Deal win adds visibility - Buy Patni Computers - Elara Capital

• Patni Computers
• Rating : Buy
• Target Price : INR673
• Upside : 26%
• CMP : INR534 (as on 29 April 2010)

Deal win adds visibility

Supply side issues haunt the near term

The revenue growth of 1.3% (in USD terms) was entirely led by volumes while the pricing was flat. With utilizations at peak levels, supply side issues have come back to haunt Patni. Attrition (LTM) went up to 17.7% (vs 13.7%). Net additions in the quarter remained flat as high attrition took its toll on delivery resources. Guidance of USD172mn (at the upper end) for the next quarter has been conservative due to supply side delivery issues.

Health insurance deal boosts visibility

The management has quantified the deal size as USD175mn of contracted revenue with additional USD50 to 75mn of third party business. Patni will be administering the health insurance policies end to end - from origination to closure. It is also likely to be the only Indian vendor with a complete health insurance TPA platform. We had clearly pointed out the deal in the pipeline in our initiation note. The five year deal will ramp up in a normalized manner from Q4 onwards (including Q4 CY10). While we had baked in some upsides from deal wins for our CY11 estimates, we choose to wait for the transition in Q2 before adjusting our CY11 numbers. We note here that there is another big multi-million dollar deal in the pipeline currently.

Incremental confidence in our Buy call

Our current estimates (particularly CY11) remain conservative in view of the deal win. We choose to wait for any upward revision in numbers till the transitioning of the 'win' in Q2CY10. We maintain our target multiple of 15.5x CY10 EPS numbers and the target price of INR673. We are incrementally more confident of our Buy call on back of the deal win. The stock is currently valued at 12.4x CY10E EPS.

Source : Equity Bulls

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