Patni Computers showed modest revenue growth of 2.3% q-o-q to Rs6,933.5 million, led by volume growth with marginal changes in pricing. However, with less deals coming in hand, volumes are expected to grow at the slow pace.
Adjusted EBITDA margin declined by 303 bps q-o-q to 16.8%, due to increase in SG&A expenses and employee cost as % of revenue by 25 bps and 278 bps, respectively.
Besides, around 7-8% wage increase in the next quarter will keep margins under pressure for CY08E to around 13-14%. However, in next 2-3 years margins will improve with increase in offshore contribution.
Non-US revenue increased 11.8% q-o-q, improving the revenue contribution to 23.4%. In addition, the Application Development Maintenance (ADM) business, remained stable despite slowdown in BFSI segment. Billing rates were stable, as clients delayed their budgets.
At the CMP of Rs241, the stock is trading at forward P/E of 9.9x and 8.9x for CY08E and CY09E respectively. When compared to the industry average, it is trading at high discount of around 43% to its peers.
We expect the buy-back program (upto Rs325 per share) will support the share price. Based on DCF valuation, we have arrived at a price of Rs320, translating into an attractive upside of 32.8% from the current level. We maintain BUY rating.