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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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
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.
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