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Patni Computer Systems Ltd. (PTNI.BO)
Sell Equity Research
Below expectations on forex loss; utilization squeezed; Sell
What surprised us
Patni Computers posted 3QCY11 net income of Rs903mn (I-GAAP) which
was 10.2% below GSe, primarily on higher forex losses. Revenues at Rs8.9bn
(8.2% qoq, 8.1% yoy) was 6% above GSe due to higher INR realization and
significant increase in utilization (incl. trainees) to 78.5% (+280 bp qoq).
Patni’s billable headcount went down by 341 employees qoq, suggesting that
integration with iGate (IGTE, NC) and high attrition remain a challenge and
pose risks to margins. Disclosure levels continue to reduce for Patni as a
standalone entity and management stated that, going forward, Patni’s
earnings concall will be combined with its parent iGate’s concall, as they are
managing the business as a combined company.
What to do with the stock
We reiterate Sell on Patni/ADR and believe that the price performance post
the results should be treated as an opportunity to exit the stock. We continue
to believe that near-term integration challenge, allocation of revenues to
Patni based on vertical expertise and potential migration of some accounts to
iGate could result in single-digit revenue growth (7% CAGR) over CY11ECY13E. Further, higher allocation of SG&A and other costs to Patni may result
in lower margins in the medium term. We fine-tune our CY11E-CY13E EPS by
up to 4% to factor in long-term INR/USD at Rs46 (vs Rs45 previously), and 12-
m Director's Cut-based TP to Rs279/US$12.20 (from Rs271/US$11.80) for
Patni/ADR, implying 16%/11% potential downside. Patni is trading at 10.1X
CY12E P/E, at only 10% discount to HCL Tech (HCLT.BO, Buy, on Conv. List,
Rs407.35). Risks: Business turnaround and inorganic growth.
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
Below expectations on forex loss; utilization squeezed; Sell
What surprised us
Patni Computers posted 3QCY11 net income of Rs903mn (I-GAAP) which
was 10.2% below GSe, primarily on higher forex losses. Revenues at Rs8.9bn
(8.2% qoq, 8.1% yoy) was 6% above GSe due to higher INR realization and
significant increase in utilization (incl. trainees) to 78.5% (+280 bp qoq).
Patni’s billable headcount went down by 341 employees qoq, suggesting that
integration with iGate (IGTE, NC) and high attrition remain a challenge and
pose risks to margins. Disclosure levels continue to reduce for Patni as a
standalone entity and management stated that, going forward, Patni’s
earnings concall will be combined with its parent iGate’s concall, as they are
managing the business as a combined company.
What to do with the stock
We reiterate Sell on Patni/ADR and believe that the price performance post
the results should be treated as an opportunity to exit the stock. We continue
to believe that near-term integration challenge, allocation of revenues to
Patni based on vertical expertise and potential migration of some accounts to
iGate could result in single-digit revenue growth (7% CAGR) over CY11ECY13E. Further, higher allocation of SG&A and other costs to Patni may result
in lower margins in the medium term. We fine-tune our CY11E-CY13E EPS by
up to 4% to factor in long-term INR/USD at Rs46 (vs Rs45 previously), and 12-
m Director's Cut-based TP to Rs279/US$12.20 (from Rs271/US$11.80) for
Patni/ADR, implying 16%/11% potential downside. Patni is trading at 10.1X
CY12E P/E, at only 10% discount to HCL Tech (HCLT.BO, Buy, on Conv. List,
Rs407.35). Risks: Business turnaround and inorganic growth.
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