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Initiating coverage with a Buy
A leveraged buyout script with integration challenges behind and a smoother cruise ahead
Action: Initiating coverage with a Buy rating; top tier-2 IT pick
iGATE post acquisition of Patni – a company ~3x its size in revenues – has
successfully integrated the sales force, minimized client/employee attrition
and realized initial operational synergies. At Patni, we see iGATE replicating
its formula for high margins by plugging inefficiencies at the delivery end
and deriving scale benefits on SGA. This operational leverage, in our view,
would lead to non GAAP EBITDA margins expanding by 400bps (to 25%)
over the next six quarters and a 37% EPS CAGR over FY11-13F. We find
the current FY12/13F P/E valuations of 12.3/9.6x attractive and expect the
stock to trade at a premium to its tier 2 peers.
Strong FCF and access to Patni cash to ease debt overhang
The overhang on restricted access to Patni cash (~USD370mn vs overall
cash of USD430mn) would likely ease as iGATE either delists Patni or
Patni resorts to a buyback in 2012, in our view. We believe this, combined
with strong FCF generation of ~USD400mn over FY11-13F (~50% of
debt), would lead to iGATE turning net cash positive over the next 2 years.
Catalysts: Higher revenue growth trajectory, Patni delisting
Ingredients exist for revenue growth upside from 1) a larger addressable
market and 2) replication of iGATE’s client mining successes at Patni
Valuation: TP of USD19 based on 13x one-year rolling forward P/E
We value iGATE at a ~20% premium to its mid-cap peers, on account of
what we view as its best-in-class earnings growth and margin profiles. USDINR
rates above 46/45 for FY12/13F could provide upside to our estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Initiating coverage with a Buy
A leveraged buyout script with integration challenges behind and a smoother cruise ahead
Action: Initiating coverage with a Buy rating; top tier-2 IT pick
iGATE post acquisition of Patni – a company ~3x its size in revenues – has
successfully integrated the sales force, minimized client/employee attrition
and realized initial operational synergies. At Patni, we see iGATE replicating
its formula for high margins by plugging inefficiencies at the delivery end
and deriving scale benefits on SGA. This operational leverage, in our view,
would lead to non GAAP EBITDA margins expanding by 400bps (to 25%)
over the next six quarters and a 37% EPS CAGR over FY11-13F. We find
the current FY12/13F P/E valuations of 12.3/9.6x attractive and expect the
stock to trade at a premium to its tier 2 peers.
Strong FCF and access to Patni cash to ease debt overhang
The overhang on restricted access to Patni cash (~USD370mn vs overall
cash of USD430mn) would likely ease as iGATE either delists Patni or
Patni resorts to a buyback in 2012, in our view. We believe this, combined
with strong FCF generation of ~USD400mn over FY11-13F (~50% of
debt), would lead to iGATE turning net cash positive over the next 2 years.
Catalysts: Higher revenue growth trajectory, Patni delisting
Ingredients exist for revenue growth upside from 1) a larger addressable
market and 2) replication of iGATE’s client mining successes at Patni
Valuation: TP of USD19 based on 13x one-year rolling forward P/E
We value iGATE at a ~20% premium to its mid-cap peers, on account of
what we view as its best-in-class earnings growth and margin profiles. USDINR
rates above 46/45 for FY12/13F could provide upside to our estimates.
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