Patni Computer Systems: High Growth, Low P/E, Limited Shares

Jun.19.07 | About: Patni Computer (PTI-OLD)

Indian IT outsourcing quiz: Which company has given the maximum investment return in the last year?

Well the answer is not Infosys (NYSE:INFY), Wipro (NYSE:WIT), Satyam (SAY) or Cognizant (NASDAQ:CTSH), but Patni Computer Systems (NYSE:PTI-OLD). Following is the table comparing the share prices of the above mentioned companies:

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What is Patni computers doing differently

In two words “Nothing different." In fact, all five companies have more or less the same business model, based on the strong demand for India based outsourcing services. The basic reason for the difference in growth is because Patni was very recently listed in USA and was not very well known amongst the investment community; this is the reason its P/E is still around 23 , whereas the P/E of other companies as of yesterday is as follows:

Patni - 23.40
Satyam - 28.58
Infosys - 34.93
Wipro - 31.44
Cognizant - 45.21

From the above figures it is still evident that Patni is undervalued compared to its competitors. I agree that Patni is not counted as Tier-1 company, because one third of its revenues still come from its top two clients (GE and State Farm Insurance). And its growth in terms of headcount has been slower than that of tier-1 companies. But we should not forget that even Narayan Murthy (present Chairman of Infosys) got his initial knowledge of IT consulting while working for Patni. In fact he worked there for three years before founding Infosys.

If we step back in time and analyze the Indian IT consulting industry in the beginning of the 1980s, we would find that Tata and Patni were the leaders in the Industry then. Naren Patni (present chairman of Patni) started Data Conversion, Inc. in 1972, with the vision of supporting data processing activities for North American companies.

Another very important point as far as individual investors are concerned is the number of shares outstanding.

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The above table shows that the supply of Patni shares is very limited. On top of this, the Patni brothers and General Atlantic partners together hold around 60% of the company. (Mr. Narendra K. Patni, Mr. Gajendra K. Patni and Mr. Ashok K. Patni, together with their families and entities controlled by them, and General Atlantic own 14.77%, 14.95%, 14.95% and 16.61% of outstanding equity shares.)

This brings to a logical conclusion that with the advent of the Indian outsourcing industry, investors are looking for undervalued companies in this sector; with a low P/E and such a short supply of Patni shares, its share value has gone up 78% in the last year.