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Patni Computer Systems
Healthy volumes, weak margin; Hold
3Q profits boosted by forex gains. Patni’s 3QCY10 revenue at
US$178.8m beat its guidance and was in line with our expectations.
Forex gains led net profit to exceed our estimate. On the higher
cost of revenues, the operating margin slipped 100bp qoq. We
lower our target price to `500 from `550 earlier and retain our
Hold rating on the stock owing to the lower margin outlook and
treasury gains.
Guidance lower than expected. Patni guided for 4QCY10
revenue of US$180-181m, implying 0.7-1.2% increase qoq. This is
lower than both our estimates and guidance given by peer IT
companies. Net profit guidance indicates a 3.4-5.5% qoq decline
excluding forex gains in 3Q.
Other key points. Volumes rose 6.2% qoq. APAC was up 15.6%
qoq, while America was up only 1.6%. BPO saw a robust 25.4%
qoq rise in revenue; the share of fixed-price projects (FPPs) upped
180bp qoq to 44.9%. Patni has US$318m in cash (`109/share). It
has won three deals, each worth US$30m (total contract value) in
the quarter. Attrition (LTM) at 26% was the highest in three years.
Change in estimates. We maintain our CY10e earnings, while
lowering CY11e and CY12e EPS by 4.1% and 5.8% respectively on
the lower margin and ‘other income’ assumptions.
Valuation and risks. Our revised target price of `500 comprises
`425 (we maintain Sep ’11e earnings at 11x) and `75 (valuing the
cash above the average 7% peer cash holding, in line with peers).
Downside risk: High dependence on ADM and the US; upside risk:
Better-than forecast demand would lead to higher earnings.
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