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Patni Computer Systems (PTNI.BO)
Sell: Pricing in Integration Benefits, Delisting the Only Catalyst
Macro signals are mixed — While iGate-Patni believes the overall macro is
weak, the company is seeing positive signals from specific segments -
Manufacturing, Insurance, product engineering in healthcare, Europe (albeit on a
smaller base) – especially in the UK Public sector. With the ongoing integration
with Igate, the company expects the consolidated entity to grow faster than the
Nasscom guidance for industry growth.
Discretionary spends — Demand trends on discretionary projects are largely
dependent on vertical – for example, iGate-Patni is seeing slower spends in BFS.
There are very few major new implementations which are being broken into
smaller parts over the last 2-3 years. Purchase orders are now structured on
specific deliverables and customers are increasingly looking at end-to-end
implementations. ~15% of the workforce is employed on discretionary projects.
Good progress on the Integration — iGate-Patni highlighted 3 positives from
the integration (1) new acquisitions - Deal size is increasing due to bigger scale.
(2) Attrition down to ~18% from ~27-28% levels – Figured among the Top 3
employers for 5th year in a row. (3) Margins expansion of 8% – have taken out
$30m from SG&A and recruited a lot more freshers to improve the pyramid.
Future outlook — (1) Identified micro verticals for increasing investments like
commercial lending, claims processing. (2) iGate-Patni has been integrated from
a sales perspective although there are two separate legal entities. So delivery will
continue to be independent and dependent on vertical. (3) Long-term targets of
45% gross margins and 25% EBITDA margins.
Focus more on fixed price contracts — Management believes that not
focusing on time and material contracts helps iGate-Patni tide over difficulties in
obtaining visas ahead of the US elections. Since the contracts are outcomebased,
Patni expects to increase the offshoring. Wage hikes are expected to be
in the ~9-10% range.
Maintain Sell — New management has done a good job on integration so far -
however, the stock run-up has priced it in, in our view. Further upside in the stock
is contingent on delisting at a higher price - given iGate's debt on books and run
up in the stock, it is difficult to take a call. Patni trades at ~15x CY12E EPS - we
maintain Sell.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Patni Computer Systems (PTNI.BO)
Sell: Pricing in Integration Benefits, Delisting the Only Catalyst
Macro signals are mixed — While iGate-Patni believes the overall macro is
weak, the company is seeing positive signals from specific segments -
Manufacturing, Insurance, product engineering in healthcare, Europe (albeit on a
smaller base) – especially in the UK Public sector. With the ongoing integration
with Igate, the company expects the consolidated entity to grow faster than the
Nasscom guidance for industry growth.
Discretionary spends — Demand trends on discretionary projects are largely
dependent on vertical – for example, iGate-Patni is seeing slower spends in BFS.
There are very few major new implementations which are being broken into
smaller parts over the last 2-3 years. Purchase orders are now structured on
specific deliverables and customers are increasingly looking at end-to-end
implementations. ~15% of the workforce is employed on discretionary projects.
Good progress on the Integration — iGate-Patni highlighted 3 positives from
the integration (1) new acquisitions - Deal size is increasing due to bigger scale.
(2) Attrition down to ~18% from ~27-28% levels – Figured among the Top 3
employers for 5th year in a row. (3) Margins expansion of 8% – have taken out
$30m from SG&A and recruited a lot more freshers to improve the pyramid.
Future outlook — (1) Identified micro verticals for increasing investments like
commercial lending, claims processing. (2) iGate-Patni has been integrated from
a sales perspective although there are two separate legal entities. So delivery will
continue to be independent and dependent on vertical. (3) Long-term targets of
45% gross margins and 25% EBITDA margins.
Focus more on fixed price contracts — Management believes that not
focusing on time and material contracts helps iGate-Patni tide over difficulties in
obtaining visas ahead of the US elections. Since the contracts are outcomebased,
Patni expects to increase the offshoring. Wage hikes are expected to be
in the ~9-10% range.
Maintain Sell — New management has done a good job on integration so far -
however, the stock run-up has priced it in, in our view. Further upside in the stock
is contingent on delisting at a higher price - given iGate's debt on books and run
up in the stock, it is difficult to take a call. Patni trades at ~15x CY12E EPS - we
maintain Sell.
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