Patni Computer Systems Ltd’s scrip has outperformed the BSE IT index in the past month, thanks to several brokers recommending the stock. The chief reasons for the recommendations include its cheap valuation compared to other IT stocks, and most importantly, a huge amount of cash on its books, which is seen as a signal that it is on the verge of a large acquisition.
Nevertheless, the stock has been hobbled by several negative features, which include the company’s lack of diversification, high client concentration and very high levels of employee attrition.
In the March quarter, revenue growth has been negative in rupee terms, compared with the December quarter because of currency appreciation. Ditto for gross profits. In dollar terms, however, the company has met its revenue guidance and beaten its profit estimates.
There has been a welcome reduction in the share of the top clients in total revenues. But attrition continues to be a major issue, going up to 29.1%, compared with 27.4% in December 2006. Net employee additions in the 12 months to March 2007 have been at 7.8% of the workforce, indicating sluggish growth ahead.
Going forward, guidance for the June quarter net profit is at exactly the same level as for the March quarter. While concerns of rupee appreciation will limit the upside, the prospect of growth through acquisition should keep investors’ hopes alive.
Banks were expected to be hit hard by the series of rate hikes and other monetary-tightening measures initiated by the central bank in the last few months. Analysts had expected loan growth to slow and margins to take a beating, while asset quality was supposed to deteriorate during Q4 of 2006-07.
Nothing of the sort seems to have happened for HDFC Bank Ltd. Profit after tax rose by 30.5% year-on-year, a rate of growth that it has been consistently delivering every quarter for so many years that analysts call it the “30% bank”. Net revenues have shown high growth, net interest margin has gone up instead of down and net non-performing assets remained at 0.4% of total assets. How did HDFC Bank pull it off? The secret lies in the bank’s deliberate strategy of slower asset growth. Taking the view that bulk deposit rates had gone too high for comfort, the bank allowed some of its wholesale deposits to be paid back. The upshot: average asset growth of just 27%, compared with 31.6% in the December quarter. Average asset growth was as high as 47.6% in the March 2006 quarter. But what was lost in asset growth was made up by the higher net interest margins.
Going ahead, margins should moderate, but asset growth should resume, on the back of the 101 branches added in the last quarter. HDFC Bank’s ability to deliver 30% growth, through good times as well as bad, is an enormous comfort to investors and is the reason why it’s one of the most expensive banks in the world.