Patni: Takeover may give co the growth impetus

Patni Computer Systems’ stock has gained momentum in the past few days after news of a takeover. According to media reports, the promoters of Patni are in the final stage of finding a suitable suitor. Possible acquisition of a majority stake in the country’s seventh-biggest publiclylisted IT exporter would help resolve the lack of a focused professional leadership. This will be beneficial for the stock, which has been underperforming its bigger peers. Demand for IT outsourcing has picked up in the last four quarters, as is evident from the 6-8 % sequential volume growth reported by the top-three IT players – TCS, Infosys, and Wipro. Patni Computers, however, has not been able to register a strong growth momentum. Over the past few years, the gap between Patni’s business model and that of its top peers has widened. Patni still draws nearly two-third of its revenue from applications development and maintenance services. This segment of services attracts higher competitive pressure and, hence, has compressed margins since it depends upon the size and productivity of the workforce. Larger IT players on the other hand have honed their skills in high-margin segments, such as business intelligence, infrastructure management , and consulting services. Today, less than half of their revenue comes from applications segment.

In the last few quarters, Patni’s exposure to applications segment has reduced but it may be more because of slower business growth in the segment. Industry trackers feel that a change in Patni’s leadership may bring the necessary impetus to transform its business model towards high-margin , non-linear projects.

Client additions and retention will be another tough task. Patni did report 13 new clients in the September quarter, the highest in three quarters, but its overall client base has not grown much. The management points at its client-pruning exercise as a major reason for this.

News reports indicate 62% stake of Patni’s promoters , including the three Patni Brothers, and private equity player General Atlantic is on offer. Details are not available, but analysts estimate a bidding price range of . 550-600 per share. This would value Patni at . 7,200-7 ,900 crore. At . 471, its stock is valued at over 10.5 times its estimated 2011 earnings. Considering the expected range of valuation, its P/E works out to be 12-13 . This is much lower than P/Es of above 22 for its bigger peers because Patni’s future growth is expected to lag that of the peers. Over the past year, Patni has beefed up its management team by adding various vertical heads. What could further boost its strength is a focused leadership.