Patni Computer Systems, based in Mumbai, is one of India's leading integrated software service providers, concentrating on insurance, financial and manufacturing vertical clients worldwide.

It is planning an IPO lead managed by DSP Merrill Lynch and Kotak Mahindra Capital via a 100 per cent book building process on the BSE and the NSE.

Patni is offering 15 per cent of its fully diluted post-issue capital and its CEO Narenda Patni states that the proceeds of the new issue sale will be to make strategic acquisitions and reduce its dependence on key US clients.

For instance, General Electric and State Farm Insurance, admittedly world class chip clients, accounted for no less than 60 per cent of Patni revenues - an unacceptable high client concentration risk for any software services vendor. Marketing to new clients from the IPO proceeds will only make Patni business model less risky by reducing its current US client concentration risk.

The United States clients, after all, provide Patni with no less than 90 per cent of its revenues and income, a dangerous geographic market concentration risk when the Indian rupee rises against the dollar. Still, Silicon Valley is in a recovery mode, Patni has huge growth potential in the North American enterprise application integration and systems management market.

At its Rs200-230 price band, Patni is under valued at 13.5 P/E, a discount to same scale peers Polaris (22X), I-Gate (30X), Hughes (25X) or Digital Global (18X). This is ironic because its operating margins are even higher than Satyam or HCL at 40 per cent, its promoters are credible, its balance sheet it sound, its business strategy is positioned for international growth and its has paid investors dividends. Patni is just beginning a sales blitzkrieg in Europe and the Pacific Rim, which will lead to a quantum increase in revenues, profitability as well as reduce its US client/geographical risk. It is also broadening its vertical focus to key global clients in petroleum, hotels and utilities. Patni is an emergent Indian brand in the global software services markets. If it executes right.

I believe it could command significantly higher valuations as well as boost its billing rates, attract world class software engineers, sign up lucrative international clients and make exciting waves in the share market. Above all, even after the IPO, the Patni family will still own 50 per cent of the company, down from 62 per cent now.

The Patni new issue closes on Feb 5, 2004. Given the recent market meltdown, I believe Patni may trade below its floor price of Rs200. So I will wait until its listing on the BSE/NSE before I begin accumulating shares. I love the financial model of a software services company whose profit is Rs236 crores out of more Rs605 sales (less than one third of Satyam Computer Services top line).

Industry grapevine has it that Patni could well offer an EPS of 18 in fiscal 2005 if they execute on their post-IPO pipeline and there are a few great Asian/European software integration clients in the pipeline. The firm has already targeted some all strategic acquisition. candidates in the US and India to boost its product menu, technological infrastructure and client footprint.

I believe fair value on Patni is probably 20 times its forward EPS of 18 rupees (which could be as high as 20). This means a Rs400 target so I would definitely recommended that investors classify this IPO as good in my good, bad and the ugly matrix of coming Indian new issue flotations. Ideally, I doubt we get it lower, given the narrow float. This deal is special. This company is special. Buy the Patni IPO!

MATEIN KHALID
STRATEGIST, CAPITAL MARKETS & RESEARCH

The opinions expressed by the writer are his own and not endorsed by Press Release Network.

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