PATNI COMPUTER SYSTEMS LTD
PRICE: RS.489 RECOMMENDATION: BUY
TARGET PRICE: RS.560 CY10E PE: 11.2X
Growth rates likely to pick up as company specific initiatives start
contributing and macro for the sector improves gradually. Improving news
on major business segments to likely reflect on demand with a lag
Outlook on business is materially better; velocity of business though is still
to pick up.
Tweak price target and estimates upwards to account for higher volumes,
starting Q1CY10E. Maintain BUY with target price of Rs.560 (Rs.520
earlier).
Consistent revenue performance, scale up of accounts and margin gains
required to increase the scope for a sustained stock re-rating. Target
multiple works out to 13x CY10E EPS, a 35-40% discount to larger players.
High proportion of net cash on the balance sheet - cRs.130 per share will
likely provide downside support.
Company specific initiatives and an improving macro likely to
see volume growth picking up
n The Patni stock has remained sideways for the last 3m despite posting a strong
out- performance CYTD. Stock returns of 4x over the last 9m can be attributed
to (i) improving outlook for IT spends as major user economies show signs of
revival, and (ii) a revamped management team's efforts to secure sustainable
longer term growth.
n The Patni stock now trades at 11x CY10E, a c45% discount to a larger peer like
Infosys. The discount while narrower than earlier reflects Patni's lower than
sector growth rates over the last two years.
n The company has suffered from client-specific issues with its top client
remaining weak and also certain meaningful clients (c10% of revenues in CY05)
ramping down to negligible contributions currently- impacted negatively by the
M&A activity on the client side.
n A favorable base post the ramp down of key clients, focused approach to
account management, and likely bottoming of billing rates given the company's
belief that the price re-negotiation cycle has likely ended are likely to ensure
volume growth and profitability from the current levels in our opinion. Also a
series of management changes hold out promise of growth, given good
execution.
n Going forward Patni intends to focus on its five to six key verticals and aims to
specialize in some sub verticals (e.g., billing systems in the telecom vertical,
industrial automation in product engineering). It is also working on
geographical diversification with the setting up of focused regional set ups in
the US, EMEA, APAC and SAARC geographies.
The market opened at an unchanged level but it failed to move higher in the later part of the day. We may call it as
a sideways correction that generally happens after the massive run up, which we came across on Wednesday.
As per intraday pattern of Indices we can say that the market is set to move higher but due to lack of "volume
strength" we may see a sideways activity in the first half of the trading session. In that case, the market may even
correct to the level 5150/17280 or 5110/17140. However, from there onwards, we may expect gradual rise in the
market. In the second half, in case the market sustains above the level 5200/17440 then the next target for the
market should be in the range 5260/5270 (17640/17670).
Our advice is to trade long on recoveries especially in index stocks.
