Midcap IT to be hit by Satyam scam: Prabhudas Lilladher

Apurva Shah, IT Analyst, Prabhudas Lilladher, said business conditions are already quite tough for second rung IT companies and this entire development on Satyam is not helping matters. "I don't know whether this will have any major impact in terms of the amount of business coming. Midcap IT companies too will be impacted."

Here is a verbatim transcript of the exclusive interview with Apurva Shah on CNBC-TV18. Also see the accompanying video.

Q: Are you expecting that there could be a problem of new business garnering by the non-TCS or non-Infosys world, do you think the second rung IT Companies could get punished because of this doubts Satyam has created?

A: The business conditions are already quite tough for the second rung IT companies and this entire development on Satyam is not helping matters. But, I don't know whether this will have any major impact in terms of the amount of business coming. It has to have some kind of an impact and there has to be few clients, which will take no chances second time around and may want to stick with only the absolute status of the fact and you may see some impact on some of the midcap IT companies.

Q: Is this the only one out there or are we missing the picture again on Tech and a lot of companies are really not reporting what's going on because Satyam is talking about 3% margins and others are talking about 25% margins, what is the true picture and how many more companies like this exist in the market?

A: On the 3% margin front a lot more clarity is needed on that, because this is a very special case, the management has already admitted to buzzing of numbers and they have already said that they were recruiting resources simply to make sure that the other metrics are aligned. So, this 3% margins would be because of that, as they have over recruited and they were falsifying the actual utilization numbers.

So, I am quite sure that across the sector this is not the margin situation, the margins are significantly higher and that's what Satyam's number seems to suggest. At the same time, it's quite possible that the stress is significantly higher, at least in the midcaps space than what the numbers or the guidance of the company seems to suggest. So, it is quite possible that the real picture over the next few quarters might turn out to be much worse than what the managements have been saying till now.

Q: Have you gone through the previous numbers of Satyam, have you discovered any discrepancies now that they have blurted out loud by Raju?

A: We have gone through the numbers and as we have always been doing that. But the point is that all the numbers are forged in the sense that you could have done judgment that this number doesn't seem to match the other and some of the other metrics don't seem to agree with each other. But, in this case since a lot of things have been fudged and there is no way for an outsider to make a call on this, as the financials, metrics or practically everything appears to be fudged, so it's very difficult for an outsider to take a call on this.

Q: Lets say if I was an European or a US client that needs to source to India - what is the continuity of some of these companies the smaller or the midcaps, a company like Satyam goes under what happens in the rest of the cases so if you could pick 2-3 companies, where you believe the companies are strong and would get outsourcing and some of the companies which are not that strong and this doubt is enough for some of the businesses and start moving else where?

A: Satyam's problem is not only because what is happening in the core IT business, much of this problem is actually because in real estate and some of the other businesses that they had.

Q: Auditors, independent directors, and analysts also missed it out, how many other companies are there?

A: There could be a few names, especially in the midcaps and smallcaps sectors and I wish I knew these names, but I am reasonably sure that many large companies in this sector are quite safe and I don't think their business will get affected.