Stock Review: PATNI COMPUTERS

The financials of Patni Computers, which posted dismal results reporting losses for the June quarter, are expected to stay close to similar levels for a few more quarters on the back of an ongoing integration process with iGate which had acquired the Mumbai-based IT services and business solutions company earlier this year.

A slowdown in the West delays in decision-making and currency fluctuation continue to be a key concern for the company which was hit because of decline in revenues across major geographies and verticals.

During the June 2011 quarter, Patni reported a 4.4% drop in the revenues to . 822 crore against the previous quarter led by 1.1% decline in the volumes and a marginal drop in onsite revenues. While selling, general and administrative (S,G&A) costs increased by 190 basis points (bps) to 21.7% in relation with the net sales, employee expense plummeted over 12 percentage points (pp) to nearly 75%.
Higher operating costs on a lower revenue base led to a drop of 15 percentage points in the company's operating profit margin to 3.1%. This further drove the company into making a loss of . 51.5 crore on a consolidated basis as against a profit of . 162 crore during the previous quarter.

The company's top 10 clients did witness traction during the quarter, growing by 270 bps to 48.4% against the previous quarter. However, excluding the revenue growth from the top clients, the decline in volume was broadbased with a poor show posted by the American and European markets, which contribute over 90% to the company's revenue. Also, BFSI segment (banking and financial services and insurance and healthcare), which forms more than 50% of the total business, remained flat on a quarteron-quarter basis.

The company is expected to post slow growth for the rest of the year on the back of lower revenue, continued integration costs and higher depreciation charges. Moreover, the deal pipeline remains sluggish with the company struggling to bag larger deals in the . 10-30 million range.

At the current market price of . 279.6, Patni's stock trades at 8.7 times its earnings for the trailing twelve months. After its integration with iGate, the combined entity is expected to benefit from a larger customer base and service offerings. However, the company's profitability is expected to remain sluggish for a few more quarters due to integration expenses and accounting charges related to the acquisition.