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Focus should be on the combined entity
With 4% topline growth in dollar terms and flat margins, there
were no surprises in Patni’s Q1CY11 results. However, there
are short term challenges due to softness in US and Insurance
vertical and weakness in deal pipeline (indicated to be likely
company specific). The stock, due to the impending open offer
from iGate at Rs503.5, has been stagnant for quite some time.
The open offer closes on 27th April and iGate is expected to
increase its ownership to above 80% in Patni. iGate prefers to
have a single entity with primary listing in the US. We are
therefore dropping the coverage on Patni as we believe the
combined entity (iGate + Patni) will take precedence over
Patni and it should be looked at together.
Inline topline growth; challenges ahead: Patni reported topline
of $190mn, a sequential growth of 4.0% in USD terms. One time
milestone related revenue contributed 1% of the growth.
Company has won four contracts of $20-$30mn TCV during the
quarter. These are multi services integrated deals which would
make the transition longer due to knowledge transfer. Revenue
would flow in from Q3-Q4 of CY11. We believe slower deal
conversion and softness in US and Insurance space would likely
make it difficult for Patni to achieve the ‘ideal’ 3-4% sequential
growth rate in coming quarters. We believe wage hikes of 9-10%
offshore is likely not sufficient to stem the 25% attrition rate
especially when larger peers have announced 12-15% wage
hikes. We think there will be a second hike some time during the
course of 2011.
Preference for one listed entity in US. Post the open offer, iGate
is likely to increase its ownership in Patni to more than 80% and
would have bring it down to 75% due to SEBI’s regulation.
Phaneesh Murthy, CEO, iGATE, indicated that post the
transaction, the preference would be to have one single entity
with primary listing in US.
Integrated front end to drive revenue: iGate and Patni will
have an integrated sales force while having separate delivery
units in the near term. Revenue growth will therefore depend on
the combined entity and efficacy of the common sales team. The
cost synergies are expected to be $25-30mn to be realized from
second year post transaction.
Dropping coverage; Although we remain negative on Patni’s
fundamentals on a standalone basis, the stock should now be
looked in conjunction with iGATE. We believe the combined
entity of $1bn will have the critical mass to target bigger deals
and will likely have a different growth trajectory. We are dropping
the coverage on Patni as we believe the combined entity will take
precedence over Patni.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Focus should be on the combined entity
With 4% topline growth in dollar terms and flat margins, there
were no surprises in Patni’s Q1CY11 results. However, there
are short term challenges due to softness in US and Insurance
vertical and weakness in deal pipeline (indicated to be likely
company specific). The stock, due to the impending open offer
from iGate at Rs503.5, has been stagnant for quite some time.
The open offer closes on 27th April and iGate is expected to
increase its ownership to above 80% in Patni. iGate prefers to
have a single entity with primary listing in the US. We are
therefore dropping the coverage on Patni as we believe the
combined entity (iGate + Patni) will take precedence over
Patni and it should be looked at together.
Inline topline growth; challenges ahead: Patni reported topline
of $190mn, a sequential growth of 4.0% in USD terms. One time
milestone related revenue contributed 1% of the growth.
Company has won four contracts of $20-$30mn TCV during the
quarter. These are multi services integrated deals which would
make the transition longer due to knowledge transfer. Revenue
would flow in from Q3-Q4 of CY11. We believe slower deal
conversion and softness in US and Insurance space would likely
make it difficult for Patni to achieve the ‘ideal’ 3-4% sequential
growth rate in coming quarters. We believe wage hikes of 9-10%
offshore is likely not sufficient to stem the 25% attrition rate
especially when larger peers have announced 12-15% wage
hikes. We think there will be a second hike some time during the
course of 2011.
Preference for one listed entity in US. Post the open offer, iGate
is likely to increase its ownership in Patni to more than 80% and
would have bring it down to 75% due to SEBI’s regulation.
Phaneesh Murthy, CEO, iGATE, indicated that post the
transaction, the preference would be to have one single entity
with primary listing in US.
Integrated front end to drive revenue: iGate and Patni will
have an integrated sales force while having separate delivery
units in the near term. Revenue growth will therefore depend on
the combined entity and efficacy of the common sales team. The
cost synergies are expected to be $25-30mn to be realized from
second year post transaction.
Dropping coverage; Although we remain negative on Patni’s
fundamentals on a standalone basis, the stock should now be
looked in conjunction with iGATE. We believe the combined
entity of $1bn will have the critical mass to target bigger deals
and will likely have a different growth trajectory. We are dropping
the coverage on Patni as we believe the combined entity will take
precedence over Patni.
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