BackStock review: Patni Computers
Stock review: Patni Computers
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Growth rates are likely to shore up as company specific initiatives start contributing and macro for the sector improves gradually.
The recent strong performance of the Patni stock (4x over the last 6months) can be attributed to improving outlook for IT spends as major user economies show signs of revival, and a revamped management team’s efforts to secure sustainable longer term growth.
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.
Consistent revenue performance, consistent scale up of accounts and margin gains could increase the scope for a sustained stock re-rating. High proportion of net cash on the balance sheet - cRs130 per share will likely provide downside support.
Outlook
Better news from the US economy (unemployment numbers, retail sales, housing prices) have led to hopes of a revival in the global economy of which the US is the major contributor.
Share prices of Indian IT services companies with a large proportion of revenues attributable to the US geography (55-62% for Tier 1 companies) have moved up on these expectations.
While individual companies like Patni believe that the outlook on client spends is materially better than Q2 ago, velocity of business still remains sober and is expected to pick up gradually over the succeeding quarters. Higher FPP and lean SG&A may also help sustain margins
Valuation
We maintain BUY with target price of Rs500 (Rs.410 earlier) as we revise earnings for CY09E, to account for the lower share count and also incorporate higher medium term growth rates in our DCF model.
Our positive stance on Patni reflects a greater probability in revival of IT spends in the USA (80% of company revenues) and also company specific initiatives embarked upon by the company, to clock higher growth rates than the past.
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