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Patni Computer Systems (PATNI IN, INR 464, Hold)
n iGATE acquires Patni - brief about the deal
Patni announced that iGATE Corporation has entered into share purchase agreement with its Promoter group and General Atlantic Mauritius to buy a total of 63% of Patni’s equity capital. The transaction is valued at USD 1.22bn including the mandatory open offer of 20%. USD 921mn will be paid to selling shareholders at a price of INR 503.5 per share and remaining USD 299mn will be used to buy shares in the open offer.
n Complementing capabilities; but integration remains the key
Patni’s growth has lagged the industry growth rate over the past few years on account of - a) low presence in banking clients; b) sub par IMS and BPO practice; and c) relatively less effective sales force (hunters). With iGATE’s 61% of revenues from BFSI vertical and large BPO practice, Patni’s service and vertical gap will be partly addressed. Patni’s execution skills and focus on micro-verticals will add to iGATE’s outcome based solutions in banking and media vertical. Product engineering, telecom and insurance verticals are areas where Patni has scale and which will be leveraged by iGATE.
While we see that iGATE gets significant scale (USD 1bn revenue; headcount of 25,000) making it eligible to bid for larger deals, integrating sales and delivery organization will take at-least two-three quarters. We believe the combined entity will have better opportunity to grow from cross selling to existing customers than winning new clients. As both companies have ~80% business from North America, the acquisition doesn’t serve geographical diversification.
n High dependence on a few clients to remain
iGATE’s business is concentrated on a few clients as Top 5 clients contribute 71% to total revenues. Average annual revenue for each of the top 10 client of the merged entity will be USD 50mn vs. USD 1.4mn for remaining clients, which indicates continued high dependence on top clients.
n Outlook and valuation: No big deal; maintain ‘HOLD’
We believe, it will be challenging for the merged entity to compete with larger peers based on competencies and do not see the growth to accelerate meaningfully in the near future. At the open offer price of INR 503, Patni would be valued at 15.3x CY11E earnings and 7.0x CY11E EV/EBITDA. This is marginally lower than HCLT’s valuations and given that the open offer is likely three months away we see limited upside from current level. Maintain ‘HOLD/SU’ rating on the stock.
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