Patni (PTI) - Part 2 – Business Issues - Indian Software Outsourcer Research

The company's core expertise is in the areas of Insurance, Financial, and Manufacturing services verticals. The company entered the IT services for Telecom Verticals with the acquisition of Cymbal Corporation in November 2004. In July 2007, it acquired another IT services Telecom Vertical "Logan-Orviss International (LOI)" and around the same time frame entered the Life Sciences area through the acquisition of "Taratec Development Corp.".

Business concentration is an area of concern for Patni - 80% of its business comes from US. One account (GE) contributes to 20% of the total revenue. The company initiated a strategy to diversify the revenue base in 2003. As a result, the GE portion of the overall business came down from about 45% at the end of year 2003 to 20% at the end of 2006. The US portion of the revenue still stands at around 80%, down slightly from around 90% in 2003.

The company had negative news recently regarding an investigation by Department of Labor (DOL). The issue was whether Patni paid less than the prevailing wages to H1B workers in the 2004-2005 timeframe. DOL announced a settlement in June 2007. The settlement amount was $2.4M and was to be distributed as back wages to roughly 600 affected workers. At the time, the press reported incorrectly that the DOL announcement said the amount, if distributed equally will be close $40K/worker. The actual amount, if you do the math, is close to $4K/worker. While it is curious that such a report came out from multiple sources, it is difficult to imagine any conspiracy, as there is no apparent beneficiary from an outsider’s point of view. The settlement is a victory for Patni, given that the amount is very small and no intention of wrongdoing was found - Patni blamed it on accounting error.

Exploiting H1B workers is common among employers, although the degree of exploitation varies. Outsourcers exploit such workers more because they usually hire the worker from a foreign country and so has more "control" over the employee. The crux of the problem is that H1B workers are tied to the company they work for until their green card applications come through. Employers realize they have the upper hand over such employees for a number of years and so are able to exploit such workers. It is common to see the salaries of such employees stagnate during these years. It is also true that the Department of Labor banned several outsourcers because of violations such as not paying the workers, employers filing fraudulent tax returns for employees without actually paying the employees the amounts quoted in the tax returns and the H1B labor certification form, etc.

From the public information available, it is clear that this issue is in the company's past. It is definitely true that a lot of technology companies were in violation of the law. Patni happened to be one of the companies that the DOL investigated. But, they got out of it rather lightly.

Another issue that needs to be looked at is the company ownership structure. The 3 Patni brothers hold roughly 45% of the outstanding shares. It is rumored that two of them have an interest in selling their stakes. Another 16% is held by General Atlantic Mauritius Limited, an investment firm that made a major investment in the company around 2002, well before the company's IPO in India in 2004. Insiders’ holding a significant percentage of the outstanding shares is usually a good thing, as they will have a direct interest in upholding shareholder value. However in Patni's case, it is not clear how much of a positive this is because of the rumor about the brothers wanting to sell their stakes.

Patni Computer Systems Limited Analysis:
  1. Part 1 - Financials.
  2. Part 2 - Business Issues.
  3. Part 3 - Investment Outlook.

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