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EARNINGS REVIEW
Patni Computer Systems Ltd. (PTNI.BO)
Sell Equity Research
Below expectations: Muted growth, margin decline disappoints, Sell
What surprised us
Patni Computer Systems posted 4Q2010 revenues of Rs8.2bn (-0.2% qoq)
and EBIT of Rs1.13bn (15%/8% below GSe/Bloomberg consensus).
Adjusting for forex gains of Rs365mn ($8.1mn) and one-time tax write back
of Rs340mn ($7.5mn), PAT was 15% below our estimates at Rs1.24bn. EBIT
margins compressed by 134 bp on lower utilization (-160 bp qoq) and high
attrition rate of 25.2%. BPO continued to grow at a strong pace (up 20%
qoq) on the back of inorganic ramp-up, however, all other service areas
witnessed sequential decline indicating a muted revenue growth outlook.
iGATE deal update: Mgmt expects the transaction to close by end of April
and in the interim are working towards integration to align for synergies.
Mgmt has discontinued giving formal quarterly guidance pending the iGATE
integration. However, it did reiterate expectations for a modest 3%-4%
sequential revenue growth and 16%-17% operating margin (excluding FX).
What to do with the stock
We reiterate our Sell rating and maintain our 12-m Director’s Cut-based target
price of Rs391, implying a 15% potential downside. We reduce our 2011E-12E
EPS estimates by up to 4% on a muted revenue outlook and introduce 2013E
EPS of Rs48.18. We believe that Patni’s lower exposure to high growth
services and overhang regarding the iGATE deal will lead to a modest 15%/1%
revenue/EPS CAGR over 2010-2013E. Stock currently trades at 12.3X P/E on
CY2011E EPS which is in line with its 6-year historical average and mid-cap
multiples. We believe it warrants a discount considering the muted future
outlook. Risks: inorganic growth, business turn-around.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
EARNINGS REVIEW
Patni Computer Systems Ltd. (PTNI.BO)
Sell Equity Research
Below expectations: Muted growth, margin decline disappoints, Sell
What surprised us
Patni Computer Systems posted 4Q2010 revenues of Rs8.2bn (-0.2% qoq)
and EBIT of Rs1.13bn (15%/8% below GSe/Bloomberg consensus).
Adjusting for forex gains of Rs365mn ($8.1mn) and one-time tax write back
of Rs340mn ($7.5mn), PAT was 15% below our estimates at Rs1.24bn. EBIT
margins compressed by 134 bp on lower utilization (-160 bp qoq) and high
attrition rate of 25.2%. BPO continued to grow at a strong pace (up 20%
qoq) on the back of inorganic ramp-up, however, all other service areas
witnessed sequential decline indicating a muted revenue growth outlook.
iGATE deal update: Mgmt expects the transaction to close by end of April
and in the interim are working towards integration to align for synergies.
Mgmt has discontinued giving formal quarterly guidance pending the iGATE
integration. However, it did reiterate expectations for a modest 3%-4%
sequential revenue growth and 16%-17% operating margin (excluding FX).
What to do with the stock
We reiterate our Sell rating and maintain our 12-m Director’s Cut-based target
price of Rs391, implying a 15% potential downside. We reduce our 2011E-12E
EPS estimates by up to 4% on a muted revenue outlook and introduce 2013E
EPS of Rs48.18. We believe that Patni’s lower exposure to high growth
services and overhang regarding the iGATE deal will lead to a modest 15%/1%
revenue/EPS CAGR over 2010-2013E. Stock currently trades at 12.3X P/E on
CY2011E EPS which is in line with its 6-year historical average and mid-cap
multiples. We believe it warrants a discount considering the muted future
outlook. Risks: inorganic growth, business turn-around.
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