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Performance in line with estimates
Patni Computer Systems (Patni) reported revenue of USD 183 mn, up 2.4% Q-o-
Q, ahead of its guidance of USD 181 mn. EBITDA margins declined 180bps Q-o-
Q due to lower utilisation and higher G&A spend during the quarter. Net income,
at INR 1.76 bn, was higher than our forecast of INR 1.18 bn due to forex gain of
INR 364 mn and tax write back of USD 7.4 mn. It increased employee base by
1,086 during Q4CY10, suggesting possible acceleration in revenue growth.
However, attrition, at 25.2% (LTM basis), continues to remain on the higher
side. Thus, a lot of the hiring could be to backfill attrition.
Adding smaller clients; to focus on large deals, going forward
The company added 19 new clients in Q4CY10, taking its active client base to
297. In CY10, the company managed to add just seven clients in the USD 1 mn
category. However, in Q4CY10, it won two deals with TCV of USD 30 mn. It
claims to be participating in more large deals (decision on which is expected in
the near future) and expects win rates to improve.
Acquisition by iGATE complements capabilities; integration is key
So far, Patni’s growth has lagged the industry over the past few years on
account of: a) Low presence in banking clients; b) sub-par IMS and BPO
practice; and c) relatively less effective sales force (hunters). iGATE’s acquisition
of Patni, however, should be complementary as 61% of its revenues originate
from the BFSI vertical and it also has a large BPO practice. Product engineering,
telecom and insurance verticals are areas where Patni has scale, which could be
leveraged by iGATE. While the merged entity would get significant scale (USD
1bn revenue; headcount of 25,000) making it eligible to bid for larger deals,
integrating sales and delivery organization will take at-least two-three quarters.
We believe the combined entity will have better opportunity to grow from cross
selling to existing customers than winning new clients.
Outlook and valuations: Growth muted; maintain ‘HOLD’
Patni indicated in early CY10 that it would sustain a quarterly growth trajectory
of 3% Q-o-Q but its revenue CQGR was 1.8% over the past four quarters. Ramp
up in a few large deals won recently makes Patni confident of delivering 3-4% Qo-
Q growth from Q1CY11 onwards. It continues to hold cash of INR 16.2 bn
(27% of market cap). At 6.0x CY11E EV/EBITDA we maintain ‘Hold/Sector
Underperformer’ recommendation/rating on the stock.
Key highlights
• Revenue in line with estimates: Revenue for Q4CY10, at USD 183 mn (up by
meager 2.4% Q-o-Q, INR 8.2 bn), were ahead of the guidance of USD 181 mn.
• Gross profit, at INR 2.9 bn, grew 0.4% Q-o-Q. Gross margin for the quarter declined
90bps to 35.5% due to lower capacity and lower utilsation owing to higher fresher
intake. Utilisation dropped to 72.4% during the quarter from 74% in the previous
quarter due to net addition of 1,086 employees.
• EBITDA for the quarter, at INR 1.4 bn, was down 7.0% Q-o-Q. EBITDA margin stood
at 17.7%, down 180bps Q-o-Q, primarily on account of lower gross margins and
higher G&A spend.
• Net income stood at INR 1.8 bn (up 37.8% Q-o-Q). Higher other income (INR 616
mn against INR 329 mn in previous quarter) and write back of previous year’s tax
boosted net income. Net income, excluding extraordinary items, stood at INR 1.4 bn,
up 11.2% Q-o-Q. Forex gain stood at USD 8.1 mn against USD 4.9 mn in the
previous quarter.
• Active client base: Patni added 19 new clients during the quarter. The active client
count increased to 297.
• Top clients: Patni’s top 5 and top 10 clients grew sequentially by 3.2% and 3.0%,
respectively.
• Vertical performance: All verticals, except telecom, reported sequential growth
during the quarter, with manufacturing leading the pack with 5.5% growth.
Insurance and financial services grew 4.7% and 2.4%, respectively. Telecom
declined 9.6% sequentially.
• Utilisation for the quarter declined from 74.0% in the previous quarter to 72.4%
due to net employee addition of 1,086.
• Attrition remains a concern: During the quarter, attrition dipped marginally to
25.2% from 25.9% in the previous quarter.
• Current cash and equivalents in hand stand at USD 362 mn, which translates into
INR 124 per share (27% of CMP).
• Tax rate: Patni expects tax rate to be 28% for CY11.
• The company has outstanding hedges worth USD 314 mn.
• DSO improved by eight days and stands at 71 days for the quarter.
Company Description
Incorporated in 1978, Patni is one of the oldest and sixth-largest IT solution providers in
India. The company provides IT services that are mainly focused on banking, financial
services, manufacturing and telecom verticals. Its service gamut includes ADM,
enterprise solutions, embedded technology service, and product engineering services,
among others, catering to over 260 clients in various verticals. The company’s past
twelve months (TTM) revenue stood at INR 31.7 bn (USD 702 mn) and it employs
17,642 people.
Investment Theme
Over the past year, Patni’s key change has been the transition from being a owner
managed company to being a professionally managed one. It struggled in the past with a
multitude of factors like lack of management focus, attrition (highest in the industry),
and declining growth visibility from top clients. However, with new management team
and plans to further deepen it, improvement on the demand side and healthy cash
position, Patni is heading in the right direction. Focus on micro-verticals, APAC
geography, and traction from Middle East are likely to yield results in 2-3 quarters.
Further, with proven cost management during the downturn the company has proved its
ability to sustain its margin.
Key Risks
The key risks to our investment theme include: (1) negative surprises from any of the
top10 client; (2) INR appreciation against USD; and (3) Acquisition integration risk.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Performance in line with estimates
Patni Computer Systems (Patni) reported revenue of USD 183 mn, up 2.4% Q-o-
Q, ahead of its guidance of USD 181 mn. EBITDA margins declined 180bps Q-o-
Q due to lower utilisation and higher G&A spend during the quarter. Net income,
at INR 1.76 bn, was higher than our forecast of INR 1.18 bn due to forex gain of
INR 364 mn and tax write back of USD 7.4 mn. It increased employee base by
1,086 during Q4CY10, suggesting possible acceleration in revenue growth.
However, attrition, at 25.2% (LTM basis), continues to remain on the higher
side. Thus, a lot of the hiring could be to backfill attrition.
Adding smaller clients; to focus on large deals, going forward
The company added 19 new clients in Q4CY10, taking its active client base to
297. In CY10, the company managed to add just seven clients in the USD 1 mn
category. However, in Q4CY10, it won two deals with TCV of USD 30 mn. It
claims to be participating in more large deals (decision on which is expected in
the near future) and expects win rates to improve.
Acquisition by iGATE complements capabilities; integration is key
So far, Patni’s growth has lagged the industry over the past few years on
account of: a) Low presence in banking clients; b) sub-par IMS and BPO
practice; and c) relatively less effective sales force (hunters). iGATE’s acquisition
of Patni, however, should be complementary as 61% of its revenues originate
from the BFSI vertical and it also has a large BPO practice. Product engineering,
telecom and insurance verticals are areas where Patni has scale, which could be
leveraged by iGATE. While the merged entity would get significant scale (USD
1bn revenue; headcount of 25,000) making it eligible to bid for larger deals,
integrating sales and delivery organization will take at-least two-three quarters.
We believe the combined entity will have better opportunity to grow from cross
selling to existing customers than winning new clients.
Outlook and valuations: Growth muted; maintain ‘HOLD’
Patni indicated in early CY10 that it would sustain a quarterly growth trajectory
of 3% Q-o-Q but its revenue CQGR was 1.8% over the past four quarters. Ramp
up in a few large deals won recently makes Patni confident of delivering 3-4% Qo-
Q growth from Q1CY11 onwards. It continues to hold cash of INR 16.2 bn
(27% of market cap). At 6.0x CY11E EV/EBITDA we maintain ‘Hold/Sector
Underperformer’ recommendation/rating on the stock.
Key highlights
• Revenue in line with estimates: Revenue for Q4CY10, at USD 183 mn (up by
meager 2.4% Q-o-Q, INR 8.2 bn), were ahead of the guidance of USD 181 mn.
• Gross profit, at INR 2.9 bn, grew 0.4% Q-o-Q. Gross margin for the quarter declined
90bps to 35.5% due to lower capacity and lower utilsation owing to higher fresher
intake. Utilisation dropped to 72.4% during the quarter from 74% in the previous
quarter due to net addition of 1,086 employees.
• EBITDA for the quarter, at INR 1.4 bn, was down 7.0% Q-o-Q. EBITDA margin stood
at 17.7%, down 180bps Q-o-Q, primarily on account of lower gross margins and
higher G&A spend.
• Net income stood at INR 1.8 bn (up 37.8% Q-o-Q). Higher other income (INR 616
mn against INR 329 mn in previous quarter) and write back of previous year’s tax
boosted net income. Net income, excluding extraordinary items, stood at INR 1.4 bn,
up 11.2% Q-o-Q. Forex gain stood at USD 8.1 mn against USD 4.9 mn in the
previous quarter.
• Active client base: Patni added 19 new clients during the quarter. The active client
count increased to 297.
• Top clients: Patni’s top 5 and top 10 clients grew sequentially by 3.2% and 3.0%,
respectively.
• Vertical performance: All verticals, except telecom, reported sequential growth
during the quarter, with manufacturing leading the pack with 5.5% growth.
Insurance and financial services grew 4.7% and 2.4%, respectively. Telecom
declined 9.6% sequentially.
• Utilisation for the quarter declined from 74.0% in the previous quarter to 72.4%
due to net employee addition of 1,086.
• Attrition remains a concern: During the quarter, attrition dipped marginally to
25.2% from 25.9% in the previous quarter.
• Current cash and equivalents in hand stand at USD 362 mn, which translates into
INR 124 per share (27% of CMP).
• Tax rate: Patni expects tax rate to be 28% for CY11.
• The company has outstanding hedges worth USD 314 mn.
• DSO improved by eight days and stands at 71 days for the quarter.
Company Description
Incorporated in 1978, Patni is one of the oldest and sixth-largest IT solution providers in
India. The company provides IT services that are mainly focused on banking, financial
services, manufacturing and telecom verticals. Its service gamut includes ADM,
enterprise solutions, embedded technology service, and product engineering services,
among others, catering to over 260 clients in various verticals. The company’s past
twelve months (TTM) revenue stood at INR 31.7 bn (USD 702 mn) and it employs
17,642 people.
Investment Theme
Over the past year, Patni’s key change has been the transition from being a owner
managed company to being a professionally managed one. It struggled in the past with a
multitude of factors like lack of management focus, attrition (highest in the industry),
and declining growth visibility from top clients. However, with new management team
and plans to further deepen it, improvement on the demand side and healthy cash
position, Patni is heading in the right direction. Focus on micro-verticals, APAC
geography, and traction from Middle East are likely to yield results in 2-3 quarters.
Further, with proven cost management during the downturn the company has proved its
ability to sustain its margin.
Key Risks
The key risks to our investment theme include: (1) negative surprises from any of the
top10 client; (2) INR appreciation against USD; and (3) Acquisition integration risk.
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