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Patni’s revenue CQGR for the last 4 quarters has fallen short of management’s
target range of 3-4% q-q and the 4QFY10F guidance confirms the same trend.
Large deal ramp-up delays, revenue foregone on attrition and deficient client
mining has led to the shortfall, in our view. We downgrade Patni from Buy to
NEUTRAL, on a sluggish revenue outlook and weakening operating parameters.
Catalysts
Stake sale by Patni promoters at a premium to current valuations could be a
positive catalyst for the stock.
Anchor themes
Mid-cap IT companies have lagged on revenue growth, while facing higher-thanindustry
supply side pressures. Current trends of industry consolidation, scale
efficiencies and wider services, geographical and vertical footprint favour top-tier
Indian IT vendors over generic mid-cap companies.
Waiting game
Revenue acceleration hopes delayed further
Despite 3QFY10 US$ revenue growth of 6.7% q-q being ahead of our
expectation (est. of 5.7%), we believe indications of sustainable 3-4%
q-q growth are not visible. Sub 2% CQGR over the past 4 quarters,
4QFY10 guidance of 1.2% q-q revenue growth and large deal rampup
delays corroborate our view. We build US$ revenue growth of
12.4% in FY11F.
Weakening operating metrics
Cost efficiencies on utilisation, non-staff costs and tight staff cost
control have all been showing a trend reversal for the past 2 quarters.
This has led to EBITDA margins declining, despite lower SGA. Patni,
in our opinion, would find it difficult to keep its EBIT margins within its
guided range of 15-17% on 1) higher bench strength necessitated by
higher attrition and 2) transition costs on large deals, compounded by
sluggish volume growth.
Promoter stake sale a possible trigger
We believe a 10% upside to our price target is possible in case of a
stake sale at above Rs550 per share. As per news reports, Patni
promoters have been in talks with suitors such as Fujitsu for a stake
sale. Promoters and General Atlantic together hold 63.1% of Patni.
Downgrade to NEUTRAL, reduce PT to Rs460
We downgrade Patni to NEUTRAL on sluggish revenue growth and
weakening operating metrics. Our PT of Rs460 is now based on 12x
(from 13x earlier) one-year forward P/E. The reduction in PT is largely
due to the adjustment for the special dividend payout (Rs63 per share)
in 3QFY10.
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