COMPANY PROFILE

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
(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

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 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.

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  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. 209.26 279.35 348.93 419.25 477.36
Depreciation
Net Block 268.02 334.95 495.06 526.72 607.2

CURRENT ASSSETS

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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.
It’s 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.

1.) Is the management control system effective?

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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 promoters—the Patni family—and private equity (PE) firm General
Atlantic Llc. The deal price of Rs503.50 per share didn’t come as a huge surprise, as is
also evident from the fact that Patni’s shares rose by less than 1% after the deal price
was announced.

Even so, iGate’s 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 Patni’s current traded price. Besides, Patni shares could correct
after the open offer closes owing to near-term concerns such as an increase in attrition.

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If all minority shareholders tender their shares in the offer, the acceptance ratio would
be around 55%.

What about the long-term prospects for Patni shareholders? Going by iGate’s delisting
itself from the Indian bourses, it’s 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 Patni’s
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 doesn’t apply from a Patni stakeholder’s perspective—after all the size
of business was already at around $700 million and would now rise to around $1 billion.

From iGate’s 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 shouldn’t 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

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cost of the acquisition financing would be less than $100 million. In the 12-month period
ended September, Patni’s free cash flow after accounting for capital expenditure was
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 isn’t 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?

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  What will happen to the internet businesses in the long term?

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.

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 The income statement takes into account some non-cash items, such as
depreciation.

 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.

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