Stock Review: Patni Computer System

EVEN though Patni Computer System's September 2010 quarter performance was in line with the Street's expectations, it lagged behind the growth reported by its bigger peers during the current results season.

   The company's volume growth and client additions were slower than its peers'. Moreover, its December quarter revenue and profit guidance doesn't hold any promise either. Given this scenario, investors may not have anything to cheer about for at least another quarter.

   The sombre outlook for the company is also reflected in its performance on the bourses. Its stock has underperformed the scrips of some of its bigger peers over the past few weeks. It gained just over 4% in the last one month compared with the robust 13% gain in the ET Infotech index.

   In the last four quarters, most of the top-tier IT companies have reported a swift turnaround with high single-digit sequential growth in revenue and business volumes. On the other hand, Patni's performance during this period has been rather lacklustre on most counts. Be it business growth, client additions or recruitments, Patni has not been able to offer an assuring picture.

   Patni's September 2010 quarter performance doesn't offer much promise. Though it clocked about 6.3% growth in volumes, its highest in recent times, it continued to lag the 7% to 11% growth recorded by bigger peers. Further, though it added 13 new clients, the largest since the December 2009 quarter, the total client base remained stagnant at 282 from the quarter-ago and year-ago levels. Other bigger IT players have shown better growth in their respective client lists. Patni's management had earlier indicated that it would prune the list of smaller, less profitable client accounts. This may be one reason for sluggish growth in active clients.

   The company has added 1,663 employees in the September quarter, which is way higher than in the previous few quarters. While this may indicate the company's optimism over future demand, the same is not reflected in the company's quarterly guidance. For the December 2010 quarter, which is also the fourth quarter of Patni's fiscal, the company expects flat sequential revenue growth and a marginal drop in net profit.

   At the Wednesday's closing price of Rs 465.3, Patni's stock is available at a trailing 12-month P/E of 9.3. This is the lowest among the top-tier IT players. The company's attractiveness, however, depends largely upon its ability to execute its inorganic expansion plans and its ability to take advantage of the growing global outsourcing pie.