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UBS Investment Research
Patni Computer Systems
Catalysts priced in, downgrade to Neutral
Post recent stock price gains, we see limited upside
Patni’s stock has moved up from a low of Rs445 in January 2011, and we expect it
to approach the open offer price of Rs503 over the next one to two weeks. We
believe both our anticipated catalysts: 1) a business turnaround; and 2) a potential
acquisition, are now priced in and we downgrade our rating from Buy to Neutral.
Open offer in April to price in the acquisition-led catalyst
In January 2011, iGate Corporation (iGate) announced its intent to buy a 60.2%
stake in Patni at Rs503/share, a 6.3% premium to the current level. iGate has also
announced an open offer for an additional 20% stake at the same price, which will
open on 8 April 2011 and end on 27 April 2011. We believe this will fully factor in
the upside from the acquisition on completion.
Business turnaround also factored in, integration challenges likely
Revenue growth has picked up and stabilised over the past two quarters, and we
expect it to gain momentum over 2011 as demand recovery gains steam. However,
we are increasingly concerned about integration challenges such as senior
management retention and potential delisting from the Indian stock exchanges.
Valuation: recent stock move limits upside, downgrade to Neutral
We downgrade the stock from Buy to Neutral with a revised price target of Rs510
(vs. Rs530 earlier), which assumes an 11.8% WACC, 0.73 beta, 3% terminal
growth, and implies an 11.1x FY12E PE multiple. We derive our price target from
a DCF-based methodology and explicitly forecast long-term valuation drivers
using UBS’s VCAM tool. We continue to prefer large caps to mid caps, with
Infosys as our top pick.
Stock price upside limited, downgrade to Neutral
Post the completion of the open offer, we expect integration-related concerns to
overshadow the impact of steady improvement in revenue growth. While we
expect Patni to grow revenue at a 22.6% CAGR over 2010-12, net profit is
likely to remain flat over the same period due to a margin decline and a tax rate
increase. To that extent, we expect stock price upside to be limited to the open
offer levels.
We downgrade our rating on Patni from Buy to Neutral with a revised price
target of Rs510 (vs. Rs530 earlier), which assumes an 11.8% WACC, 0.73 beta,
3% terminal growth, and implies an 11.1x FY12E PE multiple.
Patni is just 6% lower than the open offer price
Patni’s stock, which had taken a beating post the announcement of open offer in
early January 2011, has rallied sharply over the past few weeks. The stock is
now just 6.3% below the open offer price of Rs503/share, and we expect this
gap to close over the next few weeks as the open offer proceeds (8-27 April
2011). We believe the completion of the open offer will mark a peak due to the
acquisition-led trigger for the stock.
Revenue could grow faster, but integration challenges
remain
The Patni-iGate combined entity has cumulative revenue over the US$1bn
revenue mark (CY10/FY11), which we believe could help the combined entity
participate in larger deals. Complementary capabilities—iGate’s banking and
media practices are stronger, while Patni has better capabilities in insurance,
manufacturing, and telecommunications—are also likely to help the
consolidated entity position itself better and target faster revenue growth. Given
the relatively large size of Patni versus iGate, we expect integration to be a
challenge for the buyers. Concerns also remain on the go-to-market strategy,
branding and senior management retention in Patni.
Patni Computer Systems
Incorporated in 1978, Patni Computer Systems (Patni) is one of the leading
India-based providers of IT services. It has over 14,000 employees across 29
centres across the world. Patni offers services in application development and
maintenance, enterprise solutions and other IT-enabled services. It derives most
of its revenue from the US and the rest from EMEA and Asia. Its main verticals
are insurance, manufacturing and retail, and product engineering.
Statement of Risk
A sharp decline in IT Services spending could result in downward revision of
our earnings estimates and impact our valuation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Patni Computer Systems
Catalysts priced in, downgrade to Neutral
Post recent stock price gains, we see limited upside
Patni’s stock has moved up from a low of Rs445 in January 2011, and we expect it
to approach the open offer price of Rs503 over the next one to two weeks. We
believe both our anticipated catalysts: 1) a business turnaround; and 2) a potential
acquisition, are now priced in and we downgrade our rating from Buy to Neutral.
Open offer in April to price in the acquisition-led catalyst
In January 2011, iGate Corporation (iGate) announced its intent to buy a 60.2%
stake in Patni at Rs503/share, a 6.3% premium to the current level. iGate has also
announced an open offer for an additional 20% stake at the same price, which will
open on 8 April 2011 and end on 27 April 2011. We believe this will fully factor in
the upside from the acquisition on completion.
Business turnaround also factored in, integration challenges likely
Revenue growth has picked up and stabilised over the past two quarters, and we
expect it to gain momentum over 2011 as demand recovery gains steam. However,
we are increasingly concerned about integration challenges such as senior
management retention and potential delisting from the Indian stock exchanges.
Valuation: recent stock move limits upside, downgrade to Neutral
We downgrade the stock from Buy to Neutral with a revised price target of Rs510
(vs. Rs530 earlier), which assumes an 11.8% WACC, 0.73 beta, 3% terminal
growth, and implies an 11.1x FY12E PE multiple. We derive our price target from
a DCF-based methodology and explicitly forecast long-term valuation drivers
using UBS’s VCAM tool. We continue to prefer large caps to mid caps, with
Infosys as our top pick.
Stock price upside limited, downgrade to Neutral
Post the completion of the open offer, we expect integration-related concerns to
overshadow the impact of steady improvement in revenue growth. While we
expect Patni to grow revenue at a 22.6% CAGR over 2010-12, net profit is
likely to remain flat over the same period due to a margin decline and a tax rate
increase. To that extent, we expect stock price upside to be limited to the open
offer levels.
We downgrade our rating on Patni from Buy to Neutral with a revised price
target of Rs510 (vs. Rs530 earlier), which assumes an 11.8% WACC, 0.73 beta,
3% terminal growth, and implies an 11.1x FY12E PE multiple.
Patni is just 6% lower than the open offer price
Patni’s stock, which had taken a beating post the announcement of open offer in
early January 2011, has rallied sharply over the past few weeks. The stock is
now just 6.3% below the open offer price of Rs503/share, and we expect this
gap to close over the next few weeks as the open offer proceeds (8-27 April
2011). We believe the completion of the open offer will mark a peak due to the
acquisition-led trigger for the stock.
Revenue could grow faster, but integration challenges
remain
The Patni-iGate combined entity has cumulative revenue over the US$1bn
revenue mark (CY10/FY11), which we believe could help the combined entity
participate in larger deals. Complementary capabilities—iGate’s banking and
media practices are stronger, while Patni has better capabilities in insurance,
manufacturing, and telecommunications—are also likely to help the
consolidated entity position itself better and target faster revenue growth. Given
the relatively large size of Patni versus iGate, we expect integration to be a
challenge for the buyers. Concerns also remain on the go-to-market strategy,
branding and senior management retention in Patni.
Patni Computer Systems
Incorporated in 1978, Patni Computer Systems (Patni) is one of the leading
India-based providers of IT services. It has over 14,000 employees across 29
centres across the world. Patni offers services in application development and
maintenance, enterprise solutions and other IT-enabled services. It derives most
of its revenue from the US and the rest from EMEA and Asia. Its main verticals
are insurance, manufacturing and retail, and product engineering.
Statement of Risk
A sharp decline in IT Services spending could result in downward revision of
our earnings estimates and impact our valuation.
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