Patni Computer Systems: Catching up with the Leaders?

As the software services outsourcing markets mature, like every other

business, margins are bound to decline. In this scenario, companies have to move

up the value chain to maintain their margins. Top companies like Infosys and

Wipro have focused in the last two years to move into strategic consulting and

other high-end services to provide their clients a wider range of value added

services. Other companies are now in the process of emulating their example.

Mumbai-based Patni has shown rapid growth in the last few years after it

invited investments by GE and General Atlantic. However, since then the company's

margins have been under pressure and well below that of its peers. While there

has been some improvement in the margins, the company has a long way to go in

this area.

Incorporated as Patni Computer Systems Private Limited in 1978 with

activities like computer time rental, resale of imported computer hardware and

software exports, today, Patni Computer Systems Limited (PCS) is a provider of

integrated IT services to organizations in the insurance, financial services,

energy, utilities, retail and hospitality and manufacturing sectors. The company's

service offerings include technology intensive solutions like enterprise

application, e-Business, embedded technology solutions, enterprise systems

management, application development and integration, application maintenance,

R&D services and BPO.

In the past four years, the total income has grown at a CAGR of 33% to Rs

1,476.5 crore, whereas its net profit has risen at a CAGR of 26% to Rs 257.7

crore. PCS went public in January 2004 and the company's current equity stands

at Rs 25.4 crore, with promoters holding 51%, institutional investors holding

16%, Indian public holding 2% and others holding the balance 31%.

For the year ended December 2004, PCS reported revenues of Rs 1476.5 crore,

up 27% as compared to



Rs 1164.9 crore in the previous fiscal. Net profit for the recently concluded
financial year amounted to Rs 257.7 crore, as against Rs 184.3 crore for the

year ended December 2003, up 40%. Revenues from the insurance vertical

contributed 33% of the annual revenues amounting to Rs 484.3 crore, followed by

manufacturing and financial vertical contributing 28% and 19% at Rs 417.9 crore

and Rs 283.5 crore respectively. Revenues from USA and Europe amounted to Rs

1296.4 crore and Rs 116.6 crore, contributing 88% and 8% respectively. Revenues

from Japan and the Asia Pacific region amounted to Rs 48.7 crore and Rs 8.9

crore, contributing 3% and a mere 1% respectively.

PCS

has fifteen development centers in India and twenty-four sales offices scattered

across the globe. Patni entered the telecommunications sector by acquiring the

US-based provider of consulting, systems integration and outsourcing solutions,

Cymbal Corporation for $68 mn, which would extend the former's portfolio into

the global high-growth telecommunications segment.

Patni reported results for the second quarter ended June 2005, wherein

revenues grew 9% sequentially amounting to Rs 474.2 crore as compared to Rs.

433.68 crore. Year on year, the revenues were up 32% as compared to Rs. 359.6 in

the same quarter last year. However, net profit for the same period declined 7%

sequentially amounting to Rs 63 crore. As compared to the same quarter last

year, the net profit also declined 9%. Revenues from US and Europe amounted to

Rs 404.5 crore and Rs 44.1 crore, growing 26% and 78% y-o-y respectively.

Revenues from Japan and the Asia Pacific region also registered impressive

growth of Rs 19.9 crore and Rs 2.9 crore, rising 79% and 32% over June 2004

respectively. During the quarter, revenues from the insurance and the

manufacturing vertical grew by 13% and 3% on a y-o-y basis, amounting to Rs

133.7 crore and Rs 107.2 crore respectively. Revenues from the product

engineering practices also registered a 97% increase in revenues amounting to Rs

32.7 crore. The telecom vertical registered phenomenal increase in revenues

during the quarter amounting to Rs 70.7 crore, as compared to Rs 0.36 crore in

the same quarter of the previous year.

PCS's client concentration reduced further as revenue contribution from GE,

the company's largest customer, was lower at 23%, as compared to 25% in the

immediate previous quarter and 33% in the same quarter last year. The company

added 19 new customers during the quarter taking the total tally of active

customers to 191. During the same period, 451 employees joined the organization

and the current employee strength is 10,877, in addition to 1,099 employees as

support staff.

PCS

was recently awarded an application development outsourcing contract from ABN

AMRO Bank to help the latter further streamline its global cross-SBU IT

organization. Under the terms of the contract, Patni will be one of the partners

to support the Bank's global IT needs through application development,

enhancement and support services.

During the quarter, the company opened a new office in Amsterdam to address

the needs of corporations in the region. This is Patni's fifth office in

Europe after Germany (Stuttgart and Munich), Sweden and UK. The company claims

that the expansion is targeted at strengthening its pan European presence and

providing its business with a wider footprint in the EU market.

We believe that Patni will continue to show solid topline growth in the next

couple of years along with some gradual improvement in margins. But it will

still be quite a few notches below its larger peers.

PCS is currently traded at Rs 428, discounting our projected December 2005

EPS by 15 times and December 2006 EPS by 12 times. We had rated the stock as a

market performer in March 2004 and since then stock has appreciated by 71%,

against 80% appreciation in the BSE Teck Index. We retain our earlier rating on

the stock. Market Performer.

Sushanto Mitra he

author is the founder of Technology Capital Partners The views reflected here

are of the author and not of this publication. No liability is accepted for

losses based on the information presented here