About six months ago, when there was a desperate flight to safety by investors worldwide, shares of Patni Computer Systems Ltd (PCS) had fallen well below the level of cash the company carried on its books. The share had fallen to Rs95 in early March, even while cash and cash equivalents stood at Rs115 per share. Investors were effectively assigning zero value to PCS’ profitable and free cash flow positive core business.
The return of risk appetite has helped the firm’s shares immensely. The shares now trade at Rs422 each, having risen by 344% in six months. But it’s just not the surge in global liquidity and the low base at which the shares traded that have contributed to this sharp rise. Things are changing at the company as well. PCS has a new chief executive officer, who in turn has been making key hires to expand the management team. This process is expected to be over by November.
Surjeet Singh, PCS chief financial officer, said the firm is using the pause in the markets caused by the slowdown to fill some gaps in its service offerings and geographical reach, as well as take a hard look at its cost structure. For instance, almost all of its revenue comes from the US and the UK. Singh said that the rest of Europe and the Asia-Pacific region need to grow at a much faster rate. Similarly, as far as service offerings are concerned, enterprise resource planning and business process outsourcing need to gain size and scale. PCS’ sizeable cash balance of around $350 million (around Rs1,700 crore) as of June makes the possibility of an acquisition quite strong. In fact, the management’s thinking is that acquisitions could help fill the gaps in service offerings and geographical reach, rather than to gain size.
The company has also aggressively cut costs. PCS has brought its headcount at the end of June to a two-year low. The resultant jump in employee utilization levels led to a 330 basis points jump in profit margins, which came as a positive surprise to the street, considering that volumes rose only by around 2%. One basis point is one-hundredth of a percentage point.
Singh said there were no one-off items that helped margins in the June quarter and that those levels of profitability are sustainable. Also, the changes taking place in the firm are likely to lead to a rise in growth rates to close to industry growth levels. In the past few years, PCS’ growth has lagged that of the industry.
All these factors have resulted in a return of interest in PCS’ shares. While the shares have risen sharply, they trade at not-so-expensive valuations of 11 times estimated earnings for the year to December after adjusting for cash on its books.
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