Stock Review: Patni Computer

THE counter of Patni Computer Systems has failed to enthuse investors over the past one year. Its stock has underperformed the broader market indices in this period. This is despite several initiatives by the company to organise its business through appointments of new executives under various verticals, and not to mention some media reports on the possibility of a stake sale by promoters. Furthermore, looking at its June 2010 quarter performance, it appears that investors may have to wait for some more time before they could see a significant turnaround in Patni's performance. Patni's investors have lost just over 20% of the stock value in the past three months when most other top tier IT counters earned moderate returns. At nearly 11%, the 1-year return of the stock is again lower than the 25% jump in the index. A major reason for the poor show on bourses is that unlike its bigger peers, Patni has failed to give out signs of major growth ahead. The top four IT companies look optimistic about future demand, considering their financial guidance and headcount additions. On the contrary, Patni's quarterly numbers as well as its management commentary do not appear equally convincing.

   In the first two quarters of Patni's current fiscal that ends in December 2010, the topline has more or less stagnated sequentially even though its peers have seen impressive growth. Furthermore, unlike its peers, Patni's quarterly revenue run-rate has fallen from about Rs 860 crore six quarters ago to close to Rs 780 crore.

   Patni has also struggled to maintain its operating margin, which has seen fluctuations. Its operating margin has also fluctuated in a wide band of 15-21% in the past four quarters. Going ahead, the company expects to retain its margin at the lower end of the band between 15% and 17%.

   The sluggish trend in revenue generation can be attributed to the slower growth in its total client base. The company has been pruning less profitable accounts for quite some time. As a result, its active client base has shrunk from 294 a year ago to 280 by the end of the June 2010 quarter despite new client additions during the period.

   With higher attrition rates in the last two quarters, Patni also faces a challenge on the headcount front. It has added about 1,000 employees in the June quarter, but this is more an exercise to restore its lost headcount than an indication of future demand.