Patni Computer Systems founded by the present Chairman, Mr. Narendra K.
Patni was incorporated on February 10, 1978 under the Indian Companies Act, registered at Pune, India and it went public in 2003. Patni is the sixth leading information technology service firm in India with multi-national operations, predominantly in North America. Patni provides comprehensive IT services through onsite and offshore delivery locations primarily in India. The majority of its customer base is in insurance, manufacturing, retail and financial service sectors. For over a quarter of a century, Patni Computer Systems Ltd. has provided Information Technology services and business solutions. The original activities of the company were computer time rental, the resale of imported computer hardware, and software exports. However since 1994, the company has been entirely focused on software exports. Today the company provides world-class technology services by constantly exploring and implementing innovative solutions that drive long-term value to its customers. The company delivers high quality, reliable and cost-effective IT Services. Their vision is to achieve global IT services leadership in providing value-added high quality IT solutions to clients in selected horizontal and vertical segments, by combining technology skills, domain expertise, process focus and a commitment to long-term client relationships. The company has a network of over 15,000 professionals service clients across diverse industries and 22 Global Delivery Centers in strategic locations across the world. Headquartered in Mumbai, Patni has a global footprint supported by multiple development centers across key locations in India and sales offices in North America, Europe, and the Asia-Pacific regions. Over the years, the company has grown both organically and though acquisitions. The company enhanced its domain expertise in financial services, media and entertainment, telecommunications and life sciences by acquiring Patni Telecom 2
(formerly Cymbal), in November 2004, Logan Orviss International, a European based telecommunications consulting company and Patni Life Sciences, Inc. (formerly Taratec Development Corporation), a U.S. based life sciences consulting company in 2007. ANALYSIS OF BALANCE SHEET SHARE CAPITAL In 2003, the Company converted itself from a Private Limited company into a Public Limited company. In February 2004, Patni completed its initial public offering of equity shares in India comprising fresh issue of 13,415,200 shares and sale of 5,324,000 equity shares by the existing shareholders. Authorized share capital is Rs. 500,000. The company has no preference shares. The equity share capital of the company has been increasing till 2007 and has been decreasing since 2008 due to the following reasons - Issue of ADRs - In December 2005, Patni issued 6,156,250 American Depository Shares ('ADSs') representing 12,312,500 equity shares of Rs. 2 each fully paid-up at a price of US$ 20.34 per ADS for a gross proceeds of Rs. 5,739,262. Each ADS represents two equity shares of Rs. 2 each fully paid-up. Thus the equity share capital increased. The funds raised through this issue have been transferred to the share premium account.
Buyback of shares - In February 2008, the Board of Directors of the Company approved a proposal to repurchase fully paid equity shares upto 10% of the paid up capital and free reserves, at a maximum price of Rs. 325 per equity share, for an aggregate amount upto Rs. 2,370,000. During the year ended 31 December 2008, the Company repurchased a total of 10,957,082 equity shares through the Bombay Stock Exchange and the National Stock Exchange for an aggregate consideration of Rs. 2,370,000 being 100% of the amount authorised for buy back. In this regard an amount equivalent to the nominal value of the share capital bought back by the Company aggregating Rs. 21,914, has been 3
transferred from general reserve to capital redemption reserve which can be utilized only for the purpose of issuing fully paid bonus shares of the Company.
The board of directors of the company approved the buyback offer on 7 February 2009, wherein the company planned to buy back 72,92,308 shares representing 5.25% stake in the company at a maximum buyback price of Rs325. The necessary funds were used from Reserves and Surplus account. The aggregate shareholding of the promoter group and persons who are in control of the company was 60,972,802 equity shares amounting to 43.85% of the fully paid up equity share capital of the company.
Reason for buyback- The company did a buyback because they believed that the stock was undervalued. The markets had been very volatile and prices had been under sub-Rs 200, which was greatly undervaluing the stock. The buyback would help create a floor and increase the investor confidence. The company was not facing any outside acquisition threats and was staging the buyback only to increase share prices in short time. However, buy- back of the 5% equity is too small to make a difference to the share price.
Effect- Shares of Patni Computer Systems Ltd, fell 3.01% even as the company offered to buy back shares worth Rs237 crore at Rs. 325 share. Buy-back of the 5% equity is too small to make a difference. RESERVES AND SURPLUS The company transfers a part of the profit (0.10%) every year to Reserves and Surplus. Thus the company has adequate surplus funds. The buyback of 2008 was funded through the Reserves and Surplus. All exchange differences are accumulated in a foreign currency translation reserve which is included under Reserves and Surplus. 4
Debt Patni Computers is a cash rich company. The only debt the company has is in the form of secured loans which forms a very small portion of the total capital employed. Hence the debt equity ratio is almost zero (0). The secured loans are used for acquiring vehicles under finance lease. Since the company has no preference share capital and a very low debt, the company is high geared. Also the debt equity ratio is almost zero. Fixed assets The fixed assets of the company have almost doubled over the last 5 years and have constantly been increasing. This shows that the company has been expanding. Patni Computers has acquired many companies over the last 5 years. This could be one of the reasons for the increase in fixed assets. The main assets of Patni computers include Buildings Electrical installations Computers, computer software and other service equipments Furniture and fixtures Office equipments & Vehicles Particulars 2005 2006 2007 2008 2009 Gross Block 477.28 614.3 843.99 945.97 1,084.56 Less: Accum. Depreciation 209.26 279.35 348.93 419.25 477.36 Net Block 268.02 334.95 495.06 526.72 607.2
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CURRENT ASSSETS Current assets include Sundry Debtors, Cash and Bank Balance and Loans & Advances. Since Patni Computers is not a manufacturing company it does not have any inventories. The Company is a service company, primarily rendering IT consulting and software development services. Accordingly it does not hold any physical inventories. The sundry debtors as a percent of the total current assets almost doubled in 2006 when compared to the debtors in 2005. However sundry debtors since 2007 have been reducing but they still form a large part (over 40%) of the total current assets. Thus the company follows a liberal credit policy. Patni Computers is a cash rich company and maintains a very strong cash and bank balance. The proceeds for all the acquisitions are done through the cash and bank account. CURRENT LIABILITIES Current liabilities include Sundry Creditors, advance from customers, unclaimed dividend etc. The current liabilities have been increasing over the years indicating that the company is getting good terms of credit. Analysis - The balance sheet of Patni Computers looks very healthy and liquid. Patni has a total of $900 million in assets and more than two thirds of it, current liquid assets. Its a cash rich company. It is generating around $2 free cash a year and pacing rapidly. Patni is trading twice the book value and 12.5 times its past year earnings. With virtually no debt on the balance sheet and rapid growth prospects, Patni is trading at utter bargain price levels. With a niche in financial and insurance sectors, any uptrend in the financial sector is a big plus for Patni in future.
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1.) Is the management control system effective?
Yes, the management control system is effective to a great extent. Patni Computers is focused with a very high amount of expertise. It is a cash rich company with virtually no debt. Post the IT BPO boon various new markets have opened up for the company. Thus there is ample scope to explore this market. However, most of its sales orders come from the US markets and this could hamper the growth of the company in the long run. Also global downturn has reduced or/and delayed technology purchases. High attrition rate along with exchange rate risks are the major obstacles Patni has to overcome in the next few years in order to maintain its growth. We expect Patni to add 2,180 and 2,400 employees in FY10 and FY11, respectively. As the company moves up the value chain and optimizes costs, there would be levers like flattening the employee pyramid, increasing utilization to reduce the impact of salary hikes and rupee appreciation on the margin improving productivity through fixed-price projects and further cost rationalization. Hence we forecast a steady margin performance over 2009-11 On absolute basis the performance is good, but average in comparison to the industry. We believe that management changes at Patni are positive. Hence, we believe the turnaround could be faster than otherwise. It has essentially become a professionally-managed company (from a promoter driven one) Patni is looking to acquire companies specializing in ITO and Enterprise solutions We believe that such acquisitions could add domain expertise and new clients with growth potential.
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2.) If you were the consultant, what would be the improvement in control system? 1. Existence (Validity): Only valid or authorized transactions are processed (i.e., no invalid transactions) 2. Occurrence (Cutoff): Transactions occurred during the correct period or were processed timely. 3. Completeness: All transactions are processed that should be (i.e., no omissions) 4. Valuation: Transactions are calculated using an appropriate methodology or are computationally accurate. 5. Rights & Obligations: Assets represent the rights of the company, and liabilities its obligations, as of a given date. 6. Presentation & Disclosure (Classification): Components of financial statements (or other reporting) are properly classified (by type or account) and described. 7. Reasonableness-transactions or results appears reasonable relative to other data or trends.
3.) Growth Prospects in the next 3 to 5 years The change in ownership of Patni Computer Systems Ltd, on the cards for many months now, is finally happening. iGate Corp. has agreed to buy 63% in the company from its erstwhile promotersthe Patni familyand private equity (PE) firm General Atlantic Llc. The deal price of Rs503.50 per share didnt come as a huge surprise, as is also evident from the fact that Patnis shares rose by less than 1% after the deal price was announced. Even so, iGates open offer for an additional 20.6% stake in the company is likely to receive a good response from minority shareholders. First, the offer price represents an 8.5% premium over Patnis current traded price. Besides, Patni shares could correct after the open offer closes owing to near-term concerns such as an increase in attrition. If all minority shareholders tender their shares in the offer, the acceptance ratio would be around 55%. 8
What about the long-term prospects for Patni shareholders? Going by iGates delisting itself from the Indian bourses, its quite likely that iGate will look at delisting Patni, too. Assuming its open offer is successful, it would have a high 83.6% stake in Patni. At current valuations, it would need to shell out another $240 million (Rs1,090 crore) to completely own the company. Of course, this would involve the reverse book-building process, which may entail a high cost. Another alternative, and a cheaper way to do this, would be to merge the two companies and offer Patni shareholders a stake in iGate. Thanks to the Standard Chartered precedent, it may be possible to issue international depository receipts of the US-listed iGate. This option, however, may not be particularly lucrative for Patnis minority shareholders. As far as business prospects go, while the acquisition looks good on paper, it remains to be seen if it actually results in better growth prospects. And the argument about achieving scale doesnt apply from a Patni stakeholders perspectiveafter all the size of business was already at around $700 million and would now rise to around $1 billion. From iGates perspective, however, the deal will result in a big leap. Its consolidated revenue would nearly quadruple, which is significant because in the current environment, small-sized firms are losing market share. And while the deal size of $1.22 billion looks very large for a firm with a balance sheet size of merely $287 million, funding the deal and servicing the acquisition debt shouldnt be much of a problem. PE firm Apax Partners Llp has agreed to buy preferred stock worth $270 million in iGate and may increase its total investment to $480 million using the same instrument. The preferred stock will have a proposed dividend of 8%, have tenure of six years and is optionally convertible into equity stock after two years. Besides, the company would raise debt funds worth $700 million to fund the deal. Assuming an 8% servicing cost on the entire amount, although the cost of debt would be lower in overseas markets, the cost of the acquisition financing would be less than $100 million. In the 12-month period ended September, Patnis free cash flow after accounting for capital expenditure was 9
around $130 million. Its Ebitda (earnings before interest, tax, depreciation and amortization) stood at around $150 million. But clearly, just being able to comfortably fund the transaction isnt sufficient to make the acquisition successful. Much depends on how well the iGATE management does in integrating the operations of a much larger firm with it.
4) You are the consultant you need to hire key position HR, marketing, finance which questions would you ask? In order to hire people for key positions, I would like ask them following questions: Are you interested in our company/product (Tech Company, dotcom etc.)? Tell me about an interesting marketed product you have encountered? Why is it marketed that way? How would you do it differently? How would you approach introducing a new product for this company? What would your slogan be? You are going to introduce yourself to the world using a full-page ad in the Times. You can only fit a single word on the page. What word do you choose? What is a very complicated technical concept that you understand clearly? Now explain it to me as if I was a 5-year-old child. What do you see are the strategic challenges that our company/industry faces? From a marketing perspective, how do we/should we position ourselves vs. our main competitors? What direction do you see our industry taking and how are we/should we be aligning ourselves with that direction? What will happen to the internet businesses in the long term?
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5) Your experience of doing a research like this?
This analysis has given us opportunity to know all the facts about balance sheet of the company.
The balance sheet, also known as the statement of financial condition, offers a snapshot of a company's health. It tells how much a company owns (its assets), and how much it owes (its liabilities). The difference between what it owns and what it owes is its equity, also commonly called "net assets" or "shareholders equity". The balance sheet tells investors a lot about a company's fundamentals: how much debt the company has, how much it needs to collect from customers (and how fast it does so), how much cash and equivalents it possesses and what kinds of funds the company has generated over time. Insights of balance sheet are: Financial reports are required by law and are published both quarterly and annually. Management discussion and analysis (MD&A) gives investors a better understanding of what the company does and usually points out some key areas where it performed well. Audited financial reports have much more credibility than unaudited ones. The balance sheet lists the assets, liabilities and shareholders' equity. For all balance sheets: Assets = Liabilities + Shareholders Equity. The two sides must always equal each other (or balance each other). The income statement includes figures such as revenue, expenses, earnings and earnings per share. For a company, the top line is revenue while the bottom line is net income. The income statement takes into account some non-cash items, such as depreciation. 11
The cash flow statement strips away all non-cash items and tells how much actual money the company generated. The cash flow statement is divided into three parts: cash from operations, financing and investing. The financial statements provide more in-depth information on a wide range of figures reported in the three financial statements.