To focus on revenue growth model in '12: Patni

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Patni Computer Systems reported a better-than-expected 75% sequential rise in consolidated net profit for the fourth quarter at Rs 146.15 crore, based on US-GAAP accounting standards.

In an interview to CNBC-TV18, Phaneesh Murthy, chief executive officer of iGATE Patni and Sujit Sircar, chief financial officer of iGATE Patni, speak about the results and give their outlook going forward.

Below is the edited transcript of the interview with CNBC-TV18's Latha Venkatesh and Gautam Broker. Also watch the accompanying video.

Q: Can you take us through the numbers?

Murthy: We had a fantastic quarter. Overall, it was a very satisfying year from a margin perspective. We reached our benchmark 2013 long-term goal of 40% growth margin and 25% EBIDTA. We reached that very early. Partly thanks to the excellent work done by the team and the efficiency with which they did and partly thanks to the forex. Combination of them helped us achieve these goals.

This year was a large year for integration for us. The smooth integration actually has helped quite dramatically. On the revenue growth side, we have grown about a percent quarter-on-quarter. We had an adverse impact of another percent because a third of our revenues are not in dollars and our reporting currencies actually in dollars. So, we did about a percent on the revenue growth. Our focus in 2012 is to enhance our revenue growth model.

Q: What's the indication of 2012? Do you think it will be as stable as we have seen in 2011 or do you anticipate some kind of weakness?

Murthy: Overall, we continue to see relative stability in almost all of the verticals. If I look at the North American market place, I would say that in most of the verticals budgets are up, people are spending money. Some of those investments are towards operational cost reduction kind of projects like work flow, imaging, automation and so on and so forth. Some of those investments are also in data warehousing, big data analysis, clean up and so on and so forth. Setting themselves up in a data mining model to be much more competitive in the future.

A lot of this is happening on the bedrock of trying to outsource more so that they can get savings out of their application maintenance, application support, infrastructure support and so on. So, doing all of that what I call keep the lights on kind of stuff in a much more efficient manner, cheaper manner, free up some of those dollars. Therefore, the percentage of money which is going to go into projects for business value will be higher.

On the BFS side, however, the IT budgets are probably a little more constraint. I anticipate that while the rest of the industry is going to be 2-3% up compared to 2011, on BFS, I think it would probably be flat to marginally down.

Q: How much cost savings did you manage to get finally in 2011?

Sircar: We are able to do a USD 32 million cost savings.

Q: Should it improve in 2012 you think?

Sircar:  We have done a lot of efforts in terms of creating up lots of cost and we have cut all the fat. Now we have to put in some of the money in terms of making more solutions going into the market. It is going to be investment phase as well.

Q: The stock has run up significantly after you all announced the delisting price. Now at Rs 485-490 clearly market wants more.

Murthy: Yes they do. The question is can we afford it? And the answer is probably not. Just to give you a complete update on the delisting, in November we had made the announcement that we would start thinking about delisting. We have applied to all of the regulatory agencies. I do believe that we are very much on course there. We'll have all of the regulatory approvals that we need in the next few days.

Typically, most of these regulatory approvals come with a one year window to do the delisting. We have already achieved our operational integration benefits, we have already achieved the USD 32 million of cost savings that we were looking at. Now there is no more operational cost that we will save by doing the merger and trying to buy out this thing.

From a strategic perspective it doesn't make sense to have two services companies operating in similar spaces, listed on two separate exchanges in different manners and that's the reason why we wanted to do it. We had got our debt of USD 215 million in place. If you convert that debt to a price which is what I had indicated it was roughly a price of about Rs 450. That is based on our covenants, affordability of how much interest we can bear, based on some of the capex that we have to do and based on some of the other initiatives that we are taking.

I had indicated in November itself that although at that time the price was around Rs 350 I had said that we think we will be able to do this between Rs 400-450. At the current price levels, I am not sure what is the business case for us to do it. This is because we are actually operating as one integrated entity. We are operating a front end which is common go to market, we are operating the complete backend as integrated. We are operating bulk of this as integrated.

We have already got approvals from both the shareholders set for allocating projects in a particular vertical manner and both the boards have signed off on that. We have reciprocal transfer pricing agreements already worked out. All of that stuff is already done. We are not able to see any additional benefits of integration. Therefore, we will be hard pressed to see what is the business case for paying any price and affordability is also there. We have got a USD 215 million limit established for ourselves.

Q: So Rs 450 yes, Rs 480 no?

Murthy: Yes it's got to the point, where I don't believe that we will be able to afford it.

Q: For the combined entity most the cost savings are in place and even if the delivery integration happens by the end of this year would you expect EBITDA margins to be largely stable at where they are? What's the kind of stable state margins you are looking at in the medium term?

Murthy: We have a seasonal margin issue anyway which is April-May-June quarter because of the salary increases takes a little bit of dip in margin. Then we pick up that margin over the next couple of quarters. As a general philosophy, we have reached what we are calling our bench mark margins, rates of about 25% EBITDA, 40% growth margin.

Right now a lot of our investments are in building the right solutions, taking them to market, investing more in sales and marketing. Now that we have reached the benchmark set of margins, we want to start investing more of our dollars not in margin enhancement but in revenue growth.