Patni Computer- Resetting Stock expectations – Downgrade to EW ::Morgan Stanley Research,

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Patni Computer
Resetting Stock expectations
– Downgrade to EW
What's Changed
Rating  Overweight to Equal-weight
Price Target  Rs700.00 to Rs385.00
CY11e/CY12e/CY13e EPS   Down by 26%/28%/29%
Resetting expectations on Patni: we cut our EPS for
the stock by 26-29% to factor in a steep decline
reset in Q2 and 2011; our new PT of Rs385 reflects a
lower probability of a near-medium-term stock
re-rating given expected volatile earnings and lack
of clarity on management plans to keep Patni listed.
Not playing out as expected: We were expecting Patni
to steadily improve its revenue growth and margin profile
post the integration with iGATE. However, qoq revenue
decline, wage hikes and costs associated with the
merger could lead to a steep ~600bps margin drop for
the company Jun-11 quarter (Q2) in our view. Margins
are likely to recover in Q3 – closer to the new normalized
margins – however, we suspect that the new norm could
still be well below the current levels.
Where did we go wrong?  We are convinced that Patni
will emerge as a credible player post the integration,
however, we believe volatility in margins in 2011 could
hurt the stock and limit rerating prospects. Moreover,
management dilemma on delisting the stock versus
lowering iGATE’s stake to under 75% could rule out any
near- to medium-term rerating for the stock.
Downgrade to Equal-weight: We expect Q2 EBIT
margin to be the lowest point for the stock with Patni
delivering a sustained qoq improvement from Q3
onwards for 2H. Weak revenue/margin trajectory post
Q2 remains a key downside risk whereas eventual
delisting could be a key upside trigger for the stock.