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Research
Buy Patni Computers - Quarter miss; wait out for the bump - Elara Capital
Posted On : 2010-08-08 00:58:34( TIMEZONE : IST )
- Patni Computers
- Rating : Buy
- Target Price : INR673
- Upside : 41%
- CMP : INR478 (as on 28 July 2010)
Guidance miss on project start push outs
Patni missed its Q2 guidance lower band of USD 171mn. The miss was on account of one off deferrals of project starts in the insurance and BPO portfolio and was led by a 2.3% qoq volume dip. The deferrals were a function of client specifications as well as supply side delivery issues that we had pointed to in our last quarter update. With the utilization now having dropped to a more manageable 75%, we do not see such delivery issues in the quarters ahead. This quarter has seen a net addition of 934 vis-Ã -vis the declines seen in the past few quarters. We note that Patni has 'hire to visibility' philosophy. While on a LTM annualized basis the attrition has gone up, on a qoq basis attrition rates have gone down post the 11.7% offshore wage hike (impacting EBITDA margins by 2.3% in Q2) given out this quarter.
CHCS acquisition completed; ramp-up on new deals on track
The CHCS assets which they had acquired as a part of the health insurance deal signed has been completed. The ramp-up in this deal should start happening from Q4 onwards. However, some scale-up from acquired entities will start happening in Q3 itself and as such, we think that the guidance band of USD 176 to USD 177 is marginally conservative. Management has also commented that they do have a few deals in the USD 50 mn bracket in the pipeline.
Valuation and our view
We have adjusted our quarterly numbers based on the way treasury income is expected to fluctuate from current levels (lower in Q3 and higher in Q4) but our CY10 and CY11 estimates remain unchanged on the bottom-line. We expect the current quarter to be the bottom quarter of this calendar year. The next quarter will test out whether Patni is able to maintain a 3% qoq organic USD revenue growth rate. On our current estimates, the stock is currently valued at 10.3x our CY11 EPS estimates. We believe that for investors with a multiple quarter view, the near term fall in the stock price will present an opportunity to take advantage of the growth from Q4 onwards.
