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JUNE 17, 2007
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Rupee Rise
Though an appreciating rupee is a cause for concern for many industries, it is proving to be a boon for some, particularly those that have large foreign currency borrowings. A weaker dollar is making repayments cheaper. Also, state-run refineries and those in the aviation sector are well-positioned to benefit from the stronger rupee. The Indian currency is up 8 per cent this year and is Asia's strongest currency against the dollar in 2007.

The ECB Route
The cap on maximum external commercial borrowings (ECBs), an annual ritual for the government, is fast losing its significance. Since the bulk of the foreign borrowings is raised under the automatic route by companies, it is becoming difficult to enforce the cap. The government had raised the annual limit of ECBs last year from $18 billion (Rs 81,000 crore) to $22 billion (Rs 99,000 crore). Now, it seems that total inflows will cross the $22-billion mark.
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Business Today,  June 3, 2007

Is Patni On The Block?
There are persistent rumours of a feud in the promoter family. And a host of suitors is circling over it, waiting to pounce.
Will he, won't he: Chairman & CEO Narendra Kumar Patni

It's a tantalising proposition. Is Patni Computer Systems, India's sixth-largest it company and one of the pioneers in the sector in India, up for sale? The corporate and media grapevine is buzzing with whispers of an imminent deal. Adding grist to the mill are rumours of discord between Narendra Kumar Patni, Chairman & CEO, Patni Computer Systems, who manages the company, and his two brothers, Gajendra Kumar and Ashok Kumar, who are, effectively, passive investors despite sitting on the Patni Board as Executive Directors. Each brother owns a little over 14 per cent of the company. So, any investor who buys out Gajendra and Ashok will have to launch an open offer for another 20 per cent in terms of the SEBI Takeover Code, taking his stake to at least 49 per cent.

Boardroom battles, family feuds, brother lining up against brother and big money deals-what more can a corporate potboiler ask for? Confirmation-which, unfortunately, is not forthcoming. An official statement from the company says: "Patni Computer Systems has not been informed by any of its large investors of their intent to offload any stake. As a policy, the company does not comment on market speculation." A.K. Patni, the youngest brother, also denies any such move. "These are speculations. There is no truth in this," he says. G.K. Patni did not respond to an e-mailed query on the issue.

People close to the Patni family, however, say that it is possible that Gajendra and Ashok want to sell out. "Given the fact that they are not involved with the company's operations and run their own business, a sell-out makes sense," says one such person. Another source close to the company adds that N.K. Patni, the second brother, may himself buy out his brothers.

Gajendra and Ashok are actively involved in the family's it hardware business, PCs Technologies, which has a turnover of Rs 500 crore. Narendra, incidentally, is a Director on the board of this company. "We hold a stake of around 70 per cent in PCs Technologies and it is divided almost equally between us three brothers," says Ashok, indicating that all is hunky dory in the Patni clan. "And as a Director in Patni Computer Systems, I attend all the board meetings and I am aware of what is happening in the company," he adds.

That should have been the end of this story, but the buzz refuses to die down. The reasons aren't hard to find. The obvious one is that Patni, despite being one of the pioneers in the Indian software industry, hasn't been able to keep pace with the likes of Infosys, Wipro or TCS in either growth or in scaling up its capabilities. It also has a high attrition rate of 29 per cent (against the industry average of 18 per cent), low margins, of 19.3 per cent (industry average of top six companies: 24.3 per cent), high client concentration and low manpower utilisation levels.

As its rivals keep climbing the IT value chain, Patni will find it increasingly difficult to hold its own in this world of cut-throat competition. So, it makes sense for Gajendra and Ashok to cash out now while valuations are still comparatively high. Given Patni's M-cap of Rs 7,182.83 crore on May 21, each brother could get a minimum of about Rs 1,000 crore were they to sell out now.

Three main reasons why Patni Computers is attractive to a global vendor.

» Patni has a trained pool of 13,000 employees. An acquisition will provide a global buyer with a readymade set-up. If a global major has to seriously compete with companies like Infosys and TCS in India, it will have to ramp up fast and buying out an Indian company will obviously be the best option
It has low employee utilisation levels. Patni's employee utilisation is 72 per cent compared to Infosys (77 per cent) and TCS (79.6 per cent). This will give the acquirer sufficient headroom to scale up operations without increasing headcount
Patni will be particularly attractive to IBM as it does a lot of work on the IBM Framework; also Patni is strong in the Applications, Development and Maintenance business; IBM does not have a significant presence in India in these segments; so synergies will be easy to tap

A report on Patni Computer Systems by brokerage firm First Global says: "The problem really lies in Patni's revenue mix. It derives as much as 70 per cent of its revenues from low-end applications development and maintenance work and does not appear to have made any aggressive efforts to move up the value chain, the way some of its peers have." The report adds that the company has not diversified significantly across geographies and has not been able to grab opportunities in Europe, where offshoring has been gaining increasing acceptance and where the pricing scenario is still favourable compared to other markets. Besides, Patni has a very high client concentration compared to its peers. It derives 37.10 per cent of its revenues from its top five clients; about 14.6 per cent of its revenues come from GE, which is known for stretching its dollar further than other clients. Patni's revenue model has also kept its average billing rates low. Patni's onsite billing rate is $48 (Rs 1,968) per hour and offshore billing rate is $21 (Rs 861) per hour compared to $60 (Rs 2,460) and $24 (Rs 984), respectively, for the Big 3 of the Indian it industry. This, along with other factors like high sub-contracting costs, increase in employee and selling, general & administration expenses has led to a decline in EBIDTA margins from a robust 36.1 per cent in 2002 to 18.8 per cent in 2005 (Patni follows the calendar year as its financial year).

Why, then, does it seem such an attractive buy? Actually it's a paradox. Despite its obvious drawbacks, Patni Computer Systems is still India's sixth-largest it firm, is invited to bid for large deals and even wins some of them (it won the multi-million dollar ABN AMRO outsourcing deal along with TCS and Infosys). A closer look at its numbers also reveal that the fine print isn't half as bad as the headlines. Patni's revenues at the end of 2006 stood at $579 million (Rs 2,600 crore), about the same level as Infosys's revenues back in 2002. The company logged a net profit of $59 million (Rs 265 crore then). Then, over the last five years (2001-06), its revenues have grown at a CAGR of 32.3 per cent-higher than HCL Technologies (26.9 per cent) and Satyam (28.7 per cent). However, it has been a laggard when compared to Infosys (five-year CAGR of 39.1 per cent) and Wipro (36.9 per cent), according to the First Global report.

Harshad Deshpande, Securities Analyst at First Global, says: "Three things that make it attractive are: Patni's trained employee base, readymade set-up and low employee utilisation levels (which will allow a new promoter to ramp up operations without any significant additional investments). If the bidding process for Patni begins, there could be significant upside to the stock price despite its current high valuations," he adds.

Says Arup Roy, Senior Research Analyst at Gartner's it Services Market Group: "Both MNCs as well as Indian it service providers are resource-hungry and are always on the lookout for ways to scale up their offshore resources. Traditional it services vendors who do not have a sizeable offshore resources in India are now looking at inorganic means of bridging this gap-by way of acquisitions."

It's not that the management of Patni Computer Systems is unaware of its strengths and weaknesses. The company is in the process of strengthening its focus on sales penetration, delivery management and internal controls to generate faster growth. It has also restructured its hierarchy and created two new positions-of Chief Operating Officer and Chief Delivery Officer, and appointed Mrinal Sattawala and Vijay Khare, respectively, to these roles.

Says Sattawala: "Going forward, we are confident of continuing our profitable growth by leveraging our operating efficiency, enhancing current client relationships, expanding future customer base, and expanding our current operations." For the second quarter of 2007, the company has guided revenues at $163 million (Rs 668.3 crore) and net income in the range of $22.5-23 million (Rs 92.25-94.3 crore). "We are looking at gross addition of about 1,200 people. In general, we expect to see our employee strength grow in tandem with the overall growth of the company."

If all these plans bear fruit, it will make the company even more attractive to potential suitors. The grapevine says IBM is interested, but BT could not independently confirm this. Watch this space.

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