Patni Computer Systems

On the back of volume dip of 2.3% due to project delay, for the second quarter ended June 2010, Patni Computer Systems (Patni) reported marginal increase in operating revenues at Rs 777.63 crore benefited by impacted by rupee appreciation of 3.2%. In US$ terms, the revenues de-grew 2.8% at US$ 167.56 million with fall in constant currency at 2.3%. Operating PBIT margins fell 190bps at 16.3% on the back of wage hike of 230bps, lower utilization adversely impacted by 100bps whereas lower SG&A benefited by 130bps. Net profit was down 2% at Rs 147.30 crore.

The Revenues of US$ 167.56 million were lower than its guidance of US$ 171 - 172 million in US$ terms and net profit excl forex gain/loss was inline with the bottomline guidance of US$ 27 - 28 million reporting US$ 27.48 million (excl. Forex gain/loss and EO). The revenues were lower than market expectations whereas the bottomline was above market expectations.

Going forward, assuming Rs/US$ at 46, Patni has guided for growth in operating revenue in dollar terms of 5 - 5.6% and dip in net profit (excluding forex gain/loss) of 18.1 - 16.3%. MTM gains for Q3FY2010 would be about US$ 1 million. The revenue growth is on the back of ramp up. The earnings guidance is lower on account of lower other income and investment in business. The Company plans to add about 1000 - 1200 employees every quarter.

On Y-o-Y basis, consolidated operating revenues was up 1% at Rs 777.63 crore with rupee appreciation adversely impacting by 2.8%. Operating revenues in US$ terms were up 7% at US$ 167.56 crore. Operating PBIT margins was down 120bps at 16.3% on the back of increase in SG&A expenses and forex gain was at Rs 19.76 crore against loss of Rs 19.72 crore in the corresponding quarter previous year and the resultant reported net profit stood at Rs 147.30 crore up 8%.

On June 9 2010, Patni completed the acquisition of CHCS services Inc, fully owned subsidiary of Universal American , for a consideration of US$ 6 million. Through this acquisition Patni will enter Third Party Administration business as extension to its Insurance Services portfolio, significantly enhancing its existing BPO capabilities to deliver end-to-end platform based solutions.

Hedging contracts at the end of the quarter was US$ 398 million at average rate of Rs 41 - 48/US$. Cash & Cash equivalents at the end of the quarter stood at Rs 2165.53 crore (US$ 466.6 million) as compared to Rs 2100.67 crore (US$ 467.3 million) at the end of sequential quarter.

Sequential Performance (US GAAP)

For the quarter ended June 2010, Patni posted marginal sequential rise in its consolidated operating revenues at Rs 777.63 crore with fall in US$ terms of 2.8%: 2.3% due to fall in volumes and 0.5% on cross currency. The fall in volumes was on the back of project delay in Insurance and BPO space. The rupee depreciation benefit was 3.2%.

For the quarter, revenues from manufacturing de-grew 5.6% contributing 29.9% of revenues, financial services dipped 1.1% at 11.9%, communication and media & entertainment was down 6.7% at 11.7%, from product engineering de-grew 2.2% contributing 16.4% whereas Insurance increased 0.9% at 30.1% as compared to the sequential quarter.

In service lines, revenues from ADM fell 5.9% at 62.5%, package implementation fell 4.2% contributing 13.2%, from Product engineering de-grew 2% at 12.2% whereas, BPO grew 33% at 6.7% and IMS grew 5% at 5.4% sequentially.

Operating PBIT margins fell 190bps at 16.3% on the back of wage hike of 230bps, lower utilization adversely impacted by 100bps whereas lower SG&A benefited by 130bps. The resultant operating PBIT was down 11% at Rs 126.38 crore.

The net other income was up 26% at Rs 51.97 crore with forex gain down 8% at Rs 19.76 crore. The resultant PBT was down 2% at Rs 178.35 crore.

Tax provision for the quarter was at Rs 31.05 crore down 5% with effective tax rate at 17.4% down 60bps. The resultant PAT was down 2% at Rs 147.30 crore.

On Y-o-Y basis, consolidated operating revenues were up 1% at Rs 777.63 crore, adversely impacted by rupee appreciation of 2.8%. The revenues grew 7% in US dollar terms at US$ 167.56 million. Operating PBIT margins were down 120bps at 16.3% on the back of increased SG&A expenses and wage hike. The resultant operating PBIT fell 7% at Rs 126.38 crore.

For the quarter, the other income (net) was at Rs 51.97 crore up 53% over the corresponding quarter previous year, which includes forex gain of Rs 19.76 crore against loss of Rs 19.72 crore in the corresponding quarter previous year. The resultant PBT was up 5% at Rs 178.35 crore.

Tax for the quarter was down 5% at Rs 31.05 crore with the effective tax rate at 17.4% down from 19.2% in the corresponding quarter previous year. The resultant PAT was down 8% at Rs 147.30 crore.

For the year ended June 2010, the consolidated operating revenues were up 4% at Rs 1577.33 crore with rupee appreciation adversely impacting by 2.8%. The revenues rose in US$ terms by 6.8% at US$ 339.87 million. Operating PBIT margins improved 130ps at 17.3%, the resultant operating PBIT grew 12% at Rs 272.24 crore.

For the period, the other income (net) surged 535% at Rs 94.56 crore with forex gain of Rs 41.89 crore against loss of Rs 50.76 crore in the corresponding period previous year. The resulting PBT was up 42% at Rs 366.80 crore.

For the period, provision for taxation increased 31% at Rs 64.92 crore with effective tax rate of 17.7% down from 19.2% for the corresponding period previous year, the resultant PAT was up 45% at Rs 301.88 crore.

• Revenue contribution by top client decreased 6.9% at 11.2%. Contribution from Top 2-5 clients was down 4.3% at 24.3% and of top 6-10 clients increased 3.6% at 13.1% and other than top 10 clients was down 2.6% at 51.4%.

• Number of active clients relationships was increased to 280 at the end of the quarter as compared 260 at the end of sequential quarter. The number of million-dollar relationships was steady to 92 with 3 clients over US$ 50 million. During the quarter, Patni acquired 11 new clients.

• For the quarter under review, offshore efforts contribution was down 220bps at 72.6% compared to the sequential quarter and contribution of offshore to revenues decreased 120bps at 45.6%.

• Utilization was down 490bps at 75% in quarter under review. The Attrition excluding BPO was at 21.5% against 17.7% in the sequential quarter.

• For quarter ended June 2010, U.S. revenues were lower by 1.2% sequentially with contribution at 81%. Revenues from EMEA decreased 13.1% with contribution at 12% and APAC decreased 0.5% sequentially at 7%.

• For the quarter, revenues from fixed price contracts contributed 43.1% to overall revenues up from 43.6% in sequential quarter and 39.8% in corresponding quarter previous year.

Management Comments:

Commenting on the performance, Mr Jeya Kumar, CEO, Patni Computer Systems, said:

While there is a general improvement in demand environment predictability and sustainability of growth is still challenging. We experienced the same in current quarter as some of the projects starts were behind expected schedules in our portfolio. We are confident that our strategic investments will pay off in mid to long run with execution of differentiation in micro verticals to gain leadership in our chosen industry market segments. Inorganic efforts are expected to pick pace and will result in higher growth going forward as we remain bullish on our overall prospects to scale the business.

Commenting on the performance, Mr Surjeet Singh, Chief Financial and Operations Officer, Patni, said,

Focused cost management efforts have resulted in overall improvement of margin profile for the year as we absorbed the wage increases during the quarter in line with expectations besides neutralizing forex changes with superior risk management in an otherwise constant pricing environment. Cash investments continue to be at the operating side in innovation and platform purchases in line with our strategy besides organic investments in geographical diversification.

Guidance

The Company's outlook under US GAAP Consolidated for the quarter ending September 2010 is as follows:

Consolidated revenue expected to be US$ 176 - 177 million q-o-q growth of 5 - 5.6% and net profit (excluding the foreign exchange gain/loss and EO) for the same period expected to be in the range of US$ 22.5 - 23 million i.e. de-growth of 18.1 - 16.3% on q-o-q basis, at an exchange rate of Rs 46/US$. MTM gains for Q2FY2010 would be about US$ 1 million.

Valuation

The shares of Patni Computer are trading at Rs 470 on BSE, which discounts the quarterly annualized EPS of Rs 45.4 by 10.4 times. Cash per share is Rs 166.71 per share. Excluding cash, the PE comes to 6.7 times.

Patni Computer Systems: Consolidated Results (US GAAP)