Patni, Meek US-dollar revenue guidance for 4Q10 :: Daiwa

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Patni Computer Systems (PATNI IN) Rating:2
Meek US-dollar revenue guidance for 4Q10



What has changed?
• Patni Computer Systems (Patni) recorded US$ revenue growth of 6.7% QoQ for
3Q10, which was in line with our forecast, but the revenue guidance it gave for
4Q was meek, in our view, working out to growth of just 1.1% QoQ.
Impact
• In Rupee terms, the revenue growth for 3Q10 was just 2.4% QoQ, with two out
of five sectors reporting negative growth. Despite a strong order backlog,
capacity utilisation fell from 71.7% for 2Q10 to 70.1% for 3Q10. Despite
deriving 80% of its revenue from the markets, the sequential growth in revenue
from the US was lacklustre, and revenue from Europe declined by 0.7% QoQ.
Net client additions for 3Q10 were just two, and in the US$10m and US$50m
revenue-run-rate categories, there were no additions of clients.
• With such high attrition rates for the second consecutive quarter, Patni runs the
risk of not being able to complete many of its projects within the budgeted costs
and time. With cost of services increasing by 5.5% QoQ for 3Q, the gross profit
declined by 0.9% QoQ. The gross-profit decline for 3Q10 would have been
2.8% QoQ had it not reversed US$1.2m of expenses.
• Though the reported EBITDA declined by 3.1% QoQ for 3Q10, if we add the
US$1.2m to operating expenses as well, the EBITDA could have declined by
3.8% QoQ. The reported other income rose by US$2.1m as a result of factoring
in certain unrealised gains. Had that not been the case, other income would have
been down by 89% QoQ.
• In addition, the reported tax provision declined by US$8.1m; all of it aided the
net profit by Rs513m. For 3Q10, Patni recorded a net profit of Rs1,280m –
down 13.1% QoQ, however if we do not factor in the expenses and tax
reversals, along with the unrealised gains, the net profit would have been
Rs767m – a sequential decline of 47.9%.
• Given the muted guidance for 4Q10, not being present in all the sectors, and not
able to add clients at a good pace, we are left with no alternative but to revise
down our revenue forecasts by 6% for 2010, and by 5.5% and 4.9% for 2011
and 2012, respectively. As we do not expect any such expense reversals to
come through, we have revised down our 2010 net-profit forecast by 9.7%, and
our net-profit forecasts for 2011 and 2012 by 11.1% and 10.4%, respectively.
Valuation
• From a forward-valuation point of view, the stock looks cheap to us, however
the earnings growth does not look very exciting. Despite the downward
revisions to our earnings forecasts, we are not revising our target price of Rs480
or rating, as we expect the company to win some large deals, for which it has
been working on for some time. In addition, the revenue from Japan should
increase, although we have not factored this in to our forecasts.
Catalysts and action
• We maintain our 2 (Outperform) rating on the stock, as we expect some
corporate developments to materialise.