Stock Review: PATNI COMPUTER SYSTEMS

Patni Computer Systems' stock has fallen by nearly 30% in the past three months, much steeper than the 6% drop in the ET Infotech index. At the Wednesday's close of . 332, the stock trades way below . 503.5, the price at which iGATE bought a majority stake in the company six months ago. Patni's stock is expected to languish on bourses at these levels for at least two quarters following the slower rate of growth in business accounts and the ongoing integration with its new parent iGATE. But once the amalgamation is complete in the next four quarters as anticipated, the new entity would be in a better position to attract higher valuation on bourses.

The financial performance of Patni, which offers IT services to manufacturing, insurance, retail and distribution sectors, was lukewarm during the March 2010 quarter. Though the company reported 4% sequential growth in dollar denominated revenue, it was driven by onetime milestone payment to a certain extent.

Another challenge will be employee retention. The integration with iGATE is expected to reduce redundancies in processes and manpower to increase efficiency. iGATE has shown doors to some of the top executives of Patni though it has iterated that it would not downsize the broader employee pyramid. But retention may be a problem if the company fails to keep pace with overall remuneration growth in the sector.

Centrum Broking, in its recent report, highlights that Patni's decision to offer 9-10% wage increase to its offshore employees may not be sufficient to hold employees back when larger IT players have offered a better salary raise of 12-15%.

This may even prompt Patni to offer a second wage jump in the near term, which would put pressure on its bottomline at a time when revenue growth is hard to come by.

On the positive side, the integration with US-listed iGATE has pulled Patni into the league of companies with annual $1 billion revenue. It could help the combined entity to bid for large value, multi-year contracts in the banking and finance segment. But for this to happen, investors will have to wait for a few more quarters. Until then, the increase in its stock valuation looks limited.