Patni Computers In line quarter, Disappointing Guidance for Q4CY10 :: Emkay

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Patni Computers

In line quarter, Disappointing Guidance for Q4CY10

NOT RATED

CMP: Rs465                                        Target Price: N.A.

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n     Rev at US$ 178.8 mn, marginally ahead of est. Mgns at 18.9%, were down by ~130 bps QoQ  impacted by strong hiring (net adds of 1,663, +11% QoQ), impact of consolidation of CHCS

n     Profits at Rs 1.3 bn ahead of est. driven by higher than expected forex gains. See margin pangs continuing driven by supply side pressures( attrition at near peak levels)

n     Despite strong hiring, co’s Dec’10 rev guidance is muted. Patni’s rev growth continues to be anemic with strong margin defence until now getting threatened as expected by us

n     Tweak CY11E EPS down by ~5.7% to Rs 35.3 driven primarily by lower margin assumptions (partly on a/c of higher currency reset). At Rs 465, Patni trades at 13.1x/11.7x CY11E/12E EPS

In line revenues, Dec’10 revenue guidance muted

Revenues at US$ 178.8 mn (+6.7% QoQ,+6.9% YoY) were marginally ahead of the

guidance (US$ 176-177 mn) and in line with expectations( growth helped by full impact

of CHCS acquisition). Revenues in INR terms were at Rs. 7,967 mn (+2.4% QoQ, -0.9%

YoY). Co’s Dec’10 revenue guidance of US$ 180-181 mn (0.7-1.2% QoQ) appears

anemic and continues to reflect Patni’s struggle at achieving any kind of revenue

momentum despite (1) significant macro demand surge (seen strong growth from Tier 1

techs as well growth pick up at other Tier II’s), (2) significant investments in

senior/middle management levels over the past 6-7 quarters to address the inherent

issues at weaker positioning and client mining woes.

Margin headwinds continue to get stiffer

Patni’s margins in Sep’10 quarter have slipped by ~130 bps QoQ to 18.9% (down by

~300 bps over the past 2 quarters). Patni’s credible margin performance over the past

few quarters (op margins were resilient and consistent as they improved by ~500 bps

from June’08 qtr to June ’10 qtr despite revenue slippages currency swings) faces

significant test ahead as expected by us driven by high employee turnover (LTM

attrition jumped up further to 25.9% , up by ~1400 bps over the past 4 quarters ,

nearly as high as peak attrition levels seen in late CY06/ early CY07 despite wage

increments implemented during the last quarter). We see no respite to Patni’s

margin woes in the near term as supply pressures continue to be strong across

the industry (more so for mid tier players) and appear alleviated in case of growth

challenges

Inexpensive valuations, possible stock sale remain upside triggers

We tweak our CY 11 EPS estimates by 5.7% to Rs. 35.3 driven by lower margin

assumptions (we now build in EBITDA margins at 18.8% for CY11 V/s 20% earlier,

partly on a/c of higher currency reset). Valuations no doubt appear inexpensive at

~13x/11.7x CY11E/CY12E earnings of Rs 35.3/Rs 39.6 however need to be weighed in

the context of anemic revenue growth and margin woes ahead. A potential stake sale by

promoters at higher than market price remains the key upside trigger in our view.