India Equity Report | Company Update | Software

Patni Comp Systems Ltd.

` 360 Buy

Gateway to Prosperity June 03, 2011

Buy at an Average less than iGATE!

Company Background

iGATE Patni (Patni)-previously Patni Computer Systems), is a provider of Information Technology services. The company was incorporated in India on 10 February 1978 by Narendra K. Patni. It is headquartered at Bangalore, India. The company was recently taken over iGATE owned by Phaneesh Murthy. Patni has been in the news for their focus on micro-verticals, diversifying into emerging geographies and new client wins. It has strong presence in the key verticals such as Financial Services, Manufacturing, Telecom, Product Engineering, Life Sciences, Independent Software Vendors (ISV), Retail, Media & Entertainment, Energy & Utilities, and Logistics & Transportation. The key services include Application Development, Application Management, IT Consulting, Business Consulting, Embedded Software, Infrastructure, Management, and Enterprise Application Services, IT Governance, Business Process Management, Customized Learning Solutions, Knowledge Management, Cloud Computing and many more. Patni is an ISO 9001: 2008 certified and SEI-CMMI-Dev Level 5 (V 1.2) organization. In keeping with its focus on continuous process improvements, Patni adopts Six Sigma practices as an integral part of its quality and process frameworks. Its clients include more than 400 Fortune 1000 companies. The company employs over 15000 people, and has 23 international offices across the Americas, Europe, and Asia-Pacific, as well as offshore development centers in 8 cities in India. Financial Performance Patni Computer Systems reported satisfactory results for the Q1CY11 ended on March 31, 2011 in line with the market expectations. For the three-month period, the software services provider reported standalone net revenue of ` 5.85 bn as against ` 5.24 bn during the corresponding previous quarter up by 11.5% y-o-y. However, cost of revenue was up 29% from a year ago to ` 4.07 bn from
` 3.17 bn during the previous corresponding quarter.

Kaustubh Naik kn@indiratrade.com Arpit Jain aj@indiratrade.com Info Codes

Reuters Bloomberg NSE BSE PTNI.BO PATNI@IN PATNI 532517

Market Data
52 Wk Range (`) Mkt. Cap (` bn) BSE 2 Wk Avg Vol : 551/310 : 48 : 271000 Shares in Issue (mn) : 134

Share Holding Pattern (%)

Promoters DIIs FIIs Others Custodians : 67.31 : 0.78 : 5.63 : 22.18

On a consolidated basis Patnis revenue increased by 4% (QoQ) to USD 190.3 million in Q1CY11. Its consolidated EBITDA margin improved by 37 bps Q-o-Q to 17.7% in Q1CY11 mainly on the back of one-time milestone payment around USD 1.9 million in Q1CY11. The tax provision rose to 380 mn from 94 mn during the corresponding previous quarter. Consequently its net profit decreased by 10%. Its net profit stood at 1.77 bn as against 1.96 bn. The EPS of the company stood at 13.25 per share as against 14.25 per share during the corresponding previous quarter. Patni Computer acquired 14 clients during the quarter and had 299 active clients. The company said it won four new multi-year, multi-service contracts valued at $ 25-30 mn each, which include a healthcare services provider in Europe and Middle East and a services provider in the public sector in UK. It also won contracts from us based customer care company & forest products company.

Investment Theme The Patni computer was recently acquired by US based iGate. Patni established by Narendra Patni has been amongst the market leaders in the IT sector. The company focused on micro verticals and has started many innovative practices in the markets. The recent deal would give a new direction to its business model. It would help it leverage on its core competencies and serve a broader clientele base. We believe the synergistic effect would help it top the market in the long run. The current price of the share of Patni is at huge discount considering the average cost of its acquisition. Therefore we recommend to buy this stock. i-Gate the whole story !!!

Patni Investment Rationale Patni-iGate deal US-based iGate led consortium had bought a 63% stake in Patni Computer for about USD 921 million. The deal size, however, went up to about USD 1.22 bn after acquisition of 20% stake from public shareholders through the mandatory open offer. The average cost of Patnis share is around 500 per share. iGate Patni has been integrated and announced its day 1 on 12 May 2011 with new policies & views. Between the two - iGATE Patni, provide fullspectrum consulting, technology, business process & product engineering outsourcing services. Together they would have a talent pool of 26000 people. New business opportunities and synergies iGATE s acquisition of Patni Computers brings on board a new management and a new business plan for Patni. Phaneesh Murthys expertise would be very helpful in guiding the future growth of the new company. He has already indicated of working in the smaller teams working more collaboratively, more cohesively together. iGATE Patni is the first fully 'integrated technology and operations' (iTOPS) firm with a global services model. iTOPS facilitates a single-point analysis of the multidimensional business matrix which encompasses: business goals, IT, operations, processes, human resources and related costs. It would help them to leverage both the companies deep understanding of diverse business challenges faced by global enterprise offering their clients to optimize their business through a combination of process investment strategies, technology leverage, and business process outsourcing and provisioning. It would offer comprehensive portfolio of services including application development and management, verification & validation, enterprise application solutions, infrastructure management, customer interaction services & business process outsourcing, product engineering services, and business & technology consulting. Price Correction & attractive valuations The price of the shares of the Patni has slided drastically in the past few months. It has underperformed compared to Sensex. The shares of Patni have decreased by34 % as against 7% decrease in the sensex. This makes the valuations quite attractive considering the fact that the average cost of share for the iGate is above 500 per share (that is for 81% of Patnis all the shares.) the stock of Patni looks to be quite oversold at these levels. It has bounced back from the levels of 320s to the 360s. We believe one could enter at these levels and accumulate the stock at dips for long term investment. Key Financials Year Ended 31st Revenue (` mn) Rev. growth (%) EBITDA (` mn) Net profit (` mn) Shares outstanding (mn) EPS (`) EPS growth (%) P/E (x) EV/ EBITDA ROCE (%) Dec 07 13691.9 30.88 5456.7 3875.2 139.0 27.9 87.39 11.9 84.4 16.24 Dec 08 16498.6 20.50 5075.8 3891.5 128.1 30.4 8.97 4.2 32.3 15.31 2 Dec 09 18525.6 12.29 5427.3 5427.3 129.2 42.0 38.33 11.5 115.0 18.95

Indian IT Sector The Indian information technology industry has played a key role in putting India on the global map. Opening up of markets have given immense opportunities to the business leaders in India to capture the opportunities over the globe. It has led the country in the past decade or so, in terms of revenue and employment and wealth generation. Thanks to the success of the IT industry, India is now a power to reckon with. According to the annual review by industry body Nasscom, India's outsourcing industry has witnessed a rebound and registered better than expected growth notwithstanding the uncertain global economic environment, currency volatility, debt crisis. The Indian Information Technology sector is estimated to have grown by 19 per cent in the financial year 2011, clocking revenue of $76 billion. Future Outlook The SME segment in India is growing at a very good rate and is gaining more and more importance. This offers great opportunities to the Indian IT industry. The automobile sector along with education sector would contribute more to the IT sector. This would also help the IT companies to counter the effects of growing protectionism in the large developed markets. It sector alone is expected to generate millions of jobs in this decade.

Patni

Financial Statements
Income Statement Year end Total Sales + Excise Other Income Change in Stocks Raw Material Con. Employee Exp. Indirect Taxes Other Exp. Operating Exp. Operating Profit Total Interest Gross Profit Net Dep. Total Taxation Net Profit/Loss Dec 07 11716.7 1975.2 0.0 0.0 5692.3 52.4 2490.5 8235.2 3481.5 68.9 5387.8 804.7 707.9 3875.2 Dec 08 15410.2 1088.4 0.0 0.0 7554.9 53.1 3814.8 11422.8 3987.4 64.7 5011.1 878.2 241.4 3891.5 % Chg 31.52 (44.90) 32.72 1.34 53.17 38.71 14.53 (6.10) (6.99) 9.13 (65.90) 0.42 Dec 09 17348.6 1177.0 0.0 0.0 8209.0 61.6 4827.7 13098.3 4250.3 0.0 5427.3 0.0 0.0 5427.3 (` mn) % Chg 12.58 8.14 8.66 16.01 26.55 14.67 6.59 (100.00) 8.31 (100.00) (100.00) 39.47

4 Years Balance Sheet Balance Sheet as on 31st SOURCES OF FUNDS Equity Share capital Share Application Money Preference Share Capital Reserves & Surplus Loan Funds Unsecured Loans USES OF FUNDS Gross Block Less : Revaluation Reserves Less : Accumulated Depreciation Net Block Capital Work in Progress Investments Current Assets Less : Current Liabilities Total Net Current Assets Misc. Expenses not written NOTE Bk Val Unquoted Investments Mkt Val. Quoted Investments Contingent Liabilities Dividend (%) 13870.2 0.0 10990.0 150 5238.5 6898.1 12682.4 150 5238.4 7318.9 24669.4 150 Dec 06 22111.7 279.3 0.0 0.0 21801.8 30.6 0.0 22111.7 6143.0 9.3 2793.5 3340.2 2112.8 13870.2 8038.6 5250.1 2788.5 0.0 Dec 07 25604.4 279.8 0.0 0.0 25300.8 23.8 0.0 25604.4 8440.0 1.3 3489.4 4949.3 2174.1 15831.7 8845.6 6196.3 2649.3 0.0 Dec 08 25228.1 256.2 0.0 0.0 24954.4 17.5 0.0 25228.1 9459.8 1.3 4192.6 5265.9 2470.7 16426.4 10187.2 9122.1 1065.1 0.0

(` mn) Dec 09 32045.7 258.3 0.0 0.0 31778.0 9.4 0.0 32045.7 10845.6 1.2 4773.6 6070.8 1336.6 22070.8 9977.0 7409.5 2567.5 0.0 5644.8 15936.4 20179.3 150

Patni Quarterly Income Sheets Quarter Ended Net Sales Cost Of Sales Operating Profit Recurring Income Adjusted PBDIT Financial Expenses Depreciation Other Write Offs Adjusted PBT Tax Charges Adjusted PAT Non Recurring Items Other Non Cash Adjust Net Profit Jun 10 4770.90 3078.30 1692.60 262.50 1955.10 2.30 234.90 0.00 1717.90 377.70 1340.20 189.80 0.00 1530.00 Sep 10 5185.40 3312.50 1872.90 124.70 1997.60 12.60 236.00 0.00 1749.00 452.40 1296.60 185.60 0.00 1482.20 Dec 10 5427.10 3539.60 1887.50 182.60 2070.10 6.60 218.30 0.00 1845.20 93.90 1751.30 203.30 0.00 1954.60 (` mn) Mar 11 5427.20 3475.10 1952.10 197.00 2149.10 8.90 215.30 0.00 1924.90 379.90 1545.00 222.50 0.00 1767.50

52 Week Index Relative Percentage Appreciation

Patni vs SENSEX Risks Associated Acquisition & integration related risks Patni has high attrition rates. The recent acquisition would bring a new management on the board. It is very difficult to predict how smoothly the integration would take place. Hence performance wise it could take longer to major the synergistic effects of the acquisition. Risk of delisting Patni has retail public holding of around 4-5%. As of now, iGate has around 83 per cent stake, as against the 75 per cent limit for non-public shareholding of an Indian listed firm. The option, is to come out with another voluntary offer to delist the firm or dilute the equities. Given the unfavorable market conditions this could act as major hindrance. Slowdown in Global Economies Europe and Global economies are showing signs of slowing down. Any adverse situation could reduce the demands making it difficult to achieve the goals set by the compan 4

Patni In a Nutshell iGate-Patni previously known as Patni Computer Services ltd was incorporated in India on 10 February 1978 by Narendra K. Patni. It is headquartered at Bangalore, India. The Company provides world-class technology services by constantly exploring and implementing innovative solutions that drive long-term value to customers. Patni is an ISO 9001:2000 certified organizations; assessed enterprise-wide at SEI-CMMI Level 5 (V1.2), SEI-CMM Level 5 and PCMM Level 3. It was recently acquired by US based iGate for around ` 55.40 bn. The acquisition is one of the largest in the Indian IT sector. That is considered to be win-win situation for both the companies. The merger could result in a more competitive entity. With the acquisition, there should be scope for cross selling and improvement in margins. The share price of Patni has correctly sharply since the start of this financial year. At the current levels (around ` 350-320) the stock is trading at almost 33% discount to acquisition cost of ` 500 per share. We believe there is limited downside for the stock form this level. The Indian IT sector has recently recovered from the recession and posted excellent number. We believe the trend will continue in the future as well. Therefore recommend to buy and accumulate this scrip.

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Registered Office : Singh House, 3rd Floor, 23/25 Ambalal Doshi Marg, Fort, Mumbai 400023 Tel : +91-22-22656812 Administrative Office Fax : +91-22-22656985 Email : im@indiratrade.com

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Institutional Dealing Unit : Africa House, 3rd Floor, 5 Topiwala Lane, Lamington Road, Mumbai 400007 Tel : +91-22-30080675 Rating Interpretation
Buy : Expected to appreciate 20% or more over 12-months Accumulate : Expected to appreciate up to 20% over 12-months Trade Buy : Expected to appreciate more than 10% over 45-days Reduce : Expected to depreciate up to 10% over 12-months Sell : Expected to depreciate 10% or more over 12-months Trade Sell : Expected to depreciate more than 10% over 45-days

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