Though Patni Computer Systems Ltd is not among the best performers in the Indian IT industry, its valuations are unusually low.
After the company reported a weak guidance for the quarter to March, its shares fell to an all-time low of Rs110. It now has a market capitalization of only Rs1,408 crore. Compare this with its net profit of nearly Rs500 crore—the price to earnings ratio works out to less than three times past earnings.
But, more than the earnings multiple, what’s really shocking about Patni’s valuations is that the company has cash and cash equivalents worth Rs1,480 crore. About 70% of this is in bank deposits and liquid mutual fund schemes, while the remaining is in fixed maturity plans of mutual funds maturing within a year. The company has no debt worth speaking of, making it one of the rare cases where no value has been assigned to the company’s operations.
It’s not that the firm is running losses. It instead reported a decent 15.6% operating margin in the December quarter. While revenues and profit are expected to fall due to the recession in the West, it doesn’t look like the company would reach a situation where it will burn cash. In the January-March period, the company expects revenues to fall by as much as 12% sequentially. Net income margin is expected to be around 9%.
Investors have been negative about the company for a long time now. Ownership related issues led to under-performance in the company’s business in the past few years. For instance, in 2008, Patni grew revenues by just 8.4% when the industry grew at double the rate. However, to assign zero value to a profit-making company seems absurd. It has a high derivatives exposure and a large portion of the losses on these positions have been transferred to the balance sheet. Should this be viewed as a contingent liability?
A better way to look at a derivatives position to, say, sell dollars at the rate of Rs42 to a dollar when the ruling rate is Rs49 a dollar, is that the company would be realizing lower revenues in the future. Certainly, the company would make less profit than it would if it had converted the dollars at the rate of Rs49 each, but it would still make profit at the lower rate. In any case, the unrealized derivatives losses in the balance sheet amount to only about Rs200 crore.
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