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Patni Computer
Sep10 Results: Earnings
Growth Remains Elusive; UW
Quick Comment: We do not see any near-term triggers
for the stock and maintain our UW rating.
Weak operating Sep-10 results: Patni reported
revenues of US$178.8m ahead of its guidance
(US$176-177m). Gross margins declined to 36.3%
(-122bps qoq, -246bps yoy) due to lower utilization and
strong headcount addition (net addition of 1663 during
the quarter, which is the highest ever in any quarter).
EBIT margin remained weak declining to 15.3% (-94bps
qoq, -155bps yoy). Net income of Rs1.3bn (-12.6% qoq,
+9.6% yoy) was in-line with our estimate, driven by
higher than expected Fx gain of US$4.8m in the quarter.
Muted 4Q revenue guidance: Patni has given 4Q
revenue guidance of US$180-181m (+0.7% to +1.2%
qoq), which is lower than the range of 3.5% to 5.5% qoq
for its larger peers. Based on 4Q guidance, CY10
revenues would be ~US$700m (+7% yoy). A 3-4% qoq
revenue growth trajectory would lead to overall growth of
11-14% yoy in CY11e, still below the industry average.
Understanding the net income guidance:
Management has guided for 4Q net income excluding
Fx gains/loss of US$22.25-23m (-4% to -6% qoq).
Assuming revenues of US$181m in 4Q, with flat other
income (US$2.5m) and effective tax rate of ~17%, net
income guidance (excluding Fx gains/losses) implies a
further decline in EBIT margin to ~13.5%-14% for 4Q.
On the other hand, a flat margin of 15.3% would lead to
net income of ~US$25m excl Fx.
US$ revenues by ~13% yoy with EBIT margin of 15.8%
(-30bps yoy) leading to flattish net income in CY11e.
Patni is currently trading at ~12x CY10e and CY11e
EPS for flat earnings yoy in CY11e and is likely to
continue underperforming the market, in our view.
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