Patni Computer ::India’s Future Large Caps :: Morgan Stanley

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Patni Computer
2012 Could Be a Year of Turnaround


Patni remains a turn-around story in our view. However,
the volatility in financials and lack of clarity on
management plans to keep the stock listed could limit
any prospects of a re-rating for the stock in the near term
in our view. We have an Equal-weight rating on the stock.
Key Catalysts: We believe Patni’s industry-lagging revenue
growth has been the single biggest concern for investors and
signs of a pickup in revenue growth should be key catalyst for the
stock over coming quarters. Patni trades at 11x 2011e and 9x
2012e EPS and could turn out be a rerating candidate in the
event of potential turnaround in revenue growth trajectory for the
company.
Key Investor Debate: We believe the key investor concerns are
around lack of clarity on future management plans for keeping
Patni as a listed entity, risks around integration process and
uncertainty on timeline for turnaround in revenue growth and
margins. Patni’s reported EBIT margins have been volatile in the
last few quarters owing to acquisition related expenses.
We believe Sep-11 results highlight initial signs of turnaround for
Patni. Management has indicated that integration process
remains on track and improved revenue growth in Sep-11
resulted from ramp up of new accounts and improved account
mining. Patni reported EBIT margins of ~11.9% in 3Q11. We
believe 3Q11 operating margins could be more representative of
company’s core performance. We expect revenue growth to
improve for Patni in 2012 and expect it to achieve EBIT margins
of ~12%.
Risks to our Call: Downside 1) Delays in integration and
turnaround plans for the company, 2) Budget cuts for 2012 by its
key clients could keep revenue growth muted in 2012, 3) Lack of
clarity around delisting plans could remain overhang on the stock
in our view, 4) Adoption of transfer pricing mechanism for booking
Patni’s revenues could also remain an overhang for the stock
until both companies (iGATE and Patni) demonstrate strong
execution. Upside: Revenue growth surprises positive. Earlier
than expected turnaround in margins.



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India’s Future Large Caps :: Morgan Stanley