Patni Company Update_12082010

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					                                                                                          Patni Computers




                                                                                                                                                  Company Update
                                                                             Inexpensive valuations limit downside

August 12, 2010
                                                 ¾ Interactions with CEO indicate inherent organic revenue
                                                    growth challenges persist. Sep’10 quarter QoQ rev growth at
NOT RATED                                           5.6-5.8% helped by acquisitions
                                                 ¾ Despite credible cost controls over the past few quarters, we
Price                         Target Price
                                                    do not rule out margin pressures ahead driven by another
Rs 453                                N.A.
                                                    round of compensation increases led by increasing attrition
Sensex                             18,070
                                                 ¾ Potential Promoter’s stake sale buzz hurting business’s
                                                    prospects as well as leading to increased employee churn
Price Performance
                                                 ¾ Cut CY10E/CY11E by ~4.5%/3% to Rs 41.2/42.5 (despite a
(%)                  1M     3M    6M 12M
                                                    lower US$/INR reset) as we cut rev estimates. Inexpensive
Absolute             (10) (19)    (0)   28
                                                    valuations (cash at ~Rs 180/share) provide downside support
Rel. to Sensex       (12) (26) (13)      6
Source: Bloomberg                                Patni’s struggle at organic revenue growth continues
                                                 Patni’s struggle at achieving industry level revenue growth continues after exhibiting a
                                                 3-4% QoQ growth during Q2CY09/Q3CY09. ( refer section below) We note that revenue
Stock Details                                    growth at Patni has continued to disappoint especially in an environment wherein Tier
Sector                           IT Services     1’s as well as other mid tier peers have already started seeing revenue growth
Reuters                            PTNI.BO       momentum build up. In our opinion, Patni’s revenue growth underperformance needs to
                                 PATNI@IN
                                                 be seen in the wake of (1) some revenue share gains at State Farm Insurance (which
Bloomberg
                                                 helped drive growth during Q2CY09/Q3CY09), (2) co’s weak positioning in high growth
Equity Capital (Rs mn)                  260
                                                 service lines and (3) client mining woes.
Face Value(Rs)                               2
                                        130
                                                 Per discussions with the top management, we contend that improvement in client
No of shares o/s (mn)
                                                 mining still remains’ work in progress’ despite significant investments in senior
52 Week H/L                         624/307
                                                 management over the past 6 quarters (refer table below) and co doesn’t expect to revert
Market Cap (Rs bn/USD mn)          59/1,279      to a sustainable 3-4% QoQ growth rate before 2-3 quarters (albeit for a acquisition led
Daily Avg Volume (No of sh)         578434       5-6% QoQ growth that we expect for Sep’10)
Daily Avg Turnover (US$mn)               6.7
                                                 Credible cost containment until now, however see margin pressures
                                                 ahead
Shareholding Pattern (%)                         With due credit to the Patni top management, operating margins have been more
                         J’10    M’10   D’09     resilient and consistent as they have improved by ~500 bps from June’08 levels (refer
Promoters                46.3    46.5   46.5     chart below) despite the pressure on revenue growth, currency swings. However we see
FII/NRI                  43.3    43.6   42.6     several margin headwinds ahead emanating from (1) another round of wage increments
                                                 (as co attempts to address attrition, not attrition in the 3-5 yr experience band at ~30%,
Institutions              6.5     7.0    7.0
                                                 (2) upfront investments in transition and platform redevelopment on some of the recent
Private Corp              1.8     1.0    1.2
                                                 deal wins and IP buyouts.
Public                    2.2     2.1    2.6
Source: Capitaline
                                                 ‘Stake sale’ hurting business prospects; Inexpensive valuations limit
                                                 downside
                                                 Patni’s promoters have been looking to sell their stake as speculated by media over the
                                                 past 2-3 quarters (with the rumor not completely unfounded). The uncertainty on the
                                                 same has already started co’s business prospects with company seeing increased
                                                 employee churn within 3-5 yr experience band( attrition running at ~30%) as well as
                                                 hurting new project/client wins. However inexpensive valuations, coupled with cash
                                                 at ~Rs 180/share limit downside support. Possibility of a special one time
                                                 dividend also exists as has been speculated by certain quarters on the street.

                                                 Yr end Dec     Net    EBITDA    EBITDA     PAT     EPS    ROE    P/E       EV/       P/B
                                                 (in Rs mn)    Sales                %               (Rs)    %     (x)    EBITDA (x)    (x)
                                                 FY10         31,620    6,442      20.4     5,723   43.6   18.3   10.4       5.8      1.7
Manik Taneja                                     FY11E        32,181    6,542      20.3     5,499   41.2   15.1   11.0       5.1      1.6
manik.taneja@emkayglobal.com                     FY12E        37,300    7,458      20.0     5,671   42.5   14.1   10.6       3.9      1.4
+91 22 6612 1273                                 FY13E        41,393    7,713      18.6     5,841   43.8   13.2   10.3       3.2      1.3


Emkay Global Financial Services Ltd                                                                                                           1
                                          Patni Computers                                                                                               Company Update

                                          Cut CY10/CY11 Earnings estimates by ~4.5%/3%
                                           We cut our CY10/CY11 earnings estimates by ~4.5%/3% respectively to Rs 41.2/Rs 42.5
                                          despite a US$/INR reset to Rs 46/$ 9 V/s Rs 45/$ ) as we cut our revenue assumptions and
                                          now factor in a 7.1%/15.5% YoY growth in revenues ( V/s 10.6%/15.3% earlier). We
                                          believe that inexpensive valuations (Patni trades at <11x FY11E/FY12E earnings)
                                          combined with cash at ~Rs 180/share limit downside in the stock.


                                           Rev growth (QoQ %)                  Dec'08            Marc'09         June'09        Sept'09      Dec'09      March'10       June'10
                                           Infosys                              -3.7%             -4.3%            0.1%           2.9%        6.8%              5.2%             4.8%
                                           TCS                                  -5.8%             -3.4%            3.3%           3.9%        6.3%              3.1%             6.4%
                                           HCL Tech                             0.5%              11.3%            7.6%           3.8%        3.4%              5.1%             7.6%
                                           Wipro                                -0.9%             -4.9%           -1.3%           3.2%        5.8%              3.5%             3.2%
       Patni’s struggle at revenue
                                           Cognizant                            2.5%              -0.9%            4.1%           9.9%        5.8%              6.3%         15.2%
       growth continues despite some
       market share gains at State Farm    Patni                                -3.9%            -11.4%            3.5%           3.3%        1.8%              1.2%             -2.7%
       Insurance.                          Tech Mahindra                       -14.0%             -8.8%            7.7%           3.9%        7.3%              1.9%             -2.9%
                                           Hexaware                             -6.6%            -15.0%            1.9%           1.7%        -0.9%        -10.0%            13.0%
                                           KPIT Cummins                         -9.5%              0.0%          -16.5%           2.8%        8.7%              8.0%             5.6%
                                           Infotech Enterprises                 -5.7%             -1.0%            1.3%           2.5%        4.1%              3.9%             4.5%
                                           Source: Companies, Emkay Research


                                          Patni’s operating margins have been in a narrow range over the past few quarters

                                              25.0

                                              20.0

                                              15.0
      Due credit needs to be given to
      Patni’s management for bringing
                                              10.0
      in more consistency to operating
      margins
                                                   5.0

                                                   0.0
                                                           June'08




                                                                                                                      June'09




                                                                                                                                                                       June'10
                                                                                                                                                          March'10
                                                                                        Dec'08




                                                                                                                                               Dec'09
                                                                                                       Marc'09
                                                                     Sept'08




                                                                                                                                   Sept'09




                                           Source: Company, Emkay Research




Emkay Research     12 August 2010                                                                                                                                                    2
                                                    Patni Computers                                                                Company Update

   Patni has aggressivelt strengthened senior/middle management team
   Name                       Designation                    Most recent assignment            Background
                                                                                               > 25 years of global IT experience, served as Sr.Vice
   Jeya Kumar                 CEO                            CEO in Mphasis                    President of Sun Microsystems and was a member of
                                                                                               Sun’s Executive Management Group.
                                                                                               > 22 years of international business experience and has
                                                                                               held a series of senior leadership positions in Germany,
   Juergen Dillenberger       Senior Sales Manager           Vice President at T-Systems
                                                                                               including associated partner with Accenture and
                                                                                               managing director at Goezt partners.
                                                             Global director for application   Georg has held significant roles in Deloitte, where he was
   Georg Wagner               Vice President                 outsourcing and offshoring at     senior manager for large outsourcing engagements and
                                                             HP                                managed Deloitte’s European support centre.
                                                                                               Gabi has 11 years as a global account manager at
   Gabi Schulte-Holthaus      Sales director, SAP Alliance   Infosys Technologies
                                                                                               Siemens.
                                                                                               Amit has spent several years with Accenture
                                                                                               Management Consulting Services, where he specialised
                              Senior Sales Manager, Life
   Amit Luthra                                               Cognizant                         in the execution of large and complex programmes in
                              Sciences
                                                                                               areas of supply chain management and business process
                                                                                               re-engineering for life sciences companies.
                                                                                               >18 yrs of experience in IT/BPO business. Manish was
   Manish Soman               EVP, COO                       Genpact                           SVP and Business Leader( Software) responsible for IT
                                                                                               Delivery integrated with BPO offerings
                                                                                               Has >23 years of experience across functions like
                                                                                               operations, sales, engineering, product development and
                                                                                               strategy.Mr Lakhanpal was a Global Practice Director
   Naresh K Lakhanpal         President, Americas            Deliotte & Touche
                                                                                               (Technology, Media and Telecommunications Practice),
                                                                                               Navigational Sciences, Tandem Computers and Ericsson
                                                                                               prior to joining Patni
                                                                                               Prior to joining Patni, Gribbohm held the position of Vice-
                              SVP, Strategic Market                                            President of Global Applications Outsourcing at Hewlett-
   Peer Gribbohm                                             HP
                              Development                                                      Packard and has also held senior management positions
                                                                                               at both Deloitte and Ernst & Young.
                                                                                               Kemp brings > 25 years of experience to Patni from the IT
                              Senior Vice-
                                                                                               Telecoms and Consulting Services sectors, including
   Derek Kemp                 President(Comms, Media and     Logica CMG
                                                                                               roles as MD, Telecom and Media at LogicaCMG and as a
                              Entertainment)
                                                                                               UK board member
                                                                                               Would be responsible for increasing the profile of the
                                                                                               Patni brand in Europe and brings twelve years of
   Jeremy Mackinlay           Marketing Director             Xansa                             marketing experience within the IT Services sector,
                                                                                               holding senior management positions at Xansa, Siemens
                                                                                               and Liberata.
                                                                                               Over 28 years of experience, Anil Gupta has worked for
                              EVP, Head Business
   Anil Gupta                                                Aditi Technologies                11 years at Sun MicroSystems including VP of India
                              Operations
                                                                                               operations.
                              EVP, Head-Business
   Vijay Mehra                                               Essar Group                       Was earlier Global CIO for Essar Group of Co's
                              Verticals
   Derek Kemp                 President-EMEA                 Head, CM& Utilities-Patni
                                                                                               Joins from Real HR Consultancy prividing HR outsorucing
                                                                                               consultancy to clients from fin services, and technology
   Alison Fry                 HR Director-EMEA region
                                                                                               sectors. Prior experience with TCS, SHL ,Sony UK, Steria
                                                                                               and Hitachi Data Systems
                                                                                               Apoorva has >15 yrs of industry experience with co's like
                                                                                               Infosys, Solix, Emagia Corporation, MeraNet Pvt Ltd and
   Apoorva Shah               Global Headm, IMS              Infosys Technologies
                                                                                               Maruti Udyog. At Infy, he was heading IMS for EMEA
                                                                                               region.
                                                                                               Avtar in his previous stint, was Delivery Director for Tech
                              Head, Delivery, EMEA                                             Mahindra> Has extensive experience in handling 3rd
   Avtar Sangha                                              Tech Mahindra
                              Region                                                           party sippliers and managing offshore teams in a matrix
                                                                                               environment
   Source: Company, Emkay Research



Emkay Research        12 August 2010                                                                                                                      3
                                  Patni Computers                                                    Company Update


                                                                      FY11E/CY10E                FY12E/CY11E
                                  (All fig in Rs mn except EPS)
                                                                   Old     New    % change    Old        New % change
                                  Revenues(US$ mn)                 725      702     -3.2%     836        811    -3.0%
                                  Revenues                        32626   32181     -1.4%    37621      37300   -0.9%
                                  EBITDA                          6532     6542     0.1%     7270        7458   2.6%
                                  EBITDA mgns, %                   20.0    20.3               19.3       20.0
                                  Net profits                     5758     5499     -4.5%    5846        5671   -3.0%
                                  EPS                              43.3    41.2     -4.5%     44.0       42.5   -3.0%
                                  Source: Emkay Research




Emkay Research   12 August 2010                                                                                     4
                                                     Patni Computers                                                   Company Update

  Key Financials
  Income Statement                                                         Balance Sheet
  Y/E, Mar (Rs. m)              CY09       CY10E      CY11E      CY12E     Y/E, Mar (Rs. m)             CY09     CY10E     CY11E     CY12E
  Net Sales                    31,620      32,181     37,300     41,393    Equity share capital           265       265       265       265
  Growth (%)                                    2         16         11    Reserves & surplus          34,397    37,777    41,998    46,259
  Total Expenditure           (25,178)    (25,640)   (29,843)   (33,680)   Minority Interest                 -         -         -
  Growth (%)                                    2         16         13    Networth                    34,662    38,042    42,263    46,524
  EBIDTA                        6,442       6,542      7,458      7,713    Secured Loans                     -         -         -         -
  Growth (%)                                    2         14          3    Unsecured Loans                   -         -         -         -
  EBIDTA %                       20.4        20.3       20.0       18.6    Loan Funds                        -         -         -         -
  Other Income                    970         888      1,202      1,575    Deferred Tax Liability       1,048     1,048     1,048     1,048
  Depreciation                 (1,169)     (1,222)    (1,322)    (1,395)   Total Liabilities           35,711    39,091    43,311    47,573
  EBIT                          6,243       6,208      7,338      7,893    Goodwill                          -         -         -
  Interest                           -           -          -          -   Gross Block                 16,797    18,410    19,330    20,455
  EBT                           6,795       6,712      7,476      7,893    Less: Depreciation          (5,830)   (7,052)   (8,374)   (9,769)
  Tax                          (1,072)     (1,213)    (1,805)    (2,052)   Net block                   10,967    11,358    10,957    10,687
  EAT                           5,723       5,499      5,671      5,841    Capital WIP                       -         -         -         -
  Growth (%)                                   (4)         3          3    Investment                  17,827    18,520    18,520    18,520
  EAT (%)                        18.1        17.1       15.2       14.1    Current Assets              10,815    14,658    20,375    25,741
                                                                           Inventories                       -         -         -         -
                                                                           Sundry debtors               5,077     5,202     6,029     6,691
                                                                           Cash & bank balance          2,944     5,965    10,564    14,854
                                                                           Loans & advances               775       749       818       907
                                                                           Other current assets         2,019     2,742     2,964     3,289
                                                                           Current Liab & Prov          6,104     7,652     8,746     9,620
                                                                           Current liabilities          6,104     7,211     8,235     9,053
                                                                           Provisions                        -      441       511       567
                                                                           Net current assets           4,711     7,007    11,629    16,121
                                                                           Misc exps                         -         -         -         -
                                                                           Deferred Tax                 2,205     2,205     2,205     2,205
                                                                           Total Assets                35,711    39,091    43,311    47,533


  Cash Flow                                                                Key Ratios
  Y/E, Mar (Rs. m)              CY09       CY10E      CY11E      CY12E     Y/E, Mar                     CY09     CY10E     CY11E     CY12E
  Net Profit after Tax          5,723       5,499      5,671      5,841    EPS (Rs)                      43.6      41.2      42.5      43.8
  Add : Depreciation            1,169       1,222      1,322      1,395    CEPS (Rs)                     52.5      50.4      52.4      54.2
  Add : Misc exp w/off                                                     Book Value Per Share (Rs)    264.0     285.2     316.8     348.8
  Net changes in WC            (2,179)      2,617     (1,548)    (1,094)   Dividend Per Share (Rs)         3.0      4.1        4.3       4.4
  Operational Cash Flows        6,125       7,592      7,867      7,752    Valuations Ratios (x)
  Capital expenditure            (316)     (1,613)      (920)    (1,125)   PER                           10.4      11.0      10.6      10.3
  Investments                  (5,578)       (694)          -              P/CEPS                        10.5       9.9      10.6      11.2
  Investing Cash Flows         (5,895)     (2,306)      (920)    (1,125)   P/BV                            1.7      1.6        1.4       1.3
  Borrowings                         -           -          -              EV/EBIDTA                       5.8      5.1        3.9       3.2
  dividend paid                  (461)       (643)      (663)      (683)   EV/Sales                        1.2      1.0        0.8       0.6
  Issue of shares               2,615           0           -              M-Cap/sales                     1.8      1.8        1.6       1.4
  Share Premium                      -           -          -
  Financing Cash Flows           (208)     (2,264)    (2,347)    (2,337)   Profitability Ratios (%)
  changes in cash                  23       3,021      4,599      4,290    RoCE                          17.8      15.3      16.3      15.8
  Opening balance               2,922       2,944      5,965     10,564    RoNW                          18.3      15.1      14.1      13.2
  Closing balance               2,944       5,965     10,564     14,854    EBITDA Margin                 20.4      20.3      20.0      18.6
                                                                           EBIT Margins                  19.7      19.3      19.7      19.1
                                                                           Net Profit Margin             18.1      17.1      15.2      14.1




Emkay Research           12 August 2010                                                                                                        5
                                                                         Patni Computers                                                                                                     Result Update



                                                                       Recommendation History: Patni Computers – PATNI IN

                                                                         Date                 Reports                                                                  Reco                    CMP         Target

                                                                         30.04.2010           Patni_Q1CY10_Result_Update                                               Not Rated                535           N.A.

                                                                         15.02.2010           Patni Limited Q4CY09 Result Update                                       Not Rated                465           N.A.

                                                                         03.11.2009           Patni Limited Q3CY09 Result Update                                       Not Rated                445           N.A.

                                                                         31.07.2009           Patni Limited Q2CY09 Result Update                                       Not Rated                328          N. A.


                                                                       Recent Research Reports

                                                                         Date                Reports                                                                    Reco                   CMP         Target

                                                                         30.07.10            eClerx Q1FY11 Result Update                                                Accumulate               445           465

                                                                         29.07.2010          HCL Technologies Q4FY10 Result Update                                      Accumulate               382           430

                                                                         27.07.2010          Tech Mahindra Q1FY11 Result Update                                         Hold                     737           720

                                                                         23.07.2010          Wipro Q1FY11 Result Update                                                 Reduce                   412           420




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Emkay Research                 12 August 2010                                                                                                                                                                       6

				
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