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Patni Computer Systems
A Re-rating Candidate for 2011; Maintain OW
Quick Comment: We believe Patni could emerge as a
rerating candidate in 2011. Dec-10 results mark the end
of its legacy founders and the new management team is
likely to focus on transition in 1H11 post the completion
of the open offer in March, in our view. We expect early
signs of improvement in revenue growth for Patni to
emerge in 2H11.
Dec-10 results: Dec-10 results were ahead of guidance
but in our view are not relevant in the broader scheme of
things for the stock. Revenue of US$183mn (+2.4%
QoQ, +7.6% YoY) were ahead of its guidance of
US$180-181mn and broadly in line with expectations.
EBIT margins declined to 13.7% (-166bp QoQ, -404bp
YoY). Net income (excluding extraordinary items) of
US$31.8bn (+10.8% QoQ, +8.2% YoY) was ahead of
our expectations due to stronger-than-expected FX
gains and other income during the quarter.
Key results highlights: 1) The larger market and
verticals grew ahead of Patni’s company average. US
revenue grew +4.3% QoQ and Insurance revenue grew
+4.7% QoQ. 2) DSO including unbilled receivables
improved to 71 days (-8 QoQ). 3) EBIT margin continued
to decline through 2010 and remains at 13.7% currently,
which is the lowest level in the last 10 quarters. 4)
Attrition rates remain high at 25.2% (-7bp YoY).
Financials: Patni ended C2010 with 7% YoY revenue
growth and EBIT margin of 15.8% (-120bp YoY). We
expect Patni to improve its USD revenue CAGR to 17%
over the next two years with EBIT margin of ~16.7%.
Overall, we expect earnings CAGR of at least 10% over
2010-12.The stock is currently trading at 11x 2011e and
9x 2012e for earnings CAGR of 10% over 2010-12e. On
a trailing 12-month basis, Patni generated free cash flow
of US$125mn, implying yield of ~9%.
Other Key Highlights
1) Operating cash flow of US$42.7mn (-5% QOQ, -11% YoY) in
Dec-10 quarter. Patni ended 2010 with operating cash flow of
US$136mn (flat YoY).
2) Cash and cash equivalents were US$362mn as of Dec-10.
3) Hedge position was US$314mn at contracted rates in the
range of Rs41.1 to Rs48.3/US$.
Conference Call Takeaways
1) Management indicated that Patni would remain listed in
India even post the open offer (post open offer, iGATE’s stake
would be ~83% assuming it gets the entire 20.6%). The open
offer would be valid for the ADR shareholders also.
2) Patni management expects revenue growth trajectory of
3-4% QoQ from 1Q onward.
3) Management indicated that discretionary spending is
coming back for its clients in various verticals.
5) Patni is not seeing rate increases yet and expects pricing to
remain stable
Price target determination: Our price target is arrived at by
using a probability-weighted average of our risk-reward
scenarios. [PT Rs700 = 25%*Rs950 + 65%*Rs650
+10%*Rs400]. Our price target of Rs700 implies a P/E of 17x
20011e EPS and 14x 2012e EPS. Our risk-reward scenarios
are arrived at using the discounted cash flow (DCF)
methodology.
Our DCF assumptions are as follows: risk-free rate 6%, equity
risk premium 8%, beta 0.93, cost of equity 13.4%, terminal
growth rate 3%.
Key risks: 1) Integration-related risks and challenges, 2)
currency volatility affecting margins, 3) macroeconomic
concerns in US/Europe leading to slower-than-expected
revenue growth for Patni.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Patni Computer Systems
A Re-rating Candidate for 2011; Maintain OW
Quick Comment: We believe Patni could emerge as a
rerating candidate in 2011. Dec-10 results mark the end
of its legacy founders and the new management team is
likely to focus on transition in 1H11 post the completion
of the open offer in March, in our view. We expect early
signs of improvement in revenue growth for Patni to
emerge in 2H11.
Dec-10 results: Dec-10 results were ahead of guidance
but in our view are not relevant in the broader scheme of
things for the stock. Revenue of US$183mn (+2.4%
QoQ, +7.6% YoY) were ahead of its guidance of
US$180-181mn and broadly in line with expectations.
EBIT margins declined to 13.7% (-166bp QoQ, -404bp
YoY). Net income (excluding extraordinary items) of
US$31.8bn (+10.8% QoQ, +8.2% YoY) was ahead of
our expectations due to stronger-than-expected FX
gains and other income during the quarter.
Key results highlights: 1) The larger market and
verticals grew ahead of Patni’s company average. US
revenue grew +4.3% QoQ and Insurance revenue grew
+4.7% QoQ. 2) DSO including unbilled receivables
improved to 71 days (-8 QoQ). 3) EBIT margin continued
to decline through 2010 and remains at 13.7% currently,
which is the lowest level in the last 10 quarters. 4)
Attrition rates remain high at 25.2% (-7bp YoY).
Financials: Patni ended C2010 with 7% YoY revenue
growth and EBIT margin of 15.8% (-120bp YoY). We
expect Patni to improve its USD revenue CAGR to 17%
over the next two years with EBIT margin of ~16.7%.
Overall, we expect earnings CAGR of at least 10% over
2010-12.The stock is currently trading at 11x 2011e and
9x 2012e for earnings CAGR of 10% over 2010-12e. On
a trailing 12-month basis, Patni generated free cash flow
of US$125mn, implying yield of ~9%.
Other Key Highlights
1) Operating cash flow of US$42.7mn (-5% QOQ, -11% YoY) in
Dec-10 quarter. Patni ended 2010 with operating cash flow of
US$136mn (flat YoY).
2) Cash and cash equivalents were US$362mn as of Dec-10.
3) Hedge position was US$314mn at contracted rates in the
range of Rs41.1 to Rs48.3/US$.
Conference Call Takeaways
1) Management indicated that Patni would remain listed in
India even post the open offer (post open offer, iGATE’s stake
would be ~83% assuming it gets the entire 20.6%). The open
offer would be valid for the ADR shareholders also.
2) Patni management expects revenue growth trajectory of
3-4% QoQ from 1Q onward.
3) Management indicated that discretionary spending is
coming back for its clients in various verticals.
5) Patni is not seeing rate increases yet and expects pricing to
remain stable
Price target determination: Our price target is arrived at by
using a probability-weighted average of our risk-reward
scenarios. [PT Rs700 = 25%*Rs950 + 65%*Rs650
+10%*Rs400]. Our price target of Rs700 implies a P/E of 17x
20011e EPS and 14x 2012e EPS. Our risk-reward scenarios
are arrived at using the discounted cash flow (DCF)
methodology.
Our DCF assumptions are as follows: risk-free rate 6%, equity
risk premium 8%, beta 0.93, cost of equity 13.4%, terminal
growth rate 3%.
Key risks: 1) Integration-related risks and challenges, 2)
currency volatility affecting margins, 3) macroeconomic
concerns in US/Europe leading to slower-than-expected
revenue growth for Patni.
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