While analysts expect gains for Patni’s shareholders, they believe the new owner will have to overcome quite a few challenges to create value in the long run.
Along with the promoters, General Atlantic will also be shedding its 17 per cent holding in Patni, one of the oldest technology firms in the country. While the iGate-Apax Partners consortium and private equity (PE) firm Carlyle are in the race to buy out the promoters, the bids are reported to be in the range of Rs 500-600 a share, valuing Patni at $1.45-1.74 billion. While in the lower band, valuations are in sync with the current market capitalisation of the company, if the deal is struck at Rs 600, it could lead to immediate gains of 20 per cent for the investors.
While the valuations at the current levels are slightly lower than the peers, suggesting there is a good probability of the deal getting done at Rs 500 per share, high cash equivalents of Rs 1,416-crore (Rs 108 a share) provide further support. Analysts, too, believe the sell-out will take place at a premium to the current level of Rs 490. Jagannadham Thunuguntla, strategist and head of research, SMC Global, says, “The promoters have been looking to exit for two-three years and the finalisation of the deal will be a positive for the minority shareholders. A price of Rs 525-550 would be a good exit point for minority shareholders”. Thus, retail investors can hold the stock and benefit from the premium arising from the deal. However, the key risk would be the fallout of the deal, which will lead to a big correction in the stock price.
| PEER COMPARISON | ||||
| In Rs crore | Patni Comp. | Mphasis | Oracle Finance | Polaris Software |
| Revenues | 3,156 | 4,823 | 2,814 | 1,439 |
| % chg y-o-y | -1.8 | 39.4 | -6.4 | 4.7 |
| Ebitda | 831 | 1,308 | 990 | 248 |
| % chg y-o-y | 26.9 | 38.5 | -3.4 | 28.0 |
| EBITDA margin (%) | 26.3 | 27.1 | 35.2 | 17.2 |
| Net profit | 654 | 1,052 | 781 | 181 |
| % chg y-o-y | 48.7 | 42.3 | -4.5 | 32.5 |
| PE (x) | 10.2 | 14.0 | 26.7 | 10.9 |
| For Trailing 12 months Source: Capitaline | ||||
| MUTED GROWTH | |||
| In Rs crore | CY09 | CY10E | CY11E |
| Revenues | 3,153 | 3,184 | 3,634 |
| Ebitda (%) | 603 | 629 | 697 |
| Net Profit | 482 | 546 | 525 |
| E: Estimates Souce: Bloomberg | |||
What Patni offers
With annual revenues of $655.9 million and 16,556 employees, Patni offers a good opportunity for a buyer aiming to enhance presence in the technology outsourcing industry. The company also has a strong customer base of 282 clients, many of whom are from the insurance and financial sectors.
While the company reported a strong jump in performance in CY2009, led by its new CEO Jeya Kumar (joined in December 2008), it has reported muted revenue growth and underperformed its peers in the recent quarters. For the December quarter, it again expects muted revenue growth (0.7-1.2 per cent) and 3.7-5.8 per cent decline in the net profit (excluding forex gain) compared to the September quarter.
In the September quarter, its BPO revenues grew 31 per cent sequentially, primarily due to revenue contribution from the acquisition of CHCS, excluding which the growth was muted. While the insurance business grew 8.5 per cent, its financial services grew just 2.2 per cent, where most of the peers are witnessing strong traction. This is due to fewer banking clients, which are spending more in the current environment benefiting peers. Also, Patni has one of the highest attrition rates in the industry, of around 26 per cent. Thus, apart from boosting overall growth rates, employee retention would also be a key challenge for the new owner.
A big challenge for the new promoter will be to retain its top clients. Analysts say customers typically relook at the arrangement with their vendors when major events like acquisitions take place. While Patni is known to have clients such as GE, analysts say the relationship with Patni for most of the clients is not critical (strategic). In simpler words, it is usually not difficult for clients to move out to another vendor. The threat is apparent, given that Patni derived 48.5 per cent from its top 10 clients in the September quarter, marginally lower than 51.4 per cent in the year ago period.
For now, Patni is planning to increase its focus on the BFSI and telecom sectors in the EU. It is also planning to add more customers in the remote infrastructure management space, which accounts for less than five per cent of revenues currently.
The company recently won a big ticket transaction processing deal from the US-based health insurance company, Universal, which is five year $175 million contracted incremental revenue. This is in addition to another $75 million expected from the third-party agreement totalling $250 million. Going forward, good traction from the healthcare vertical and higher demand in the US market will continue to drive volume growth.