Patni Computer Systems -- Going steady : BUY:: RBS

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Patni Computer Systems
Going steady
3Q10  organic  growth  of  c4.5%  qoq  and  operating  cues  (2HCY10  hiring  plans,
large deals, client growth) point to demand traction, although 4Q10 looks muted.
While near-term upside potential looks  limited  to  us,  given a better  showing by
larger peers, the healthy CY11 outlook should drive medium-term upside.


3Q11 results: revenues beat expectations; margin adjusted for one-offs slightly better
Consolidated revenue rose 6.7% qoq to US$179m, marginally exceeding the top end of
guidance and our forecast of US$177m. Growth was largely driven by a 6.5% increase in
volumes (c4.5% ex-CHCS acquisition impact) and a modest currency uplift. The EBITDA
margin (ex-FX) dropped 103bp qoq to 19.5% (RBS est: 18.1%), as a significant offshore shift
(140bp) helped mitigate the acquisition impact and on-site transition costs. Other income fell,
as we expected, by 65.2%, due to seasonality and the special dividend (Rs63/share during
the quarter), while the tax rate was stable at c17% qoq. Consequently, PAT was down 13.1%
qoq to Rs1.28bn (RBS est:: Rs1.1bn), including an Rs217m FX gain (RBS est: Rs67m).
Subdued near-term guidance contrasts with deal flow and hiring outlook
Patni’s 4Q10 revenue guidance of US$180m-181m implies growth of just 0.7-1.2% qoq,
factoring in ramp-ups in a few projects at the end of the quarter, revenue volatility based on
milestone achievements in fixed-price projects, and seasonality. Management maintained 3-
4% qoq revenue growth as a base case for the medium term, based on current visibility and
a cautious macro stance. A healthy hiring outlook (c18% in 2HCY10), growth in large clients
(up 6.5% qoq in Top 10 clients) and improving deal flow (three US$30m-plus deal wins)
support our view of a steady recovery in top-line growth medium term. We continue to build
in an 18% revenue CAGR for CY09-12F. Margin management continues to exceed our
expectations. We are adjusting our FY11/12F EBITDA margins by 140bp/28bp, respectively.

Maintain Buy on inexpensive valuations, although near-term upside could be capped
We broadly maintain our US$ revenue forecasts for CY10/11 and revise our CY10/11 EPS
forecasts +4/0%, respectively (CY10 factors in FX gains). The current revenue growth
trajectory and sedate 4Q10 guidance could restrict near-term upside potential, given strong
revenue growth of larger peers (up 5.7-11.7% qoq). However, we maintain our thesis of a
recovery in growth in CY11 (up 26% yoy), which should drive medium-term upside in the
stock. Ex-cash, the stock trades at an inexpensive 10.5x CY11F core EPS. We reiterate Buy.