PATNI COMPUTER- Muted guidance::Edelweiss

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􀂃 Performance in line with guidance
Patni Computer Systems (Patni) reported revenue of USD 179 mn, up 6.7%
Q-o-Q, in line with its guidance of USD 177 mn. The Q-o-Q growth seems high
because of low base as the company reported revenue CQGR of 1.9% in the past
two quarters compared to 2.5% in four quarters prior to that. EBITDA margins
declined 130bps Q-o-Q due to lower onsite utilisation during the quarter. Net
income, at INR 1.28 bn, was higher than our forecast of INR 1.21 bn due to forex
gain of INR 216 mn. The company has guided for 1.2% Q-o-Q revenue growth and
stable (Q-o-Q) net income for Q4CY10. It increased employee base by 1,663
during Q3CY10, highest ever in its history, suggesting possible imminent
acceleration in revenue growth. But, attrition at 25.9% (LTM basis) jumped from
21.5% in Q2CY10. Thus, a lot of the hiring could be to replenish the bench.



􀂃 Winning smaller deals
The company added 13 new clients in Q3CY10 and has an active client base of
282. It added six clients (highest ever in a quarter) to its million dollar revenue
category (LTM basis). The number of clients in all other client buckets has
remained stable. Thus, Patni is winning smaller deals but larger deals are eluding
it. The company stated that it is participating in more large deals and improving
win rates as well, but decision making in most large deals has not concluded.

􀂃 Margin pressure could continue
Patni’s gross margins hit a peak of 40.7% in Q1CY10 from a low of 31.4% in
Q1CY08 even as the quarterly revenue run-rate stagnated at about USD 175 mn
primarily due to operation efficiency including improving utilisation. The
company sacrificed revenue growth in Q2CY10 as it refrained from hiring high
cost resources. We believe, Patni’s record hiring of 1,663 during the quarter and
its guidance to hire another 1,500 in Q4CY10 could lead to margin pressure.

􀂃 Outlook and valuations: Muted growth. maintain ‘HOLD’
The company has been unable to deliver on its general guidance of revenue
growth of about 3% Q-o-Q each quarter as revenue CQGR was 1.7% over the
past four quarters. But, it stated that Q1CY11 onwards it should be on track to
deliver on guidance as it expects to ramp up a few large deals won recently.
Patni still holds cash of INR 14.2 bn (24% of market cap), which it plans to
utilize for acquisitions. We are revising down CY11E earnings by 8.1%. At 6.2x
CY11E EV/EBITDA, the stock appears inexpensive but growth remains muted.
We maintain ‘Hold/Sector Underperformer’