Visit http://indiaer.blogspot.com/ for complete details �� ��
Patni Computer Systems (PATNI)
Technology
Decent quarter; anemic revenue outlook. Reiterate REDUCE. Patni reported a
decent quarter, edging ahead of our estimates on revenues as well as margins.
However, a weak Dec quarter revenue guidance in the middle of strong demand
environment for the industry indicates sustenance of revenue challenges for the
company. Moreover, low revenue growth also has a flow-through margin impact in a
supply-constrained environment. We reiterate our REDUCE rating on the stock.
One of the drivers of any M&A transaction is the underlying business, which is not doing well
Patni’s multi-year business struggle continues—3QCY10 revenues of US$178.8 mn, despite the
robust 6.7% qoq growth (aided in part by full-quarter CHCS acquisition consolidation), remained
below June 2008 quarter levels. We note that the company has made several acquisitions in the
interim. Muted 0.7-1.2% qoq revenue growth guidance for the Dec 2010 quarter does not
encourage, either. The company has done well on expanding margins from the 1HCY08 lows, but
the trends therein suggest pressure—ex-forex EBIT margins have declined 290 bps in the past two
quarters; more importantly, we see further pressure ahead. Acquisition premium on the back of
cost of capital arbitrage can never be ruled out, but we find an investment thesis based on this
wishful thinking fraught with risk.
Decent quarter; challenging outlook
Patni reported a 6.7% qoq growth in US$ revenues to US$178.8 mn, 1.3% ahead of our
estimates. Underlying organic revenue growth was ~4.5%, substantially lower than the larger
players. Ex-forex EBIT margin of 15.3% came in 70 bps higher than our estimate, aided by lower
depreciation and sustained SG&A control. Net income of US$28.8 mn beat estimate by 11.5%, on
the back of revenue/margin beat and higher treasury income.
Revenues outlook for the Dec quarter (+0.7-1.2% qoq) suggests sustained revenue challenge. In
addition, we remain cautious on the company’s margin outlook as well, for three reasons – (1)
flow-through impact of low growth in a supply-constrained environment – Patni’s high attrition
rate (26% LTM) does not help either, (2) little scope of utilization improvement (already high at
74%), and (3) currency pressure ahead. Net income growth in CY2011E faces additional
headwinds of increased tax rates and high forex gain and treasury income base.
Reduce estimates; build in special dividend payout in our model. Cut target price to Rs400/share
We cut our EPS estimates for CY2010/11E to Rs40.4/33.7 from Rs41.3/37.5. Reduction in
estimates is driven by (1) cut in revenue/margin estimates, and (2) factoring in the recent special
dividend (Rs63/share) payout in our model. We reduce our target price to Rs400 (Rs450 earlier)
and reiterate REDUCE rating on the stock.
No comments:
Post a Comment