Patni Computer Systems Ltd’s attempt to reduce flab and improve employee productivity seems to have gone a bit too far. The firm hasn’t been able to fully capitalize on the recovery in demand for IT (information technology) services because of a shortage of trained manpower.
The firm’s revenues grew by just 1.3% sequentially in the March quarter and are expected to be flat in the June quarter.
In a recent report, Credit Suisse had estimated Patni would grow by 3.6% and 4.7%, respectively, in the March and June quarters. The reported numbers and the guidance are quite a disappointment.
According to Patni’s chief financial officer Surjeet Singh, while demand for its services is stable, the firm has been constrained by its ability to service clients because of supply-side (manpower) shortages. He adds that there was unplanned attrition in the March quarter, leading to supply constraints.
Attrition rose to 17.7% last quarter, compared with 13.7% in the December quarter. If Patni had adequate staff on the bench, it would have been able to manage the supply side better despite this surge in attrition. But in its quest for high productivity, employee utilization levels were running high in the late 1970s (it had reached 80% in the March quarter). Its ability to quickly respond to unplanned attrition, therefore, was constrained. According to Singh, the firm’s policy has been to hire at the bottom of the pyramid. As a result, there is a lead-lag relationship between hiring of employees and their turning billable resources.
Analysts say that it’s unfortunate that Patni hasn’t been able to fully capitalize on the increase in demand due to supply constraints.
The firm sees it differently. Singh said that cost-cutting measures bore much fruit in the past many quarters and the current impact is only for a couple of quarters.
In the past eight quarters, the company has reduced its employee base by around 1,200 staffers and utilization has risen from 70% to 80%. Even though revenue has been flat to marginally negative during this period, operating margin has risen from 11% to over 18% due to the increased productivity.
While this improvement is commendable, the markets are likely to be disappointed with the delay in Patni’s return to growth. In the past two months, the firm’s shares had outperformed the CNX IT index by around 15% and given the disappointment about the guidance, there is likely to be some underperformance in the near term.
According to Singh, the company will add between 2,000 and 3,000 employees this year, indicating that growth should return in the second half of this year. Needless to say, investors are likely to adopt a wait and watch approach after the negative surprise this quarter.
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