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Great operating leverage story
A leveraged buyout script with
integration challenges behind
and a smoother cruise ahead
Action: Reiterate BUY and top tier 2 IT pick
iGATE post-acquisition of Patni – a company ~3x its size in revenues –
has successfully integrated the sales force, minimized client/employee
attrition and realized initial operational synergies. At Patni, we see iGATE
replicating its formula for high margins by plugging inefficiencies at the
delivery end and deriving scale benefits on SGA. This operational
leverage, in our view, would lead to non-GAAP EBITDA margins
expanding by 400bps (to 25%) over the next five quarters and a 43% EPS
CAGR over FY11-13F. We find iGATE’s valuation attractive at P/E of
12.6/10.3x on FY12/13F and expect the stock to trade at a premium to its
tier 2 peers.
Strong FCF and access to Patni cash to ease debt overhang
The overhang on restricted access to Patni cash (~USD370mn vs overall
cash of USD430mn) would likely ease as iGATE delists Patni, in our view.
We believe this, combined with strong FCF generation of ~USD400mn
over FY11-13F (~50% of debt), would lead to iGATE turning net cash
positive over the next 2 years.
Catalysts: Higher revenue growth trajectory, Patni delisting
Ingredients exist for revenue growth upside from 1) a larger addressable
market and 2) replication of iGATE’s client mining successes at Patni.
Valuation: TP of USD20 based on 13x one-year rolling forward P/E
We value iGATE at a ~20% premium to its mid-cap peers, on account of
what we view as its best-in-class earnings growth and margin profiles.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Great operating leverage story
A leveraged buyout script with
integration challenges behind
and a smoother cruise ahead
Action: Reiterate BUY and top tier 2 IT pick
iGATE post-acquisition of Patni – a company ~3x its size in revenues –
has successfully integrated the sales force, minimized client/employee
attrition and realized initial operational synergies. At Patni, we see iGATE
replicating its formula for high margins by plugging inefficiencies at the
delivery end and deriving scale benefits on SGA. This operational
leverage, in our view, would lead to non-GAAP EBITDA margins
expanding by 400bps (to 25%) over the next five quarters and a 43% EPS
CAGR over FY11-13F. We find iGATE’s valuation attractive at P/E of
12.6/10.3x on FY12/13F and expect the stock to trade at a premium to its
tier 2 peers.
Strong FCF and access to Patni cash to ease debt overhang
The overhang on restricted access to Patni cash (~USD370mn vs overall
cash of USD430mn) would likely ease as iGATE delists Patni, in our view.
We believe this, combined with strong FCF generation of ~USD400mn
over FY11-13F (~50% of debt), would lead to iGATE turning net cash
positive over the next 2 years.
Catalysts: Higher revenue growth trajectory, Patni delisting
Ingredients exist for revenue growth upside from 1) a larger addressable
market and 2) replication of iGATE’s client mining successes at Patni.
Valuation: TP of USD20 based on 13x one-year rolling forward P/E
We value iGATE at a ~20% premium to its mid-cap peers, on account of
what we view as its best-in-class earnings growth and margin profiles.
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