Patni Computer Systems Limited: Listed at Last

The Indian software industry has been a darling of the stock markets since
mid-nineties and there exists only a few Indian companies with sizable revenues
still to be listed. After the two-year lull in the stock markets, the road is
being cleared for new issues from the software sector.  

Among the companies which took advantage of the thaw in the IPO markets was
Mumbai-based Patni Computer Systems which was also one of the few large software
companies which remained outside the public markets apart from the giant TCS
whose public issue is also slated to happen soon.   

While the sentiment for the software sector is somewhat mixed due to the slow
US recovery as well as some anti-outsourcing rhetoric emanating from the
election focused US politicians, the fundamentals of the sector remain strong.
And going by recruitment spree of larger companies, the outlook in the medium
term is positive and it wont be long before some of the mid-market companies in
the software and BPO sectors test the IPO markets.

Patni Computer Systems (Patni) was incorporated as Patni Computer Systems
Private on February 10, 1978 with activities like computer time rental, resale
of imported computer hardware and software exports. During the past four years,
the total income has grown at a CAGR of 25% to Rs 1143.5 crore, whereas its net
profit has risen at a CAGR of 17% to Rs 192.3 crore. The company’s current
equity stands at Rs 25 crore with promoters holding 51.3%, Indian public holding
15% and others holding the balance 33.7% of the stake.

Patni 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.

Patni entered the capital market in January 2004 with a public issue of
1,87,24,000 equity shares of Rs 2 each comprising fresh issue of 1,34,00,000
equity shares and 53,24,000 equity shares being offered for sale by the selling
shareholders. The company priced the issue at Rs 230 per equity share of face
value of Rs 2 which was oversubscribed 22 times.

The company’s wholly owned subsidiaries are Patni Computer Systems Inc.
USA, Patni Computer Systems (UK) Limited, Patni Computer Systems GmbH, Germany
and the recently acquired The Reference Inc. USA. Patni has nine development
centers in India and twenty-two sales offices scattered across the globe.

In the previous financial year, Patni acquired The Reference Inc., a US-based
IT solutions provider primarily focusing on consulting and advisory services in
the financial services segment. For the year ended December 2003, Patni reported
revenues of Rs 1143.5 crores, up 26.5% as compared to Rs 903.7 crores in the
previous fiscal. Net profit for the recently concluded financial year amounted
to Rs 192.2 crores as against Rs 172.9 crores for the year ended December 2002,
up 11.2%. The top five clients of the company contributed 69% of the total
revenues with the number of million dollar clients increasing from 15 in 2002 to
26 in 2003. Seventy seven new clients were added during the year as compared to
59 in the year ended 2002. 51.8% of the total revenues were earned from time and
material contracts as compared to 48.2% in the previous year. Fixed price
contracts (including fixed price SLA) contributed 48.1% of the total revenues
earned this as against 51.7% earned last year. During 2003, 1526 employees
joined the company taking the total staff strength from 5570 in the previous
year to 7096.

Patni has a 13-year relationship with its largest client General Electric
(GE), which contributed 37.8% and 41.2% of the total revenues for the last
quarter and financial year ended December 2003 respectively and is an area of
concern for investors due its high concentration and perceived low margins.
Other than GE, the company has relationships with State Farm Automobile
Insurance Company, Coca-Cola, Motorola, Hewlett Packard, Sony, Novartis and
Hitachi.

Patni signed a contract with the Guardian Life Insurance Company of America,
a mutual life insurance company in the US, potentially worth $35 million. As per
the terms of the contract, the former would assist Guardian in introducing new
life and annuity products and undertake GAP analysis and implementation of IT
systems to meet the changing business needs in the insurance marketplace over a
period of seven years. Under the software services outsourcing deal, 70% of the
work would be delivered out of the company’s offshore development centers in
India leading to significant cost savings for Guardian.

Patni reported results for the fourth and final quarter ended December 2003,
wherein revenues grew 4% sequentially amounting to Rs 321.3 crores as compared
to Rs 308.2 crores. Year on year the revenues were up 28% amounting to Rs 252.4
in the same quarter last year. Net profit for the same period was Rs 62.9 crores,
up 21% sequentially and 51% y-o-y as compared to Rs 51.8 crores and Rs 41.7
crores respectively. Revenues form USA and Europe amounted to Rs 284.7 crores
and Rs 23.5 crores, growing 5% and 4% respectively, whereas revenues from Japan
and the Asia Pacific region were Rs 10.3 crores and Rs 2.9 crores, a decline of
10% and 6% over December 2002 respectively. During the quarter, the insurance,
manufacturing and the financial services vertical grew by 5%, 9% and 2%
respectively.

High levels of attrition is a menace for all technology companies in India
and in times of increasing global competition in the technology sector,
attracting and retaining key employees are of immense significance for a company’s
growth. This seems to be an area of concern for Patni as its annualized
attrition rate is much higher at 20.4% for fiscal 2003 than the industry average
of around 15%.

Going ahead, the company estimates operating margins in the region of 17% for
the next few quarters, claiming that the key drivers for the year would be
better volume growth and further offshoring. Patni plans to focus on de-risking
client concentration through acquisition of new businesses in India and abroad.

Patni is currently traded at Rs 251, discounting our projected March 2004 EPS
by 13 times and March 2005 EPS by 11 times. Considering that the company is
unlikely to improve significantly its margins in the near term and will continue
to depend on GE for a large part of its business, the share seems fully priced
in the near term. Market Performer.

Sushanto Mitra 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.