Patni Computer: Sell In line with expectations: Modest guidance :: Goldman Sachs

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Patni Computer Systems Ltd. (PTNI.BO)
Sell
In line with expectations: Modest guidance, high attrition surprise
What surprised us
Patni Computer Systems (Patni) posted 3Q2010 revenues of Rs8.2bn (up
7.8% qoq) and operating profit of Rs1.24bn (1.4%/6.8% below
GSe/Bloomberg consensus). Adjusting for mark-to-market forex gains, net
income was inline with our estimates at Rs1.2bn. Attrition touched 25.9%
(highest in the last 12 quarters) with the 3-5 years experience band being
the most impacted. Volume growth at 7.4% qoq remained in line with the
strong trend observed in the industry in this quarter. Product engineering
was the fastest growing vertical (up 12.4% qoq). BPO continued to grow at
a strong pace (up 32% qoq) on the back of inorganic ramp-up.
Guidance: For 4QCY10, mgmt guided for a modest USD revenue at $180-
181mn (+1% qoq) and net income at $22-23mn (at Rs45/USD). Mgmt
expects to add another 1,000 employees (net) in 4QCY10 after adding
about 1.6k net adds in this quarter (highest in the last 5 years).
What to do with the stock

We reiterate our Sell rating on the stock and maintain our 12-month
Director’s Cut-based target price of Rs391, implying 16% potential
downside. We raise 2010E-12E EPS estimates by up to 7% to adjust for f/x
gains. We believe that Patni’s lower exposure to high growth services will
lead to a modest 9% revenue CAGR over 2009-2012E. Stock currently
trades at 11.9X P/E on CY2011E EPS of Rs39.04 which is in line with its 6-
year historical average and mid-cap multiples. We believe it warrants a
discount considering the muted future outlook. Risks: Stake sale, inorganic
growth via acquisitions, business turn-around.