Patni Computer Systems Limited

Q2 CY2010 Conference Call Transcript Wednesday, July 28, 2010

Patni Management Participants Jeya Kumar, Chief Executive Officer Surjeet Singh, Chief Financial Officer

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Moderator: Ladies and gentlemen, good day and welcome to the Patni Computer Systems Q2 CY2010 Earnings Conference Call. I now hand the conference over to Mr. Nitin Tandon of Citigate Dewe Rogerson. Thank you and over to you Mr. Tandon. Nitin Tandon: Thank you. Good day everyone and I appreciate all of you taking time and joining us on the Patni Computer Systems Q2 CY2010 Results Conference Call. We have with us for this call Mr. Jeya Kumar, CEO and Surjeet Singh, CFO of the company. Before we begin let me state that some of the statements in todays discussion may be forward-looking in nature and a detailed statement to that effect is available in the Q2 CY10 results communications emailed to you earlier. We will begin the conference call with key perspectives from the management team followed by a Q&A session where you can have your discussions in more detail. So let me now take this opportunity to invite Jeya Kumar to begin the proceedings for the call, over to you Jeya. Jeya Kumar: Thank you Nitin. Greetings all; thank you for joining us on this conference call to discuss our operating and financial performance for the quarter ended June 30th. We hope you have gone through our release as of this morning. Surjeet will provide you with the details on the performance and numbers later on this call. First on revenues, during the quarter we had reported lower than guided revenues. This does not reflect underlying changes in our portfolio but a one-off deferral in project starts and ability to scale up due to supply conditions in the scope of the last quarter. Combined with the currency changes during the quarter we are reporting $167.6 million revenues against our guidance of $172. The project delays were in our insurance and BPO portfolio, in few of our growth accounts which have since begun as we were short and these were of short term nature. Our guidance for next quarter reflects the growth we had planned for on a sequential basis and we are confident to continue the path that we have set for ourselves. From a market perspective we find customers to be more amenable to take decisions on efficiency and cost reduction. Discretionary spending is slowing but seen in pockets. We are currently chasing more deals in $50 million initial TCV range that we had in the past few quarters. Geographically, Europe has begun to look better than the previous quarter even as the microeconomic recession still remains. We are beginning to see increased pipeline in APAC especially following our investments in the region. We are also pleased that we have completed the acquisition during the quarter of CHCS Services and are further along in expanding our services as a third party administrator. We are one of the few companies to position ourselves in that segment and are excited about the growth prospects. All in all, with the investments made in the geographic expansion, micro-vertical strengthening and efficiency focus we are confident to scale the business along with inorganic activity. I will now hand over to Surjeet for further commentary on the operating results. Surjeet Singh: Thank you Jeya and hello everyone. The revenues for the quarter at $167.6 million were lower sequentially as compared to $172.3 million by 2.6% with cross currency impact of about 40 basis points. The reason for the decline around the revenue as Jeya already commented on were largely led by project deferrals which were there for one-off and will get recovered. We added 11 new clients during the quarter, taking our total number of active clients to 280. The number of $1 million client relationships was 92; the percentage of repeat business continues to be stable at 94.5% for the quarter. Concentration from top customers remains flattish at about 48.7% during the quarter. Revenue contribution from our top customer marginally reduced which is abrasion from 11.7% to 11.2% during the quarter. On the operating side, utilization was about 75% as compared to 79.9% and it was in line with our plan and expectations. The quarter-end headcount is 14,893 as compared to 13,959 in the previous quarter with a net add of close to a thousand people. This was largely with the fresher hiring that we conducted in order to overcome the supply constraints faced in the previous quarter. Moving onto margins, which are generally stable, the gross margin changed 2.3% on account of compensation which is seasonal in nature and annual therefore in this quarter, besides marginal impact on account of lower utilization. There was a better absorption and reduction in SG&A spend leading to our overall operating margins being in the region of 18.8% as compared to 21% in the previous quarter.

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On ex-foreign exchange basis spending operating margins were 16.3% as compared to 18.2% during the previous quarter. As we have already reported our overall hedging is hedged well in terms of managing the foreign exchange risks we have sold almost the entire 2010 exposure at Rs. 48 and those gains are being seen in the current quarter as well in order to mitigate the foreign exchange volatility. For the quarter the treasury income was up sequentially to $6.9 million as against $4.4 million. They have caused an active shift in our portfolio of investment during the quarter and in order to leverage, increase in short term interest rates given the liquidity conditions and interest rates and short term end going up during the quarter. Consequently, the net income reported for the quarter is $31.7 million at 18.9% as compared to $33.9 million at 19.3% during the previous quarter. Based on average share counts of 129.6 million outstanding shares we are reporting an EPS of 24 cents per share or 49 cents per ADRs for the quarter under review. From the cash flow side, the net cash generated from operating activities was $35.5 million. We used about $18.2 in investment activity, largely for inorganic purchases including CHCS and asset for sales from surplus systems. Capex was $4.2 million and outside of that with translation change our net cash at the end of the quarter is at about $466.6 million, given marginal changes on the financing side including payout of dividends. Our overall receivables remain stable and the debtors number of days including unbilled receivables is 84 days, although marginally up that the last quarter it will get corrected going forward. Coming to guidance for the next quarter we are guiding revenues in the range of $176 to $177 million reflecting an increase in the range of 5% to 6% sequentially. On the net income excluding foreign exchange side we are expected to report the same in the region of $22.5 to $23 million at about 13% and forecasted at an exchange rate of Rs. 46. The major change sequentially was on account of treasury income which is likely to be lower by at least $3.5 to $4 million sequentially and will then correct itself in quarter four. This brings me to the end of the management commentary. I would like to now hand over to the moderator to begin the Q&A session. Moderator: Thank you very much. Ladies and gentlemen we will now begin the question and answer session. Our first question is from the line of Joseph Vafi of Jefferies & Company, please go ahead. Joseph Vafi: Yes, good evening gentlemen. I was wondering if you could comment a little bit on recent press article we saw that General Electric looking to China a little bit, if you are seeing any of that in your account base or within the thoughts of your client. Jeya Kumar: No, I think this is consistent news over the last few years, we do not see any of it. Joseph Vafi: Secondly, on the growth outlook; obviously it sounded like there were a couple of deferrals going on in the account base and those seem to be moving forward now. A lot of the other players in the industry so far that have reported have talked about generally broad-based growth within their account base so I was wondering excluding clients where there was deferrals what you were seeing there, if you were seeing that same type of, or do you believe that you will still see that type of broad-based growth as these budgets return for these clients. Jeya Kumar: Yeah, I think we do, generally if we look at most of the deals that we are working on, these mega deals like $25 million and above, they are all broad-based and they tend to be market self-defined. Joseph Vafi: Okay, thank you very much. Moderator: Thank you. Our next question is from the line of Joseph Foresi of Janney Montgomery Scott, please go ahead. Joseph Foresi: I was wondering if you could get into as best you can a little more detail for the reasons behind the delay. Obviously, it sounds like they were company-specific but any color you can give us on why the projects were delayed and why they are picking back up.

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Surjeet Singh: I think on the BPO side in particular there is a need for a common and together sort of knowledge transition to take place and that took more time than what was factored and that was primarily the reason. I think we have moved on from there on, it was a one-time event, those have since begun. So in that sense then whatever deficits you see is not necessarily a lost one it has recovered already. Joseph Foresi: Okay. And so is that how we should think about it, that the BPO was not client-specific; it was just a start time of project. Surjeet Singh: Yeah exactly, there was no cancellation; the actual start got deferred on account of timing that is all. Joseph Foresi: Okay, that is helpful. Then on a labor supply front, I wonder if you could talk a little bit about, is it difficult for you guys to find people in the labor market and if so it is that keeping you from addressing any potential activity on the demand side. Jeya Kumar: In the last quarter we hired close to 1000 people. Since Q4 last year the attrition is trending down but on a year on year basis it is still twice high of what it used to be. So we are seeing the offer-tojoining ratio becoming more stable and also the attrition scaling down we think that by probably the next two quarters, the industry may actually see attrition back to what it used to be in the 2007-2008 realm. Joseph Foresi: And lastly I think you talked before, or we talked before about getting back up to industrylevel growth rates. Can you give us an update on how you think you are going to go about that and any potential catalyst in upcoming quarters? Thanks. Jeya Kumar: So I think in our next quarter we are guiding 5% to 6% quarter on quarter sequential growth and we are working on planning to actually operate at 3% to 4% quarter on quarter growth. This will definitely be coupled with inorganic activity. I think we have stated earlier at least in the last couple of calls, we are looking to acquire assets no more than one-third of our current revenue profile. We have a set of assets that we are currently looking at and it would probably take us another couple of quarters over there. Joseph Foresi: Okay, thank you. Moderator: Thank you Mr. Foresi. Our next question is from the line of Nimish Joshi of CLSA, please go ahead. Nimish Joshi: Hi, I had a question on your growth guidance. Given that some of your projects were deferred from this quarter and the fact that you will have an uplift from the CHCS acquisition in the next quarter, the September quarter, what otherwise was the organic growth that you were planning for. If you strip these two off or I would say even the September quarter growth would have been relatively pretty muted. Surjeet Singh: I think the scale-up of the acquired entity as I stated earlier would be on a full rate basis at least two or three quarters away so there is marginal upscale. We do not decompose numbers but I think what you should know is that we have always planned and as Jeya stated earlier about 3% sequential growth rate and the company will be acquisitive both from platform or IP perspective and/or from an organic perspective so to that extent I think you know this is an organic play of the transaction rather than pure play inorganic activity. So far as the deferral is concerned I think that is where you are seeing some part of that leading to a 6% guidance which in normal course based on our portfolio and the pipeline we will see more 3% to 4% of trajectory right now. Nimish Joshi: And out of curiosity, would not 3% to 4% somewhat trail even some of the other midcap companies in terms of growth trajectory, why is there a gap? Surjeet Singh: We will talk about our portfolio; different portfolios have different sort of characters including scale and denominator. We have said earlier that we do have portfolio gaps from horizontal service lines perspective where we are seeing growth happen which will actually catch up once we acquire scale on

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those. And as a strategy we have chosen to be in verticals where we think that we can create leadership. So to that extent I would not worry too much about the others. We would first want to achieve sustainability of growth at our level and then along with inorganic plays obviously you have to grow bigger and better than the industry. Nimish Joshi: Attrition has fallen this quarter, in terms of quarterly annualized basis, was that the comment made in the opening remarks. Surjeet Singh: Yes. Nimish Joshi: Okay thank you Moderator: Thank you Mr. Joshi. Our next question is from the line of Brian Kinstlinger of Sidoti & Company. Please go ahead. Brian Kinstlinger: Im curious why you hired almost a thousand people. It does not seem that aggressive, when compared to what some of your peers have done and given your supply constraints that you have been talking about and knowing that attrition was there, would be why you want to be little more aggressive and let me know what your plans are for the second year in terms of recruiting Surjeet Singh: This is net add and in the last quarter we had said that we will probably add closer to about 1100 or 1200 net add people by July and I think we are on track with that. Our overall structure is to keep utilization in the 74-75% band, higher to visibility and we feel that we will not let supply constraint demand going forward. Brian Kinstlinger: And what is the second half of the year target for net additions? Jeya Kumar: We are looking at about the same range. Brian Kinstlinger: Another 1100 to 1200. Jeya Kumar: Yes, it will be looking at it on a quarterly basis more than anything else and I think at the beginning of the year we guided, we will be hiring net adds about 2500 to 3000, we are staying the course with that. Brian Kinstlinger: And then it looks like SG&A came down sequentially by a good amount, have you been cutting cost, what was the reason for that? Surjeet Kumar: There are period costs in that band. Overall, I think G&A into 10% to 10.5% band sales and marketing in the 8% to 8.5% band is part of the operating model. Just as we manage the overall operating margins in the 16%-17% range for the full year which we are comfortable with. Brian Kinstlinger: When you reported $1, $5 and $10 million customers, you have 1 have less $5 million customers and 2 less $10 million customers but no more $1 million customers, so I am curious of the movement there. Surjeet Singh: Well the million-dollar customers are stable and the clients based on the run-rates continue to do our portfolio shift, so I do not think there is any loss per se, but there will always be a portfolio shift within $5 to $10 million customers or $10 to $15 million customers. Brian Kinstlinger: Okay, thank you. Moderator: Thank you. Our next question is from the line of Vincent Colicchio of Global Financial, please go ahead.

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Vincent Colicchio: Good morning, was there any change in the top ten clients this quarter or do you expect any change in the upcoming quarter? Surjeet Singh: We do not expect portfolio shifts, so I think it will just be based on the quarter-end measurement that you see the numbers changing which will normalize in itself. Vincent Colicchio: And on the sales force, has there been any meaningful turnover in the sales force and how do you feel about the current strength of the sales force that you have in place today? Jeya Kumar: There is no significant change in our current sales force. They are working to plan and they are executing to the current two quarters, so we feel comfortable with it. Vincent Colicchio: And for the upcoming quarter, are there any particular verticals or service lines you feel good about that are going to gain good traction in particular. Surjeet Singh: Yeah, so we are seeing accretive growth coming in from BPO as clients actually adopt more BPO work now along with IT and I think that we are well positioned, managing and combining IT and BPO together from a business process perspective and moving and executing the business more from a platform perspective rather than just labor perspective. So we are finding that to be on the uptrend. We are feeling good and comfortable about the product engineering spend which in the last quarter also grew well and I think is expected to do well next quarter as well. From a verticals perspective I think given our portfolio and our focus I think we find it broad-based. So overall I think there is a balance in the growth as well. Vincent Colicchio: Thanks guys. Moderator: Thank you Mr. Colicchio. Our next question is from the line of R. Ravi of Daiwa Capital Markets, please go ahead. R. Ravi: From the cost of services increase I do not get a sense that you have given a very high wage revision when most of the people are giving a wage increase between 12% and say 15%. If you were to give a much higher wage revision would it impact the margins in subsequent quarters? Jeya Kumar: We gave out a total wage increase at least for offshore in India. The wage increase was closer to about 11.7%. We noticed a dip in our attrition level and if we need to give out any further increases it would be more in terms of retention bonuses then anything else and we would do it if and when necessary. R. Ravi: Okay, thank you. Moderator: Thank you. Our next question is from the line of Pinku Pappan of Nomura, please go ahead. Pinku Pappan: My question is more on the guidance for next quarter and the net income guidance. You are growing in revenues 6%. You do not have any wage salary cost coming next quarter yet your guidance for $23 million which is lower than if we take the previous year. So want to know are you factoring a drop in margins in the coming quarter? Surjeet Singh: No, there is no drop in margins, let me just state that one more time. I think if you look at the margin change or the net income guidance change excluding foreign exchange, a major component of that is on account of the treasury income which had a spike lower than the previous years spike but still a spike in Q2 and therefore we will see a dip of about $4 million in Q3 and will go back up in Q4 to about $4.5 million. Second, if you look at our operating margins in the first half they are upwards of about 18%. We have always said we will invest in the business. We are making organic investments, we are funding some of the transitions and scale-ups of some clients that will scale in the coming quarter, and those are all in-line with our operating model. Overall, the way to think about our operating margin profile is that we will meet or exceed our 15% to 17% full-year range. So there is no change in the profile sequentially, even taking the treasury income out, the marginal changes are expected and we will continue to make investments ahead.

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Pinku Pappan: Okay, the 15% to 17%, you are talking of EBIT margins, right? Surjeet Singh: Yes. Pinku Pappan: Okay, and two quarters back you were talking about pursuing a second large deal, can you give us the progress on that? Surjeet Singh: That is sort of delayed inordinately and I think the concept of the transaction is also changing because of the customer decision not comparative reasons, we are still hopeful, however, that pieces of that particularly in the BPO side which is still in the offing will come. The predictability of that timeframe is lower but the overall transaction size on account of customer risk side internally has changed so it is a little bit unpredicted and we are still hopeful that we will be able to service the customer. Pinku Pappan: Okay, and your top two to five clients, they are showing a decline for the third quarter consecutively. Could you tell us what kind of trends are you seeing there and why is the decline happening on a sequential basis? Surjeet Singh: Well, on a net effort basis we are actually seeing neutrality or upward trend. There is more offshorization that has happened. Secondly, if you do the two quarter comparison because of attrition at the end of Q2, we did have a lapse of billable positions which will come back through in Q3. Generally speaking, there is more flatness there on dollar terms and we are pretty much well-entrenched and comfortable with the growth profile and process on those customers, there are no reasons for us or you to feel uncomfortable about it. Pinku Pappan: And on attrition, are you feeling comfortable with the way it's going, do you think it's going to take couple of more quarters to stabilize? Jeya Kumar: I think we are on track as attrition is trending down, now it's a question of hiring fast enough and we think industry-wise attrition will probably settle down more in a couple of quarters get back take around in 2007-2008 levels. Pinku Pappan: Okay. And the last question is, you had inorganic and operating assets purchased of $19 million, $6 million was what you paid for CHCS, could you explain what the $13 million were for? Surjeet Singh: We have brought another platform for managed services from one of our UK-based strategic customers where we would be providing managed services of that platform to their end customers and also redeveloping the platform, so it's a transaction where our revenues will be more predictable and also will be non-linear if you will. Jeya Kumar: It was also give us a spread across different geographies that we dont currently have coverage for. Pinku Pappan: Okay, thanks a lot. Moderator: Thank you. Our next question is from the line of Ronak Onkar of Parag Parikh Financial Services. Please go ahead. Ronak Onkar: Good evening, I just wanted to know about the Japanese geography and how fundamentally different is this geography the American or the European geography, if you can elaborate on that please? Jeya Kumar: Okay, it's a long answer. From a business perspective, Japan is the second largest IT market in the world. Their current outsourcing is around $110 billion out of which 8.5% is offshore. Of the 8.5% is the offshore 55% goes to China and 15% goes to India.

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Ronak Onkar: And since European market is not doing well right now, how do you see the chances of scaling of in Japan would be? Jeya Kumar: I dont know if the European market is not doing well, whether you are talking the currency market or the equity market, but we are not seeing that in our business right now. In fact, in this quarter we are really looking for the Euro to be catching up in their growth over the last few quarters. Yes, we look at Japan, as a market and we felt the best way to penetrate was to go into JV mode with a local brand. Ronak Onkar: What percentage of your revenue do you think would be Japan in a few years time, what is your target as such? Jeya Kumar: I can give you a number, but I dont think it's really relevant right now. I think for Japan we are looking to at least double revenues over a three-year term. Ronak Onkar: Okay. Thank you so much. Moderator: Thank you. Our next question is from the line of Nitin Padmanabhan of India Bulls Securities. Please go ahead. Nitin Padmanabhan: With regard to utilization, would it be fair to assume that we are now looking at having utilization at 75 versus taking it all the way to 80% earlier, so same thing would be at 75 next quarter despite the 490 bps decline this quarter, when we are going to have that as a lever for next quarter? Jeya Kumar: Nitin, I think it's also because of the intake that we have this quarter that brings the utilization level down. Internally we operate at 77% utilization at 1% short for sales that is boundary for hiring and bench. Nitin Padmanabhan: So next quarter if utilization is lever, ideally you margin should be higher and thereby our PAT guidance would be a little too conservative. Surjeet Singh: Dont decompose the individual factor, I think our overall utilization will remain in the 75% band as we continue to grow. When the growth stagnates or hopefully it never happens again, but if it does then yes, we kind of manage the bench in a manner which provides for the visibility of growth. In that sense I think 75% as part of the model is the right number based on where our portfolio is and how our geographical service line spread is. I think quarterly change in the EBIT line is driven by our investment that we do in creating marketing infrastructure, some of this could be period cost or in the transitions that as the business scales and we fund ahead including investments we made in terms of geographical infrastructure in terms of delivery. Overall, however, we are committed to and feel very confident that we can maintain or exceed the guidance in 15%-17% operating band. Nitin Padmanabhan: Do we expect then any transition cost for next quarter? Surjeet Singh: We have provided for that, there will be transition cost as the business grows. As we have maintained earlier that the customers expect our off-shoring to be P&L neutral to them because of cost reduction and some of those are also the solutions and investments that we do in our business in order to develop the micro-vertical strategy for this. Nitin Padmanabhan: The $13 million that was spent on managed services platform, if you could just give us a sense of when that could start yielding revenues and what the roadmap is for that? Surjeet Singh: By the end of coming quarter, largely in Q4 onwards we will start that and we hope that this business will grow more in 2011 than in 2010. Nitin Padmanabhan: Regarding the client bucket, there is no shift visible between those client buckets. There is a decline of 2 in the $10 million, one in the $5 million, but we dont see a shift within those buckets.

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Surjeet Singh: Which bucket do you not see the shift in, is it the $1 million or $10 million? Nitin Padmanabhan: The $10 million has come down, $5 million has come down by about 1, but it is not moved to any other buckets, so it looks like we have lost three clients. Jeya Kumar: No, I dont think there is a loss of three clients, I think it must have been quarterly phenomena based on the quarterly run rate, but there is no change in the overall client base per se. Nitin Padmanabhan: And with regard to the yields on cash and tax rates, can you give a sense on those two? Jeya Kumar: On an average, we are getting about 6% yields on our treasury investments. Tax rates are likely to remain in the 18% range full year. Nitin Padmanabhan: Thank you. Moderator: Thank you. Our next question is from the line of Anurag Purohit of Alchemy. Please go ahead. Anurag Purohit: Could you break up this quarters revenue decline in terms of volume and pricing? Surjeet Singh: The foreign exchange or constant current change was about 0.5% and 2.3% was the decline out of the total 2.7% change. There is no change in pricing per se. Anurag Purohit: So essentially volume declined by 2.3%. Surjeet Singh: Yes. Anurag Purohit: And you did mention that Europe is looking better in comparison with the last quarter. Could you highlight the kind of growth rate that you are witnessing in Europe and how the financial terms are different than compared to US? Jeya Kumar: In Europe what we see is more requests coming in or projects that we are working on which are transformational in nature, in terms of growth structure, it is pretty much the same as what you will find in US. Anurag Purohit: Thanks and all the best. Moderator: Thank you. Our next question is from the line of Shraddha Aggarwal of B&K Securities. Please go ahead. Shraddha Aggarwal: We saw a 10% kind of a jump in onsite headcount, but in terms of revenue the growth was muted, so was there some kind of a pricing decline that we witnessed in this quarter? Surjeet Singh: No, I think we concluded and closed our BPO acquisition towards the middle part of June, so therefore in the quarter-end reporting you do see closer to upwards of about 180-200 people that we have acquired along with as reported in the month-end or the quarter-end numbers, so thats the reason why we see that. However the revenues there were from minimal or marginal and thats the reason why it doesnt add up, so dont extrapolate the two for a pricing decline and think pricing is stable. Shraddha Aggarwal: Okay. And secondly, what is actually happening in the telecom vertical. For the last 2-3 quarters now, we have been seeing a stagnant kind of a revenue profile from telecom, so could you shed some light on what is happening in telecom? Surjeet Singh: Well I think in telecom, our major footprint has been in the European territory given that the US market has been consolidated and also we have got attempts on the emerging markets. Now most of

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these transactions have higher lead time to close so therefore you may not be seeing as much of higher sort of increased revenue base in that, but the kind of pipeline that we have and the deals that we are working, given the fact that they are longer gestation deal cycles, once they start it will scale up well. So overall we feel comfortable where we are. Shraddha Aggarwal: Right, thats it from me. Moderator: Thank you. Our next question is from the line of Sandeep Shah of ICICI Securities. Please go ahead. Sandeep Shah: On the treasury income, if we add what you have guided for Q3 and Q4, total CY10 treasury income would be $19 million, so it seems for the full year we are guiding a 4% treasury yield. Surjeet Singh: No, because I think the yields earlier in the year were lower and based on invested capital our overall yields are more in the 6% range than in the 4% range. Sandeep Shah: Jeya, in your initial remarks, you mentioned that we are chasing deals with TCVs of around $25 million to $50 million. Can you elaborate, is it one deal or is it a combination of various deals where all the deals TCV together is $50 million? Jeya Kumar: These are all separate deals. Sandeep Shah: And each of them is of Jeya Kumar: Each of them is in the range of $30 to $50 million. Sandeep Shah: So can you give some color in terms of these verticals, whether the competition has been more than 2-3 players, what is the status of these deals? Jeya Kumar: Some of the deals we haven't closed here, I think we are in the final stages, we have got deals broad-based both in telecom and manufacturing. Sandeep Shah: And just on the platform which we have acquired - can you elaborate, is it the UK-based client, in which vertical and it's only a platform buy from another system integrator? Jeya Kumar: Its a little like the CHCS deal. We have taken over the platform. The customer will be buying services from us and we are rebuilding the platform so that we can take the same platform across the other geographies in which the customer operates. Sandeep Shah: And which vertical is this, for this platform? Jeya Kumar: Manufacturing. Sandeep Shah: Can you give some color on that, by selling this platform the revenue which you can get from that client itself? Surjeet Singh: It will be from that client itself, what we have are the rights to actually provide services outside of their core markets. I think the scale-up will actually happen over and beyond by the new platform that we will develop and they actually increasing their end customer sales. So therefore our managed services business of maintenance underneath that is going up. Sandeep Shah: Thanks. Moderator: Thank you. Our next question is from the line of Ankur Arora of ING Investment Management. Please go ahead.

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Ankur Arora: Just a quick question on the guidance that you have given, even if the treasury income of the total earnings which we have made you are talking about roughly around 15% fall in net profit. I understand you are trying to invest that into business, but can you just elaborate a bit more where this investment is going because 15% is quite a big number you are talking about. Surjeet Singh: Yeah I think in guiding for the 6% growth, there are projects which need transition costs which will not be paid by the customers, so I think that is one part of that. And second is that we are actually expanding our teams on the front-end side into new geographies that we penetrated from the sales perspective, so there are some delivery investments that are happening on that side. The combination of those two is where you see that marginal decline, I call it marginal only because I think it is in an overall range, on a full-year basis we dont manage each and every element on a quarterly basis, so thats the reason why some of these comparisons have become a little bit incorrect because overall you have to invest ahead in order grow and service customers. Ankur Arora: Point taken but even if you are investing in different geographies, then the margins logically should be down even going forward till the time the return from those investments start flowing in, am I correct in my understanding there? Surjeet Singh: Yeah that's true, but however having said that I think based on the scale of the revenues and the incremental margins that we will get from the future revenues and absorption effects, I think it will neutralize itself. Ankur Arora: All right, thank you so much. Moderator: Thank you Mr. Arora. Our next question is from the line of Ankur Rudra of Execution Noble. Please go ahead. Ankur Rudra: Just first as a bookkeeping question, I want to clarify at the beginning of the call Jeya mentioned, you are looking for adds around 2500 to 3000, is that net or gross? Jeya Kumar: That is net. Ankur Rudra: And just a follow up to that, to make the 5%-6% guidance given out now, how many people do you think we need to add on a net basis in the quarter? Jeya Kumar: Our plan is to continue adding a 1000 a quarter, so we need to add another 1500 to up to 2000 by the end of the year. Ankur Rudra: But this is specific to Q3, would it be closer to just about less than 1000? Surjeet Singh: Yeah about 700-800 people, if your question is how many are needed to fund that growth. Well we will be able to fund the growth from where we have the employee base, but we will have to add ahead to make sure that we are able to then fund the future growth of next quarter and thats how the process works. Exactly how many will be added in this quarter to service the revenue of this quarter, I dont think that's sort of relevant. Ankur Rudra: Okay fair enough, thanks. Just a final question, you have been struggling to an extent in the last couple of quarters with supply-side issues. Some of the skill sets would have been a bit scarce in the market as well. Have you been able to replace them with a bit more of subcontracting? Jeya Kumar: Yes. Ankur Rudra: All right, thanks a lot and best of luck. Moderator: Thank you. Our next question is from the line of Sandeep Muthangi of IIFL. Please go ahead.

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Sandeep Muthangi: Just a quick question on your wages and the cost increase. This quarter you were running into multiple headwinds in addition to the wage hikes, wage hikes are about 12% offshore than you had about 7% increase in net headcount and even the currency was acting against you as far as the cost is concerned. But yet the total increase in cost is somewhere about 5% quarter on quarter especially employee-related cost, so I am just wondering what were the other cost containment options you had during the quarter that you may have exercised? Surjeet Singh: Well, from an operating margin perspective, operating margin excluding foreign exchange for example, in Q1 was 18.2% and we have had 16.3% operating margin excluding foreign exchange in this quarter and the walk from there is that 2.3% was a change on account of compensation, about 1% on account of utilization, but then there was a reduction through period cost changes or other efficiencies in the SG&A infrastructure of 1.3%. So those were the gains that we saw which were not there in Q1 and hence you have those overall reconciliations so to speak to 16.3%. Sandeep Muthangi: Okay. The other question was on the client additions, even during last year when the demand was not as robust as maybe what it is now, the client additions was fairly good. Right now we are running at about half of the client additions which you had last year. Anything that I should read from here, whether it is really a challenging environment for adding new clients or whether there is a shift in the way you are reporting the new clients? Surjeet Singh: There is no shift in the way we are reporting new clients, but we are getting selective about where we add clients. Sandeep Muthangi: Okay, thanks thats it. Moderator: Thank you. Our next question is from the line of Ashish Agarwal of Tata Securities. Please go ahead. Ashish Agarwal: BPO revenues actually when we stated there were some projects as well as in the BPO side, so BPO revenues grew 33% QoQ. I just wanted to understand the reason for the same. Surjeet Singh: Well, BPO has been an accretive service line for us even in our existing accounts and thats the reason why you are seeing the kind of growth that you are seeing and we are fairly bullish that that will continue. Ashish Agarwal: But was there any component coming from the acquisition? Surjeet Singh: Very marginal. As I said, we closed the transaction middle of June, so it was fairly marginal and also it is a non-linear revenue reporting. Ashish Agarwal: Okay, thank you. Moderator: Thank you. Our next question is from the line of Niral Dalal of Almondz Global Securities. Please go ahead. Niral Dalal: Could you comment on the pricing outlook going forward given that your top clients have been talking of aggressive cuts? Jeya Kumar: The pricing outlook is pretty flat so we are not expecting any major further erosions on the prices. Niral Dalal: And could you comment on the outlook on the European geography as to whether clients are really talking of increased spending over there?

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Jeya Kumar: We dont hear clients talking about increased spending, they will talk about projects available for supplies to work on and we see that happening in Europe. Like I said, if you look at it, it's not about the currency market, but in our business we are not seeing the kind of volatility that you see that makes everybody panic about Europe. The business is stable and I think this quarter we are beginning to actually see growth coming back in Europe itself. Niral Dalal: Okay, thank you. Moderator: Thank you Mr. Dalal. Our next question is from the line of Madhu Babu of Systematix Shares and Stocks. Please go ahead. Madhu Babu: On inorganic initiatives, would it surround around strengthening our service line portfolio or more around the vertical side? Jeya Kumar: I think it will be a combination of both from a service line, selective service lines like ITES and definitely even in BPO. If its verticals we will look for something more which has got either IP which will strengthen the micro-verticals than anything else. Madhu Babu: Okay sir. What is the current BPO headcount? Jeya Kumar: It's about 2000 people. Madhu Babu: And in terms of new geographies we have started this geographical strategy, so how are we seeing the India and APAC markets in terms of growth opportunities? Jeya Kumar: I think in India on a year on year basis we see growth, effectively we started focusing, we are signing a sales force and really focusing in India since last year August. We are happy with the traction. I think we are in the deals that we should be in and I think we are closer to winning some of the good size deals that we never thought we could win at such a quick rate. On the other hand if you divide APAC, Japan I think we have a strategy in motion, working staff in Australia and in the ASEAN region which just started. And also in China, I think we are seeing good traction for now. Madhu Babu: Okay, thanks a lot. Moderator: Thank you. Our next question is from the line of Ritesh Rathod of UTI Mutual Fund. Please go ahead. Ritesh Rathod: You mentioned $19 million of inorganic and operating asset purchase, so have I read it correctly that the operating asset is something of $13 million and rest is for inorganic thing? Surjeet Singh: That is correct, well I mean call them either both inorganic or call them both operating assets. Ritesh Rathod: Can you just elaborate on how has your past experience been where you have just taken this managed platform from one of your client. You had done similar things two-three years back where you had bought some $20-25 million IP from one of your connection service providers, so what has been an experience for that IP or that platform which you bought and did it meet your internal expectations and what kind of expectation do you have from this IP, what kind of payback period are you looking for in this kind of thing? Surjeet Singh: So let's go back to the core strategy. I think we have stated this multiple times that we want to gain leadership in micro verticals and that has to be through tangible assets underneath to drive service portfolio. We are pleased with our performance that has positioned us differently in the marketplace. It leads to different levels of conversations with the business owners rather than IT alone. And also it provides sort of tangibility to service lines to build from, because we are able to then demonstrate effectively beyond people and Powerpoints the value proposition. So I think in that sense, it positions us well. And so far as the

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revenue profiles from there, I dont think it's a measurement only from the direct IP, it is from the overall portfolio of the sub-verticals that you actually measure, and thats the reason why we are gaining more confidence and actually almost even convinced that thats how our differentiated growth can emerge. You know the timeframe of that there is always questions about it, we are comfortable with the steps that we are taking and that it will start reflecting in numbers based on what we think is the right gestation period. Ritesh Rathod: And how was the past experience which you did with these communication service provider clients? Surjeet Singh: As I said, we are satisfied. Ritesh Rathod: Okay. And was there any revenue impact from this one month impact from CHCS? Surjeet Singh: Very, very marginal because the revenue is not labor denominated there. Ritesh Rathod: And what was the headcount impact overall? Surjeet Singh: Overall headcount, I think it's about 200 people that we brought on along with the asset thats where it is reported in the end-quarter numbers. Ritesh Rathod: And most of them would be onsite? Surjeet Singh: Yeah. Ritesh Rathod: Thanks thats it from my side. Moderator: Thank you Mr. Rathod. We have one last question from the line of Brian Kinstlinger of Sidoti and Company. Please go ahead. Brian Kinstlinger: Yeah, my question is on currency. If we were to remain around Rs. 47 to the dollar or maybe just below, you said you were hedging at Rs. 48, what would the quarterly gain be at that point for your foreign exchange? Surjeet Singh: Well, let's just put it this way that for every rupee change our operating margin profile changes by about 60-65 basis points. Brian Kinstlinger: That's your operating margins? Surjeet Singh: Thats right. Brian Kinstlinger: I look it outside of that so what would the change be on the foreign exchange line? Surjeet Singh: Foreign exchange gain for every dollar I think we have $4.3 million gain here, it has some premier built in, it will be closer to about million dollars give and take. Brian Kinstlinger: Right, thank you. Moderator: Thank you. Our last question is from the line of Ankur Rudra of Execution Noble. Please go ahead. Ankur Rudra: Just a question on offshorization, earlier you mentioned there was a bit more offshorization in the quarter which impacted your revenue this time, was this broad-based or was it limited to one or two customers?

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Surjeet Singh: Well, it's actually in the overall scheme of things it is broad-based, now quarterly aberrations continue to happen, I was commenting more on the trend within our growth and key customers. Ankur Rudra: All right, thanks. Moderator: Thank you. Ladies and gentlemen that was the last question. I now hand the call to Mr. Jaya Kumar to add closing comments. Please go ahead, sir. Jaya Kumar: Thank you all for your great questions. I hope your questions are answered and we look forward to a promising quarter. Talk to you guys again in the next quarter. Moderator: Thank you gentlemen of the management team. Ladies and gentlemen on behalf of Patni that concludes this conference call. Thank you for joining us on the Chorus Call Conferencing Service and you may now disconnect your lines. Thank you.

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