PCS - Reduce

Patni’s 4QCY08 revenues at Rs8.57 billion (up 0.6% q-o-q and 25% y-o-y) were marginally ahead of our estimates, impacted favorably by the Rupee depreciation.

Reported PAT of Rs780 million (down 51% q-o-q and 22% y-o-y) was however below estimates and was impacted by losses in the other income line.

Reported EBITDA margins at 17.8%, were up 100bps q-o-q and favorably impacted by the Rupee movement during the period.

Inability to scale up accounts consistently and with better profitability has kept us cautious on Patni’s growth prospects for the last three quarters. We remain circumspect about Patni’s ability to grow business volumes consistently and manage/grow margins, more so in the backdrop of a challenging macro.

Uninspiring hiring trends, extremely weak Q1CY09 guidance and cautious management commentary will be further stock overhangs. These in our opinion also validate our continuing concerns on Patni’s prospects in the medium term.

The road ahead

The guidance for Q1CY09 points to revenues of $154-155 million and profits (excluding forex) of $13.5-14.5 million. These are sharply lower than the performance in Q4CY08 and point to sequential declines in revenues and profits of 12% and 10% respectively.

Losses in other income line could provide downside to the offered guidance too, according to the company.

Revise price target and estimates to account for medium term concerns on growth rates given a challenging and uncertain demand environment- reflected in our DCF model.

We maintain our valuation discount for Patni vis-à-vis industry peers due to uninspiring revenue growth rates, lower margins and competitive positioning. We estimate an EPS of Rs20  for CY09- this would be down nearly 32% over the Rs29.6 reported in CY08.

Maintain REDUCE with a price target of Rs124 (exit-6x CY09) given our concerns on Patni’s ability to negotiate the current challenging macro environment better than larger peers. We continue to prefer larger peers like Infosys to Patni Computer.

Source : Kotak Securities