Patni blog - Patni as hot as Indian curry
Mood:  not sure

Patni blog- Well this is not an official corporate blog. As an employee i love patni computer system and thought of creating a space where i can share latest happening and views about patni computer systems.  

I came across a absolutely interesting news article about Patni Computer system written some days back- by Dayanand Menashi- titled 'Patni as hot as Indian curry'.

 he writes that:

The following is an excerpt from one of Buffet’s letters…..”If you like cheeseburgers and their price falls, then you would be happy because you can buy more of them”. Paralleling cheeseburgers to hot Indian curry, in this case I feel Patni Computer Systems (PTI) is as hot as curry.

Its price has fallen from $28.00 to $22.00 in last couple of months [22% drop]. Applying the covered call strategy I found its $25.00 strike price call option for Dec-07 is selling at $3.10 [14% premium of current stock price], which is pretty good by call option standards.
The following are some other call option strike prices of similar businesses as of Aug-2/2007.

Infosys Technologies Ltd. (INFY)
CURRENT STOCK PRICE : $49.00
JAN-08 PREMIUM FOR CALL STRIKE PRICE $55 : $3.50

Satyam Computer Services Ltd. (SAY)
CURRENT STOCK PRICE : $26.84
JAN-08 PREMIUM FOR CALL STRIKE PICE $30 : $1.65

Wipro Ltd. (WIT)
CURRENT STOCK PRICE : $14.36
DEC-07 PREMIUM FOR CALL STRIKE PICE $17.50 : $0.35

Cognizant Technology Solutions Corp. (CTSH)
CURRENT STOCK PRICE : $82.22
JAN-08 PREMIUM FOR CALL STRIKE PRICE $90 : $6.40

Even though Patni is in the same boat as other IT outsourcing companies that are battling the strong rupee and weak dollar, its small market cap differentiates it from its competitors. Patni’s market cap as of Aug-2 is $1.5bn compared to:

INFY……………$28.29bn
SAY……………$8.9 bn
WIT……………. $20.97bn
CTSH………….. $11.81bn

The investors are more likely to take larger bets on small cap companies rather than mid cap and large cap companies. As mentioned in one of my earlier posts Patni is as strong as any of the above companies in terms of its expertise in the IT outsourcing business. Its major weakness is low brand value which in turn obstructs it to increase its billing rates. This is the reason it remains a strong candidate for acquisition by a large consulting business.

VALUATION STANDARD FOR IT OUTSOURCING COMPANIES :

At the end of the day, the earning power of an IT outsourcing company is its headcount. So if a business consulting player like Cap Gemini is to acquire an IT outsourcing company then it will measure how many employees it will be buying by paying the acquisition premium. In this case Patni is pretty undervalued , even though its market cap is 20 times less than INFY. But its headcount is 12,804 as of Dec-31/2006 compared to 72,000 of INFY as of Mar-31/2007. What this means is that the brand value of Infosys makes its employee three times more valuable than that of Patni. This is true since INFY’s headcount is 6 times that of Patni , but market cap is 20 times higher. So 20/6 is approx 3.

The following scenario can be paralleled to the one above. If we have two Indian restaurants selling Indian food: One called “Infosys curry” which operates in downtown Chicago and a similar smaller Indian restaurant called “Patni curry” operating in Bloomington, IL. The average price of a dish at “Infosys curry” is $50 and the average price of “Patni curry” is $20. The reason being the location assuming food quality in both the places is same. If a restaurant owner in Chicago wants to get in the Indian restaurant business, then his best bet would be to buy “Patni curry’ and get all its cooks from Bloomington, IL to Chicago. The odds are the new restaurant will sell its dish for $50.