Patni Computer Systems (PTNI.BO) Sell: Pricing in Integration Benefits Citi Research

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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.

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

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

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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.

UBS: Patni Computer Systems 3 Q11 results beat estimates

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UBS Investment Research
Patni Computer Systems
3 Q11 results beat estimates
􀂄 Event: revenue and net profit ahead of estimates
Patni reported 3Q revenue of Rs9.4bn, 14% QoQ growth, 8% above our estimate.
The underlying dollar revenue was $191mn, (up 3.9% QoQ) higher than our
estimate of $188mn. Consolidated EBITDA margins were at 17.6% due to
favourable currency and lower operating expenses. Net profit was Rs835mn (vs
108mn in 2Q), ahead of our estimate led by lower tax rate of 11% vs. our estimate
of 27%.
􀂄 Impact: margin expansion due to absence of one-off costs in 3Q
Patni reported operating margin of 17.6% in 3Q versus 1.9% in the last quarter.
The increase was primarily due to absence of one-time costs such as stock based
compensation and severance expenses. Higher employee utilisation at 78% also
boosted the margin in 3Q.
􀂄 Action: corporate action likely to drive the share price
Successful completion of Patni-iGate merger is likely to provide near-term revenue
visibility for Patni. In addition, any corporate action clarity from iGate to delist the
company or reduce its stake in Patni to 75% (currently 82%) may act as a catalyst
in the near-term.
􀂄 Valuation: revisiting our estimates
We maintain Sell and price target of Rs250, which is derived from a DCF-based
methodology and explicitly forecast long-term valuation drivers using UBS’s
VCAM tool.

Patni Computers - Encouraging improvement, see value in the stock :Emkay,

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Patni Computers

Encouraging  improvement, see value in the stock

NOT RATED

CMP: Rs338                                        Target Price: N.A

---

n     Decent operational performance ahead of estimates. Revenues at US$ 191 mn(+3.9% QoQ) with margins improving by ~600 bps QoQ after the sharp fall in June’11 qtr

n     Profits at Rs. 842bn (-5.3% QoQ), beat est despite higher hedging losses (Rs 340 mn). Headcount reduces by ~500 to 17,850 with utilization improving by ~300 bps QoQ to 78.7%

n     Front end integration with iGate completed while Delivery integration to be completed over next 12-18 months. Co’s attrition has been brought below historical levels

n     We find value in Patni given cash at ~38% of mkt cap, improvement in op performance ahead. Potential delisting by parent iGate remains an additional upside trigger

Patni Computer - coverage dropped ::ICICI Securities,

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D r o p p i n g   c o v e r a g e   d u e   t o  c o n  d e n  s e d   d i s c l o s u  r e s….
Patni reported Q3CY11 numbers ahead of toned down estimates. US$
revenues grew 3.9% QoQ to $191 million while rupee revenues increased
8.1% to | 889 crore. Management commentary suggests that front-end
integration work is behind them while back-office in on course. Note, next
quarter onwards the company plans to combine quarterly earnings calls
for both iGate-Patni investors. Astonishingly, factsheet disclosures have
condensed from Q2CY11. Revenue by verticals, client metric and attrition
numbers are conspicuously missing from the Q3CY11 factsheet and
would be released on a consolidated basis along with iGate earnings call
on November 4, 2011. Further, with iGate booking orders from new
accounts and acting as gatekeeper for distributing projects to both
companies, we believe Patni’s quarterly earning could likely be erratic and
tricky to model. Consequently, we are dropping coverage till clarity on
earnings disclosure emerges.
ƒ Revenue and EPS above estimates
Reported revenues increased 8.2%QoQ to | 889.3 crore (I-direct
estimate: | 809.7 crore). However,  EBIT margins were in-line with
our 11.8% led by lower staff costs and SG&A expenses. At | 90
crore reported PAT was below our modest | 100 cr estimate.
ƒ Operating metric highlights
Across  geographies,  EMEA  grew  by  12.6%  QoQ,  APAC  grew  by
3.9% and America grew by 2.6% QoQ from Q2CY12. Patni added 20
new clients this quarter as compared to 11 last quarter. The active
client base stood at 277.
V a l u a t i o n
We expect US$ revenues to grow by 4.3%/5% in CY11E/CY12E and rupee
revenue/EPS to grow by 4.1%/(4.3)% and 7.5%/14%, respectively.
Though iGate would be releasing consolidated factsheet data along with
earnings call, we would appreciate clean factsheet (for Patni) disclosures.
Further, iGate as gatekeeper for revenue distribution could likely lead to
erratic earnings, which would be tricky to model. Consequently, we are
dropping coverage on the stock.

Goldman Sachs:: Patni Computer : Below expectations on forex loss; utilization squeezed; Sell

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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.

Patni Computer Systems- Upgrade to Neutral on better risk reward - Nomura research,

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Weak revenue outlook in the
price; downside protected by
delisting trigger


Action: Weak revenue outlook in the price; upgrade to Neutral
Patni has corrected by 39% (vs 19% correction for the Nifty) YTD and is
now trading at 10x FY12F EPS. Post this correction, we see limited
downside given: 1) likely sequential margin and EPS improvement for the
next few quarters primarily on the back of G&A savings; 2) a cash balance
of INR130 per share (~45% of market cap); and 3) Igate’s expressed
preference for a delisting, which could result in shares being acquired at a
premium to current prices. Upgrade Patni to Neutral.
Not a Buy yet, as revenue and governance concerns remain
Patni’s revenue growth will be sluggish, in our view, (we model 6.6%
CAGR over FY10-12F) as margin improvement seems to be the primary
focus of management. Also, we still have concerns on allocation of costs
and revenues to Patni under a common Igate-Patni front-end.
Catalyst: Change in delisting plans, improvement in revenue growth
An Igate decision to cut its stake instead of delisting could lead to
valuation multiple de-rating. Any sign of Patni breaking out from the sub-
4% sequential revenue growth pattern could lead to a re-rating in the
stock.
Valuation: Raise TP to INR300 based on 10x 1-yr forward earnings
Our diluted EPS estimates are higher by 6%/3% to INR25.4/28.3 in
FY11/12F on 1) rupee depreciation; and 2) higher G&A savings, despite
cut in FY13F revenue estimates.

UBS :: Patni Computer Systems-- Integration issues to dampen growth

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UBS Investment Research
Patni Computer Systems
Integration issues to dampen growth
[ EXTRACT]
􀂄 Revenue growth to be impacted by integration issues
We expect revenue growth to remain under pressure for Patni Computer Systems
(Patni) as iGate (which now has an 82% stake in Patni) incrementally tries to move
revenue from large clients such as GE onto its own books instead of Patni’s. We
also expect the demand slowdown to impact revenue.
􀂄 ‘Push-down’ accounting to impact profitability
Post acquisition, iGate has applied the ‘push-down’ accounting policy to Patni as
allowed by US Securities and Exchange Commission regulations. This implies that
acquisition-related assets and liabilities will be visible on Patni’s books.
Accordingly, we have factored in higher amortisation expenses and lower
operating performance in our estimates and cut our 2011/12/13 EPS estimates from
Rs35.75/36.90/39.09 to Rs15.32/25.94/32.35.
􀂄 Stock to remain range bound until corporate action occurs
iGate will need to reduce its stake in Patni to 75% by May 2012 as per Securities
Exchange Board of India regulations or delist the company. We believe clarity on
the corporate action will act as a catalyst for the share price.
􀂄 Valuation: maintain Neutral, lower price target from Rs380 to Rs250
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. Our price target assumes an
11.7% WACC and 3% terminal growth.


􀁑 Patni Computer Systems
Incorporated in 1978, Patni Computer Systems (Patni) is one of the leading
India-based providers of IT services. It has over 14,000 employees across 29
centres across the world. Patni offers services in application development and
maintenance, enterprise solutions and other IT-enabled services. It derives most
of its revenue from the US and the rest from EMEA and Asia. Its main verticals
are insurance, manufacturing and retail, and product engineering.
􀁑 Statement of Risk
We believe the primary risk to Patni is the integration with iGate, which has led
to push down cost accounting. Additionally, a demand slowdown could impact
business momentum.

Patni Computer Watershed along expected lines :Emkay

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Patni Computer

Watershed along expected lines

NOT RATED

CMP: Rs322                                        Target Price: N.A.

---

n     June’11 rev fell short of est with a 3.4% QoQ decline to ~US$ 184 mn. Mgns declined ~ 640 bps QoQ to 11.4% driven by lower top line, wage increments and higher SG&A expenses

n     Metrics performance poor with the only bright spot being growth within top 5/10 clients at ~2.6/2.3% with performance weak across verticals  and outside top 10 clients (-8.2% QoQ)

n     Cut our ‘lower than street’ CY11/12E EPS by ~18%/12% to Rs 25/30.4 as we incorporate lower op performance, higher amortization and taxes. Expect sharper cuts from street 

n     Valuations at ~10x CY12E EPS are modest ( after a 30%+ fall in past 3M’s), upsides hinged on potential delisting and  op improvement( more likely a late CY12/early CY13 case)

Hold Patni Computer Systems; Target :Rs 330:: ICICI Securities,

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T r i g g e r s   a r e   m i s s i n g …
Patni reported numbers, which were below our estimates. Revenue
declined 3.4% sequentially led in  part by volume decline (1.1% QoQ),
merger & acquisition related accounting (2.4% impact) and migration of
one of Patni’s key and common client to iGate. We believe revenue
growth and operational performance, relative to peers, could likely
remain feeble during the integration process and a potential delisting
offer remains the sole trigger for stock price rally. However, note that
buyback entails additional ~$180-200 million and is a few quarters away
as per management commentary. Consequently, we are lowering our
estimates and target price sharply  and reiterating a  shift to TCS and
Infosys, which remain our top picks.
ƒ Revenue, EPS way below estimates, impacted by restructuring cost
Reported revenues declined to |  821.4 crore (I-direct estimate: |
839.2 crore) led by 1.1% decline in volumes. EBITDA margins came
in  weak  at  4%  vs.  our  17.3%  estimate  as  reported  EBITDA  margins
include severance cost  paid to Patni employees. Note this quarter,
Patni added subcontractors to the employee base of the firm. Thus,
the total employee base stood at 18,372 in Q2CY11 from the revised
18,562 number in Q1CY11.
ƒ Operating metric highlights
Media entertainment was weak and declined 5% QoQ while public
sector had decent growth of 7% QoQ and 30% YoY. Insurance,
though weak, grew 1% QoQ and 13% YoY along with healthcare.
Manufacturing showed a modest growth of 6% QoQ and 23% YoY.
Patni added three new clients this quarter out of which two were
from the manufacturing vertical.
V a l u a t i o n
We are adjusting our CY11 EPS estimate to | 26.4 vs. | 41.5 earlier due to
the lower revenue and earnings in Q2CY11. We continue to believe that
Patni-iGate synergies are few quarters away during which the company
could likely report tepid revenue and earnings growth. Consequently, we
are lowering our estimates, price target to | 330 (| 440) earlier and
reiterating a shift to TCS and Infosys, which remain our top picks

Patni Computer Systems - Better than it appears:: Credit Suisse

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Patni Computer Systems Ltd.-------------------------------------------- Maintain OUTPERFORM
Better than it appears


● Patni’s Jun-11 result was expected to be weak. It was further
subdued due to higher-than-expected one-offs and changes in
accounting policy. For instance, this quarter included ~US$17 mn
(20% of FY11E PAT before one-offs) relating to severance costs.
● Management commentary on topline growth was subdued. On the
other hand, management reiterated its margin guidance of 25%
EBITDA by the second half of 2013 (2Q11 (adj): 12%, iGate
2010A: 22%, Patni 2013E: 22%).
● Management reported that integration was proceeding smoothly
and we were pleasantly surprised by an improvement in employee
attrition rates and client metrics.
● We reduce our EPS (as reported) estimates for FY11 and FY12
by 30% and 12%, respectively. Our target price changes to Rs400
(earlier: Rs410). Given low float, an offer for buyback seems likely
and thus, management’s incentives may not be aligned to
improving stock prices near term. This presents a key risk to our
OUTPERFORM rating.
Results impacted by one-offs, accounting policy changes
Patni reported decline in revenue of 3.4% QoQ vs CS est of 1% drop
driven by (1) volume decline of 1.1% and (2) one-off revenues in
March 2011 quarter and revenue not recognised due to change in
accounting standards: 2.4%. Adjusted for one-offs, EBIT margin
declined by 840 bp QoQ vs CS est of 400 bp drop. This was driven by
(1) impact of wage hike: 350 bp, (2) increased depreciation, SG&A
expenses, decline in revenue and others: 490 bp. Depreciation was
higher due to revaluation of assets due to push-down accounting.
SG&A expenses increased due to higher travel expenses, fees for
consultants, etc relating to the integration process. Adjusted PAT was
38% below CS estimates.
Unexciting demand outlook, positive margin commentary
Management indicated it was observing some volatility in the demand
environment and that decision cycles were lengthening. On the other
hand, management reiterated its margin guidance of 25% EBITDA by
the second half of 2013 (2Q11 (adj): 12%, iGate 2010A: 22%, Patni
2013E: 22%).
Management expects subdued topline growth in the ‘protect and
stabilise’ phase of 2011 and growth to reaccelerate only in 2012.
However, it expects margins to steadily improve starting next quarter.
We remain confident of management’s ability to improve margins at
Patni since it had successfully used the same margin levers at iGate.
Integration on track. Client, employee metrics positive
Management reported integration was proceeding as per plan.
Employee attrition dropped 170 bp QoQ. Client metrics were positive
with number of US$1 mn and US$5 mn clients increasing QoQ.
Low float could be a risk
iGate owns 83% of the outstanding stock of Patni. Based on current
regulations, it is required to either reduce its shareholding to 75% or
increase it to 100% (delist) by May ’12.
For dilution to occur, stock must be 26% above our TP (iGate’s
purchase price for its current stake), which we find difficult to justify. In
this scenario, a buyback seems more likely. Thus, management’s
incentives may not be aligned to improving stock prices near-term
though the announcement of stock buyback could lead to volatility.
Maintain OUTPERFORM
We reduce our revenue growth estimates for FY11/FY12 by 3-4%, in
line with subdued management commentary. We also reduce our
margin estimates by 400 bp/ 200 bp largely due to the impact of
higher than earlier anticipated depreciation and amortisation expenses.
This leads to ~12% change in EPS pre-extraordinary items
for FY11/ FY12. Including impact of severance costs in Q2, EPS
changes by 30% and 12% for FY11 and FY12, respectively. We
exclude the impact of higher depreciation & amortisation expenses
(non-cash costs) and severance costs (one-off) while calculating our
target price of Rs400 (earlier TP: Rs410). At a 24% upside potential to
CMP, we still rate the stock an OUTPERFORM.

UBS:: Patni Computer Systems - Integration weighs heavily on Patni

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UBS Investment Research
Patni Computer Systems
I ntegration weighs heavily on Patni
􀂄 2Q revenue disappoints, profits 90% below estimate
Patni reported revenue of Rs8.2bn (down 3% QoQ), 5.1% lower than our estimate,
implying dollar revenue of US$184mn vs. our estimate of US$195mn. Operating
margin declined to 1.9% led by one-time expense such as stock based
compensation, severance expenses, higher travel and consultancy costs. Patni’s
consolidated net profit declined to Rs108mn from Rs1.18bn in 1Q 2011, 90%
below our estimate and consensus.
􀂄 Acquisition costs on Patni’s books, incremental revenue to move to iGATE
Given that iGATE now owns 82% stake in Patni, the company has applied that
‘push down’ accounting policy as prescribed by the SEC to its financial statements
post acquisition (15th May 2011). This implies that acquisition-related assets and
liabilities will now be visible on Patni’s books. iGATE management also intends to
move incremental revenue to iGATE instead of Patni over the medium-long term.
􀂄 Management sceptical of NASSCOM’s 16-18% revenue growth estimate
Patni’s management is cautious on the demand outlook and expects the industry to
grow revenues at 12-13% YoY versus NASSCOM’s outlook of 16-18% YoY. The
management attributed this to continued hesitation of clients to put money in larger
sized projects and continued macroeconomic uncertainty. However, management
believes that Patni’s revenue has bottomed out and will remain stable.
􀂄 Valuation: retain Neutral, reviewing estimates
We are reviewing our estimates to reflect the “push down” accounting applied
from May 15 2011. Our PT is based on DCF.


􀁑 Patni Computer Systems
Incorporated in 1978, Patni Computer Systems (Patni) is one of the leading
India-based providers of IT services. It has over 14,000 employees across 29
centres across the world. Patni offers services in application development and
maintenance, enterprise solutions and other IT-enabled services. It derives most
of its revenue from the US and the rest from EMEA and Asia. Its main verticals
are insurance, manufacturing and retail, and product engineering.
􀁑 Statement of Risk
A sharp decline in IT Services spending could result in downward revision of
our earnings estimates.

Patni Computers: Quarterly results disappoint on all ::HSBC

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Patni Computers
N, removing V-flag: Quarterly results disappoint on all
fronts, as integration remains the focus
 2Q saw decline in revenues and significant fall in profitability
 Near-term trends appear likely to remain uninspiring
 Reiterating Neutral rating and removing volatility indicator
from it, and cutting target price to INR360 from INR565


Patni reported weak 2Q11 results, with a revenue decline of 3.4% q-o-q, yielding USD184m,
compared with the consensus estimate of USD193m. The company reported a loss of USD6.7m
on the EBIT level (excluding other income and hedging gains). This included one-time
severance cost of USD17.5m; excluding that, the EBIT margin would have been 5.9%.
Integration is on track, but benefits may take time to reflect in the financials: According
to management, S&M (go-to-market) integration is complete, and the back-office and managed
services integration is likely to be completed by this quarter-end. The company remains
confident about strong cost synergies as it looks to expand margins to +20% in FY13. The
near-term story, however, is not that positive. The company has already lost incremental work
from one of its largest clients to iGate. We expect Patni’s USD revenues to grow 10% in FY11
and 14.3% in FY12, and we estimate respective EBIT margins of 5.8% and 10.6%.
We expect the overall demand market to soften: Management reiterated its softer outlook
for the overall IT demand market and expects modest 12-14% growth in overall IT exports in
FY12, compared with 16-18% growth projected by NASSCOM. Patni is seeing slower
decision-making in large deals, particularly in the BFSI market, and believes that the 2011 IT
budgets, which looked good in the initial part of the year, may not be fully spent by year-end.
We reiterate our Neutral rating and remove our V-flag from it, and cut our 12-month target
price to INR360 from INR565: This is led by a 35% cut in FY12e earnings, as we factor in
slower growth and weaker margins. PTNI may remain range-bound, as downside is protected from
the INR130-140/share cash by year-end. It is trading at 17x on our FY11e EPS. We value the stock
at 12x (historical average of mid-cap Indian IT companies) FY12e EPS at INR360.

Patni Computers: Quarterly results disappoint on all ::HSBC

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Patni Computers
N, removing V-flag: Quarterly results disappoint on all
fronts, as integration remains the focus
 2Q saw decline in revenues and significant fall in profitability
 Near-term trends appear likely to remain uninspiring
 Reiterating Neutral rating and removing volatility indicator
from it, and cutting target price to INR360 from INR565


Patni reported weak 2Q11 results, with a revenue decline of 3.4% q-o-q, yielding USD184m,
compared with the consensus estimate of USD193m. The company reported a loss of USD6.7m
on the EBIT level (excluding other income and hedging gains). This included one-time
severance cost of USD17.5m; excluding that, the EBIT margin would have been 5.9%.
Integration is on track, but benefits may take time to reflect in the financials: According
to management, S&M (go-to-market) integration is complete, and the back-office and managed
services integration is likely to be completed by this quarter-end. The company remains
confident about strong cost synergies as it looks to expand margins to +20% in FY13. The
near-term story, however, is not that positive. The company has already lost incremental work
from one of its largest clients to iGate. We expect Patni’s USD revenues to grow 10% in FY11
and 14.3% in FY12, and we estimate respective EBIT margins of 5.8% and 10.6%.
We expect the overall demand market to soften: Management reiterated its softer outlook
for the overall IT demand market and expects modest 12-14% growth in overall IT exports in
FY12, compared with 16-18% growth projected by NASSCOM. Patni is seeing slower
decision-making in large deals, particularly in the BFSI market, and believes that the 2011 IT
budgets, which looked good in the initial part of the year, may not be fully spent by year-end.
We reiterate our Neutral rating and remove our V-flag from it, and cut our 12-month target
price to INR360 from INR565: This is led by a 35% cut in FY12e earnings, as we factor in
slower growth and weaker margins. PTNI may remain range-bound, as downside is protected from
the INR130-140/share cash by year-end. It is trading at 17x on our FY11e EPS. We value the stock
at 12x (historical average of mid-cap Indian IT companies) FY12e EPS at INR360.

Patni Computers: Quarterly results disappoint on all ::HSBC

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Patni Computers
N, removing V-flag: Quarterly results disappoint on all
fronts, as integration remains the focus
 2Q saw decline in revenues and significant fall in profitability
 Near-term trends appear likely to remain uninspiring
 Reiterating Neutral rating and removing volatility indicator
from it, and cutting target price to INR360 from INR565


Patni reported weak 2Q11 results, with a revenue decline of 3.4% q-o-q, yielding USD184m,
compared with the consensus estimate of USD193m. The company reported a loss of USD6.7m
on the EBIT level (excluding other income and hedging gains). This included one-time
severance cost of USD17.5m; excluding that, the EBIT margin would have been 5.9%.
Integration is on track, but benefits may take time to reflect in the financials: According
to management, S&M (go-to-market) integration is complete, and the back-office and managed
services integration is likely to be completed by this quarter-end. The company remains
confident about strong cost synergies as it looks to expand margins to +20% in FY13. The
near-term story, however, is not that positive. The company has already lost incremental work
from one of its largest clients to iGate. We expect Patni’s USD revenues to grow 10% in FY11
and 14.3% in FY12, and we estimate respective EBIT margins of 5.8% and 10.6%.
We expect the overall demand market to soften: Management reiterated its softer outlook
for the overall IT demand market and expects modest 12-14% growth in overall IT exports in
FY12, compared with 16-18% growth projected by NASSCOM. Patni is seeing slower
decision-making in large deals, particularly in the BFSI market, and believes that the 2011 IT
budgets, which looked good in the initial part of the year, may not be fully spent by year-end.
We reiterate our Neutral rating and remove our V-flag from it, and cut our 12-month target
price to INR360 from INR565: This is led by a 35% cut in FY12e earnings, as we factor in
slower growth and weaker margins. PTNI may remain range-bound, as downside is protected from
the INR130-140/share cash by year-end. It is trading at 17x on our FY11e EPS. We value the stock
at 12x (historical average of mid-cap Indian IT companies) FY12e EPS at INR360.

Patni Computers: Quarterly results disappoint on all ::HSBC

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Patni Computers
N, removing V-flag: Quarterly results disappoint on all
fronts, as integration remains the focus
 2Q saw decline in revenues and significant fall in profitability
 Near-term trends appear likely to remain uninspiring
 Reiterating Neutral rating and removing volatility indicator
from it, and cutting target price to INR360 from INR565


Patni reported weak 2Q11 results, with a revenue decline of 3.4% q-o-q, yielding USD184m,
compared with the consensus estimate of USD193m. The company reported a loss of USD6.7m
on the EBIT level (excluding other income and hedging gains). This included one-time
severance cost of USD17.5m; excluding that, the EBIT margin would have been 5.9%.
Integration is on track, but benefits may take time to reflect in the financials: According
to management, S&M (go-to-market) integration is complete, and the back-office and managed
services integration is likely to be completed by this quarter-end. The company remains
confident about strong cost synergies as it looks to expand margins to +20% in FY13. The
near-term story, however, is not that positive. The company has already lost incremental work
from one of its largest clients to iGate. We expect Patni’s USD revenues to grow 10% in FY11
and 14.3% in FY12, and we estimate respective EBIT margins of 5.8% and 10.6%.
We expect the overall demand market to soften: Management reiterated its softer outlook
for the overall IT demand market and expects modest 12-14% growth in overall IT exports in
FY12, compared with 16-18% growth projected by NASSCOM. Patni is seeing slower
decision-making in large deals, particularly in the BFSI market, and believes that the 2011 IT
budgets, which looked good in the initial part of the year, may not be fully spent by year-end.
We reiterate our Neutral rating and remove our V-flag from it, and cut our 12-month target
price to INR360 from INR565: This is led by a 35% cut in FY12e earnings, as we factor in
slower growth and weaker margins. PTNI may remain range-bound, as downside is protected from
the INR130-140/share cash by year-end. It is trading at 17x on our FY11e EPS. We value the stock
at 12x (historical average of mid-cap Indian IT companies) FY12e EPS at INR360.

UBS:: Patni Computer Systems - Muted revenue momentum to limit upside

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UBS Investment Research
Patni Computer Systems
Muted revenue momentum to limit upside

„ Event: iGate integration has begun, but synergies at least a year away
iGate now owns an 82.4% stake in Patni after the completion of the open offer in
April 2011. The planning process for the integration of iGate and Patni started in
January 2011, and the sales force is currently being trained to effectively cross-sell
services between iGate and Patni. Benefits from the integration, however, are
unlikely to have meaningful impact over the next few quarters.
„ Impact: revenue momentum unlikely to see meaningful pick-up
Over the past few quarters, hopes of improvement in revenue momentum for Patni
have begun to fade. Revenue has struggled to meet the company’s intended 3-4%
quarterly run rate. Q211 revenue is likely to be muted, and the deals won over the
past four to six quarters are yet to make a meaningful impact on revenue. We
expect revenue momentum to be slower than our earlier expectations of a pick-up
in 2011.
„ Action: lowering earnings estimates to reflect slower-than-expected growth
We lower our 2011/12/13 EPS estimates by 8.8%/10.7%/17.8% to factor in the
slower revenue growth and related margin impact. We expect the lower free float
and the lack of clarity on delisting or a sell-down in stake to 75% (for regulatory
compliance) to continue to weigh heavily on the stock, limiting upside.
„ Valuation: lower PT, maintain Neutral
We maintain our Neutral rating given the reasonable valuations at 9.2/8.9x
2011E/12E EPS, a 12% discount to the 5-year average, and a 25-30% discount to
mid-cap peers. We lower our DCF-based price target from Rs475 to Rs380, with
target PE of 9.8x 2012E.


Q Patni Computer Systems
Incorporated in 1978, Patni Computer Systems (Patni) is one of the leading
India-based providers of IT services. It has over 14,000 employees across 29
centres across the world. Patni offers services in application development and
maintenance, enterprise solutions and other IT-enabled services. It derives most
of its revenue from the US and the rest from EMEA and Asia. Its main verticals
are insurance, manufacturing and retail, and product engineering.
Q Statement of Risk
A sharp decline in IT Services spending could result in downward revision of
our earnings estimates.

Patni Computer- Resetting Stock expectations – Downgrade to EW ::Morgan Stanley Research,

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Patni Computer
Resetting Stock expectations
– Downgrade to EW
What's Changed
Rating  Overweight to Equal-weight
Price Target  Rs700.00 to Rs385.00
CY11e/CY12e/CY13e EPS   Down by 26%/28%/29%
Resetting expectations on Patni: we cut our EPS for
the stock by 26-29% to factor in a steep decline
reset in Q2 and 2011; our new PT of Rs385 reflects a
lower probability of a near-medium-term stock
re-rating given expected volatile earnings and lack
of clarity on management plans to keep Patni listed.
Not playing out as expected: We were expecting Patni
to steadily improve its revenue growth and margin profile
post the integration with iGATE. However, qoq revenue
decline, wage hikes and costs associated with the
merger could lead to a steep ~600bps margin drop for
the company Jun-11 quarter (Q2) in our view. Margins
are likely to recover in Q3 – closer to the new normalized
margins – however, we suspect that the new norm could
still be well below the current levels.
Where did we go wrong?  We are convinced that Patni
will emerge as a credible player post the integration,
however, we believe volatility in margins in 2011 could
hurt the stock and limit rerating prospects. Moreover,
management dilemma on delisting the stock versus
lowering iGATE’s stake to under 75% could rule out any
near- to medium-term rerating for the stock.
Downgrade to Equal-weight: We expect Q2 EBIT
margin to be the lowest point for the stock with Patni
delivering a sustained qoq improvement from Q3
onwards for 2H. Weak revenue/margin trajectory post
Q2 remains a key downside risk whereas eventual
delisting could be a key upside trigger for the stock.

Query Corner: Long-term correction seen in SAIL :: Business Line

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I want your opinion on Patni Computer purchased at Rs 563 and SAIL bought at an average rate of Rs 160.

Ravindra Davda

Patni Computer Systems (Rs 367.5): Patni Computer has long-term resistance around Rs 575 where it peaked in June 2007. The stock once again spluttered around this zone in June last year and is in a sharp correction since then. The stock declined below its key medium-term support at Rs 423 this month. Subsequent supports are at Rs 360 and Rs 300.

The stock is close to the first support but is not showing any sign of reversal from here.

Investors with long-term perspective can however hold the stock as long as it trades above Rs 300.

But the medium-term is likely to be choppy for this stock and it can face resistance at Rs 420 and Rs 500 in the days ahead. Investors with short-to-medium term perspective should exit the stock on failure to move beyond these resistances.

The area between Rs 600 and Rs 620 will continue to act as a strong long-term resistance over the next couple of years.