The Hindu Business Line : Patni Computers: Hold

SHAREHOLERS can consider retaining their exposure in the Patni Computers stock. Fresh exposures may, however, be considered at declines as the stock has run-up by nearly 10 per cent over the past week. At the current price, the stock trades at a price-earnings multiple of 15 times its annualised 2004 per share earnings.

The encouraging signals coming out of Patni's second quarter performance for the period ended June 30, 2004 are:

Strong sequential revenue growth of over 10 per cent (in dollar terms), but coming off a lower base in the first quarter.

Gross and operating margin are lower on account of annual salary revision and other income (including forex changes) in the latest quarter. The margin decline, at the gross level, was mitigated, to some extent, by increased volumes and better employee utilisation rate.

The contribution of GE, its largest client, has come down to 33.4 of overall revenues, from 36 per cent in the previous quarter.

New client additions at 25 and increase in the million dollar clients to 32 in the latest quarter are positive signs. This was reflected in the growth of the outside the Top-ten client list of Patni.

The rise in revenues from enterprise application systems and management (which includes ERP projects and package implementation) and embedded technology services are encouraging. But application development and maintenance at 74 per cent of revenues continues to be the key service line. Patni will, however, continue to face challenges on at least four fronts:

While the increase in the million dollar accounts is encouraging, Patni's ability to scale-up some of these accounts to say $4 million or above is still untested.

In the first quarter ended March 31, 2004, Patni had lost a chunk of application support revenues from one of its large clients on account of vendor rationalisation.

Though the risk of an outsourcing backlash from the US are receding, 89 per cent of the revenues accruing from a single geography (US, in this case) remains a material risk. Until the concentration shifts to Europe and Japan, Patni will remain vulnerable to any economic turbulence in the US relative to its frontline peers.

The competition in the new service lines — enterprise systems and embedded technology services — is expected to be intense, as all frontline players are aiming to build both volumes and margins from these service lines. This will call for larger sales and marketing expenses and higher onsite presence for project execution.

Until Patni is able to build differentiation into these service lines and also reach a critical size, quarterly fluctuations in Patni's performance cannot be ruled out.

The annualised attrition rate at 21 per cent perked up from 15 per cent the previous quarter. These quarterly changes may not be a cause for concern. But as the offshoring trend gathers momentum and the top five Indian vendors accelerate their flight to `scale', retention of the middle management will emerge as the key to financial growth.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Max India: Accept

Textiles: Gloom is over for the looms

Quite warm enough to wrap around

`Insuring' more bang for the buck

The EPF rate crisis

Why pharma is good prescription

ING Vysya Select Stocks: Sell

Principal Resurgent India Equity Fund: Hold

HDFC Growth Fund

Top moves at Franklin Templeton

Fund Talk