Hold Patni Computer; target of Rs 461: KRChoksey

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Hold Patni Computer; target of Rs 461: KRChoksey

KRChoksey has maintained hold rating on Patni Computer Systems with a target price of Rs 461 in its April 28, 2011 research report.

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KRChoksey has maintained hold rating on Patni Computer Systems with a target price of Rs 461 in its April 28, 2011 research report.

"Patni Computer Systems, revenue increased by 4% (QoQ) to USD 190.3 million in Q1CY11, which was in line with our expectation and was led by around 2.5% QoQ volume growth, one time milestone payment of around USD 1.9 million and Rs depreciation against the major global currency on QoQ basis in Q1CY11. The growth was primarily led by EMEA geography contributing around 97% of the incremental revenue (on QoQ basis) in Q1CY11. Whereas US geography, which constitutes 78% of the total revenue, registered de-growth of 0.8% QoQ (in USD ). Moreover, the management indicated that they are witnessing some softness in their US portfolio in near term which will lead to weakness in Q2CY11 (the seasonally strong quarter in a year).However; the management has refrained from giving guidance in respect of revenue in Q2CY11. We believe, the softness in revenue growth from US is the company specific issues as TCS management reiterated that their witnessing relatively stronger growth in US than Europe."

"EBITDA margin improved by 37 bps QoQ to 17.7% in Q1CY11, which was more or less in line with our expectation, despite dip in utilization rate (including trainees) by than 240 bps QoQ to 70%. The margin improvement was primarily led by one-time milestone payment in Q1CY11. We believe the management target range of 16%-18% for EBITDA margin is attainable despite double digit wage hike (around 10%) for India based employees and 2%-4% for onsite based employees. The primary margin lever at the company's disposal is employee utilization (including trainees) which has come down drastically from the recent peak of 79.9% in Q1CY10. iGate's stake in the company has reached more than 80% in the company after closure of open offer. On questioning them regarding their listing plans for the company no major insights were shared by them. Moreover, they gave little information regarding their joined go-to-market strategy and distribution of work between iGate and Patni."

"We are concerned about softness in the company's US portfolio in coming quarters; hence expect its revenue growth will be lower than the overall Indian IT industry in CY11E. Taking the same into account we maintain our "HOLD" recommendation on the stock with price target of Rs 461 per share by assigning P/E of 11 times (i.e. around 10% discount to target multiple for peer sets ) to its CY12E EPS of Rs 41.9," says KRChoksey research report.

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