Satyam Scandal Takes Toll on Hyderabad

Bangalore's rival city for Indian IT outsourcing is under the microscope in the wake of last month's fraud revelations at Satyam

By Manjeet Kripalani

The collapse of Satyam Computer Services (SAY) on Jan. 7 touched off a flurry of anxious investor conference calls set up by bankers and analysts. Rajeev Chandrasekhar, a member of Parliament and president of the Federation of Indian Chambers of Commerce & Industry, sat in on one—and was startled by what he heard. How, asked one foreign investor, does one spot the next Satyam?

In particular, the callers homed in on the similarities between Satyam and other companies based in its hometown of Hyderabad. Like Satyam, many of these outfits are managed by their founders, enjoy strong links to local politicians, and have built up big land holdings—even when their core businesses have nothing to do with real estate or development. "There is a lot of pressure on Hyderabad companies to prove they are not like Satyam," says Chandrasekhar.

Effect on Stock Prices

It has been a dramatic fall from grace for Hyderabad, the southern Indian city that had emerged as a viable competitor to Bangalore as the public face of the new India. Giants such as Microsoft (MSFT), Dell (DELL), Oracle (ORCL), and Google (GOOG) have opened offices there. But Satyam was also among the city's leading lights, and Hyderabad today is rife with tales of murky land dealings, companies that cook their books, and owners who siphon off cash.

Now investors are talking about a "Hyderabad discount" for companies based there. Even before the scandal, Satyam's stock typically had about two-thirds the price-earnings ratio of market leaders such as Infosys Technologies (INFY) and Wipro (WIT). The reason: Satyam did relatively simple work, and investors fretted about Chairman Ramalinga Raju's political connections.

Satyam's fall seemed to validate those latent fears. Since Jan. 7 stock prices for the top 50 listed companies from Hyderabad, mostly managed by their founders, have fallen by an average of 23% (not including Satyam's near-total collapse), vs. an 11% fall for the Bombay Stock Exchange's benchmark index. In contrast, the top 50 companies in Bangalore have fallen by 14%. "Hyderabad developed as a low-cost option to Bangalore," says Ravi Raheja, chief executive of Mumbai developer K. Raheja & Sons, which has built offices for many tech companies in Hyderabad. "Now we are back to square one."

A Different Path to Growth

Some blame history for Hyderabad's problems. As recently as the late 1940s the region was feudal and largely poor, with little industry and virtually no middle class, though many farmers had extensive land holdings. When Hyderabad became the capital of Andhra Pradesh state in 1956, the rich farmers got into the construction business. Major infrastructure projects were launched and local companies with little experience—but strong political ties—emerged to win government contracts.

Neighboring Bangalore, in contrast, was a military station during the British Raj, so it was apolitical, well run, and orderly, known for its pleasant climate and lush gardens. In 1947 newly independent India made it a center of scientific and industrial research and built major universities there.