Patni - In the price discovery phase; we see value.:: Kotak Sec,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Patni Computer Systems (PATNI)
Technology
In the price discovery phase; we see value. We believe the Patni stock is in the price
discovery phase post majority stake acquisition by iGate. Views on new normal on
revenue growth as well as margins under the new management remain in the
formation phase. iGate’s stance on potential stake reduction to 75% or de-listing also
remains unknown. Nonetheless, strong cash support (37% of market cap) exists and we
see value despite building in conservative estimates. Retain ADD. TP raised to
Rs400/share from Rs300 earlier. Our TP implies a PE of 11.7X CY2012E earnings.
3QCY11 results – robust revenue growth, sharp increase in margins
Patni reported revenues of US$191 mn for 3QCY11, up 4% qoq and 7% yoy; revenues were
0.8% ahead of our estimate. More importantly, the company reported an EBITDA margin
expansion of 620 bps qoq led by non-recurrence of integration-related expenses, cost
rationalization, increase in utilization and currency benefits. Reported EBITDA margin of 17.6%
was 310 bps ahead of our forecast. Net income for the quarter came in at US$17 mn, down 14%
qoq on account of sharp swing in forex line item – the company reported forex loss of US$6.8 mn
for the quarter versus a gain of US$7 mn in the previous quarter.
Results post iGate transaction have been volatile; volatility could persist for some time
In the two quarters since iGate acquired a majority stake in Patni, Patni’s revenues have shown a
sharp decline in one and robust growth in other. Similarly, margins showed a sharp dip in the first
quarter post acquisition and have now recovered sharply. In fact, revenues and EBITDA in absolute
terms for 3QCY11 are both eerily similar to 1QCY11, the last quarter pre transaction. iGate
continues to seek revenue and cost synergies with Patni – these measures could lead to some
serious volatility in Patni’s quarterly operating performance. The Street would continue to seek
more clarity on the ‘new normal’ till then, in our view.
We would approach the stock with the ‘value’ focus in this discovery phase
In the process of discovering the new operating normal, ours and Street’s financial forecasts for
Patni could see sharp moves, as reflected in the 17/26% upward revision in CY2011/12E EPS
estimates for the company. Earnings-based fair value estimation is hence fraught with substantial
risk (on either side). Nevertheless, we see value in the stock at current levels, driven by (1) cash
comfort; end-September 2011 cash balance of US$367 mn is around 37% of the current market
cap of the company, and (2) our view that Patni’s margins can be sustained at or improved from
September 2011 levels even if revenue growth trajectory turns out to be slightly lower than our
conservative 2.3% CQGR over the next 5 quarters. We retain our ADD rating on the stock with a
revised target price of Rs400/share (from Rs300).


Other results, earnings call highlights
�� iGate-Patni integration progressing smoothly. The management indicated that it would
take another 12-18 months for delivery integration to complete. We note that the two
companies have already moved to a common front-end.
�� The management indicated that new project ramp-ups and better account mining led to
the robust 4% qoq revenue growth in 3QCY11.
�� SG&A for the quarter, on a normalized basis, was down US$4 mn on a qoq basis; the
company intends to plough back some of these savings to improving S&M capabilities
over the coming quarters.
�� End-September 2011 hedges outstanding stood at US$397 mn.
�� The company ended the quarter with a headcount of 17,853, a decline of 519 qoq.