Nasdaq-listed IT services company iGate, which recently acquired Patni Computer Systems, says the acquisition has started reflecting in the company’s results. The company saw for 21 new deals. However, Chief Executive Officer Phaneesh Murthy is concerned about the macroeconomic environment and says a double-dip recession is imminent. In a telephonic interview with Bibhu Ranjan Mishra, he talks about iGate’s success, as well as the trends in the clients’ environment. Edited excerpts:
How has your performance been in the last quarter, since this reflects the strength of the combined entity?
The positive aspect in the last quarter (2010-11) is that the first phase of the integration was quite smooth and our attrition has come down substantially. We have also added a number of new clients. Among the negatives, because of the interest expenses and restructuring costs, we saw a drop in the net income level. This was not unexpected. When we chose a large transaction like this and raised debt, we knew there would be one or two quarters of turbulence.
There were concerns that the acquisition of Patni would dilute your margins, and your margins in the second quarter have declined to 34.7 per cent from 38 per cent a year ago.
The margins have declined primarily for two reasons. First was the blending of Patni’s margins with our margins. The second aspect was second salary increases. However, I am quite positive we would return to our benchmark margins in the next few quarters. Whenever there is a large acquisition, things don’t change overnight, but over time.
How many quarters would it take to return to the old margin levels?
Over the next eight quarters, we expect to get back to 40-41 per cent growth margins and 25 per cent of adjusted Ebitda (earnings before interest, taxes, depreciation and amortisation).
Do you expect acquisition-related costs to take a toll on your profit in the current quarter?
First, the interest cost is roughly about $18.5 million per quarter. That would continue for many years until we pay off the loans. Second, we saw some impact in the last quarter due to the restructuring costs related to the acquisition. The total restructuring costs stood at about $7 million, which has been partly adjusted in the last quarter. There could some spillover to the third quarter.
Is the additional cost of $18.5 million in your balance sheet every quarter not a cause of concern?
We are generating enough cash, and this is not an issue for us. We have $430 million of cash in the balance sheet. From the last quarter to this quarter, we added $50 million of cash.
How does the overall macroeconomic environment look? Are we heading towards a double-dip recession?
In January, I had spoken of a potential double-dip in the third and fourth quarter. I think that is pretty much possible. In fact, the housing sector is already in a double-dip. I always expected a weakness in the economy. Though the stimulus dollars really helped the economy last year, in the absence of the stimulus money, there is a general weakness in the economy.
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As clients approach the budgeting session, what kind of indications are you getting from them?
Most of the clients finalise their budgets by November or December. It is too early to comment on 2012 budgets. However, I hope the market would recover before the budgeting for 2012 happens. This is because we don’t want to go into the budgeting session in a choppy environment. The US market is choppy and turbulent. The economy in the US is so uncertain that it is becoming difficult to predict things even a month ahead.
How far has the Patni acquisition enabled you to compete and win more deals?
Since we have more capabilities now, we are winning more deals. Larger deals are opening up for the combined entity and customers are overwhelmingly positive. We are in potential talks on deals worth tens of millions of dollars a year.
Visa problems continue to haunt India-centric information technology services players. How challenging is the issue?
I think it’s becoming a little challenging. In this kind of an environment, we need the support of the government.
What about delisting Patni?
Over time, we would like to delist. However, we don’t have a specific time frame yet. We are building enough cash reserves in order to do that, but we have to use it for working capital and pay out the debt.