Genpact- F3Q Miss and Guidance Cut , Downgrade to Neutral : JPMorgan

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Genpact
▼ Neutral
Previous: Overweight
G, G US
F3Q Miss and Guidance Cut Puts Stock in Penalty
Box, Downgrade to Neutral



G reported very disappointing results and guidance last night, primarily due to
client conversion delays. The shortfall will likely strike a raw nerve with
investors, as the company had defended the achievability of back-end loaded
guidance. While we still expect G to eventually penetrate existing clients, it could
be at least two quarters out before we see evidence of this playing out and getting
priced back into the stock. With limited catalysts ahead (FY11 guidance to be
given with 4Q results will likely be discounted by the Street), the stock is likely
dead money, and we downgrade the shares to Neutral from Overweight, and
establish a Dec'11 price target of $15, down from our Dec-11 price target of $17.
We now prefer EXLS (N-rated) as the best short-term play on offshore BPO. We
still see good long-term value in G.
• 3Q miss a negative surprise. Revenue/non-GAAP margins/adj. EPS of
$322M/15.4%/$0.20 vs. JPMe of $330M/18.4%/$0.21 and consensus of
$332M/NA/$0.22. However operating EPS missed by $0.04 and was offset by
below the line FX gains (non operational component) and lower taxes. The
company attributed the disappointing miss to client delays in transitioning a few
contracts on which it had made upfront production investments.
• GE better than expected, Global clients below. GE revenue continued to
outperform expectations, increasing 11% y/y (vs. JPMe 5%). The Global
Clients segment however was a big disappointment increasing only 11% on an
organic basis compared to our estimate of 21% y/y growth and prior qtr. at 13%
y/y. The company indicated its experienced delays in a few of its top global
clients which resulted in $8m in revenue miss during the quarter (4% of global
clients segment’s overall revenue). We believe significant growth slowdown in
global clients could be a shor-term thesis-breaker as investors expect the
segment to drive G’s long term revenue growth. While we still expect G to
eventually penetrate existing clients, it could be at least two quarters out before
we see evidence of this playing out and getting priced back into the stock.