be major winners. So all this will be reflected in the stocks as well,” says Rohra.

However, few experts also feel that stocks in this space are rising quickly because of momentum and news flows, and not valuations.

Apurva Shah of Prabhudas Lilladher says, “I am positive on the media sector, but the valuations of stocks is definitely not cheap. Media is a relatively newer territory as compared to other sectors in the markets. So I believe most media stocks are momentum picks. They are news flow driven. News flows regarding CAS as well as IPOs of companies and their subsidiaries is the kind of news that is turning positive for this sector.”

But in the same breadth he says that the wind is in the favour of these stocks as of now.

Zee, one of the best picks at this point:
Zee’s stock has risen over 64% in the last one year as compared to its peers like TV18, which has risen 52%; and NDTV, which has, in fact, fallen by 5%.

Rohra is most bullish on Zee. He says, “I would look at media stocks Zee, NDTV and TV18, in that order. Zee has Dish TV, Citi Cable and Zee news channels under its umbrella, so the company has a lot to offer. The company is also getting ready for a demerger, so I believe after the demerger a lot of value unlocking will take place. This is what excites me about this stock.”

Sanjay Dutt of Quantum Securities also has Zee in his favourites’ list.

He says, “I am very positive on the media space on the whole and Zee has been one of my favourites for quite some time right from the Rs 160-170 levels. The story is panning out phenomenally and around December-January when one gets shares of the individual companies, the sum-of-parts will be much higher than what it is today.”

However, as of now, Zee is expensive, and analysts say they would wait for a correction to buy it. “In the short term I may want to buy it lower, I may see a technical correction coming in because one has already seen it running up quite a bit. But I like the story, I have to hold on to the stock. I want to disclose that I have it and there is more juice in it particularly because of its DTH operations also. It is the best media play at this point of time,” says Dutt.

Shah says, “I would look at Zee on a correction, I like TV18 too. But I am not too positive on NDTV.”

Rohra says, “The media sector is at the threshold of growth opportunity, there will be 50-80% YoY growth. Media will definitely outperform the markets. So I would say one must hold long positions in it.”

He says that one could accumulate media stocks now. “If you want to buy say 100 shares, it would be good to buy maybe 50 now, and the rest after some time,” he adds.