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Patni Computer Systems Ltd. (PTNI.BO)
Sell Equity Research
In line with expectations: Margin pressure persists, maintain Sell
What surprised us
Patni Computers posted 1Q2011 revenues of Rs8.6bn (4.7% qoq) and EBIT of
Rs1.23bn (5%/13% below GSe/Bloomberg consensus). Adjusting for forex
gains of Rs243mn (US$5.5mn), EPS was 11% above GSe at Rs1.24bn on a
lower tax rate. EBIT margins (at 14.3%) remained low (-360 bp yoy) on lower
utilization (-240 bp qoq) and a high attrition rate of 24.6% for the third
consecutive quarter. Patni announced 9%-10% offshore wage hikes from
2QCY11. Both factors reaffirm that supply side pressures continue to be high
for Patni and may keep EBIT margins suppressed in CY11. The US (
-0.2% qoq) and insurance verticals (-3% qoq) were weak; similar to peers.
iGATE deal update: Management expects the open offer to take iGate’s stake
above 80% and reiterated its intention to keep a single US listed entity in the
long term. As part of the integration plan, a front end firm under iGate’s
ownership will follow the joint go-to-market strategy to bid for deals,
comprising a combined sales force of Patni and iGate. Management also
expects US$25-30 mn cost synergies from the deal within the next two years.
What to do with the stock
We remain Sell with a 12-m Director’s Cut-based TP of Rs391, 15% potential
downside. We revise our 2011E by 5% on the quarter beat and our 2012-13E
EPS by -1%/-3% on a muted margin outlook. We see 14%/0% revenue/EPS
CAGR over 2010-13E on Patni’s lower exposure to high growth services and
overhang of the iGATE deal. Stock is trading at CY11E 11.8X P/E, in line with
its 6-year historical average. Risks: inorganic growth, business turn-around
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Patni Computer Systems Ltd. (PTNI.BO)
Sell Equity Research
In line with expectations: Margin pressure persists, maintain Sell
What surprised us
Patni Computers posted 1Q2011 revenues of Rs8.6bn (4.7% qoq) and EBIT of
Rs1.23bn (5%/13% below GSe/Bloomberg consensus). Adjusting for forex
gains of Rs243mn (US$5.5mn), EPS was 11% above GSe at Rs1.24bn on a
lower tax rate. EBIT margins (at 14.3%) remained low (-360 bp yoy) on lower
utilization (-240 bp qoq) and a high attrition rate of 24.6% for the third
consecutive quarter. Patni announced 9%-10% offshore wage hikes from
2QCY11. Both factors reaffirm that supply side pressures continue to be high
for Patni and may keep EBIT margins suppressed in CY11. The US (
-0.2% qoq) and insurance verticals (-3% qoq) were weak; similar to peers.
iGATE deal update: Management expects the open offer to take iGate’s stake
above 80% and reiterated its intention to keep a single US listed entity in the
long term. As part of the integration plan, a front end firm under iGate’s
ownership will follow the joint go-to-market strategy to bid for deals,
comprising a combined sales force of Patni and iGate. Management also
expects US$25-30 mn cost synergies from the deal within the next two years.
What to do with the stock
We remain Sell with a 12-m Director’s Cut-based TP of Rs391, 15% potential
downside. We revise our 2011E by 5% on the quarter beat and our 2012-13E
EPS by -1%/-3% on a muted margin outlook. We see 14%/0% revenue/EPS
CAGR over 2010-13E on Patni’s lower exposure to high growth services and
overhang of the iGATE deal. Stock is trading at CY11E 11.8X P/E, in line with
its 6-year historical average. Risks: inorganic growth, business turn-around
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