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UBS Investment Research
Patni Computer Systems
Integration issues to dampen growth
[ EXTRACT]
Revenue growth to be impacted by integration issues
We expect revenue growth to remain under pressure for Patni Computer Systems
(Patni) as iGate (which now has an 82% stake in Patni) incrementally tries to move
revenue from large clients such as GE onto its own books instead of Patni’s. We
also expect the demand slowdown to impact revenue.
‘Push-down’ accounting to impact profitability
Post acquisition, iGate has applied the ‘push-down’ accounting policy to Patni as
allowed by US Securities and Exchange Commission regulations. This implies that
acquisition-related assets and liabilities will be visible on Patni’s books.
Accordingly, we have factored in higher amortisation expenses and lower
operating performance in our estimates and cut our 2011/12/13 EPS estimates from
Rs35.75/36.90/39.09 to Rs15.32/25.94/32.35.
Stock to remain range bound until corporate action occurs
iGate will need to reduce its stake in Patni to 75% by May 2012 as per Securities
Exchange Board of India regulations or delist the company. We believe clarity on
the corporate action will act as a catalyst for the share price.
Valuation: maintain Neutral, lower price target from Rs380 to Rs250
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. Our price target assumes an
11.7% WACC and 3% terminal growth.
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
We believe the primary risk to Patni is the integration with iGate, which has led
to push down cost accounting. Additionally, a demand slowdown could impact
business momentum.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Patni Computer Systems
Integration issues to dampen growth
[ EXTRACT]
Revenue growth to be impacted by integration issues
We expect revenue growth to remain under pressure for Patni Computer Systems
(Patni) as iGate (which now has an 82% stake in Patni) incrementally tries to move
revenue from large clients such as GE onto its own books instead of Patni’s. We
also expect the demand slowdown to impact revenue.
‘Push-down’ accounting to impact profitability
Post acquisition, iGate has applied the ‘push-down’ accounting policy to Patni as
allowed by US Securities and Exchange Commission regulations. This implies that
acquisition-related assets and liabilities will be visible on Patni’s books.
Accordingly, we have factored in higher amortisation expenses and lower
operating performance in our estimates and cut our 2011/12/13 EPS estimates from
Rs35.75/36.90/39.09 to Rs15.32/25.94/32.35.
Stock to remain range bound until corporate action occurs
iGate will need to reduce its stake in Patni to 75% by May 2012 as per Securities
Exchange Board of India regulations or delist the company. We believe clarity on
the corporate action will act as a catalyst for the share price.
Valuation: maintain Neutral, lower price target from Rs380 to Rs250
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. Our price target assumes an
11.7% WACC and 3% terminal growth.
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
We believe the primary risk to Patni is the integration with iGate, which has led
to push down cost accounting. Additionally, a demand slowdown could impact
business momentum.
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