Patni Computer System (Patni)’s result for CY08 was in line with our estimates. For Q4 CY08, the company reported 6.7% q-o-q growth in net sales to Rs8.5 billion, largely helped by the sharp depreciation of the rupee vis-à-vis the dollar.
However, revenues went down by an expected 3.9% q-o-q, in USD terms, due to the global slowdown. The EBITDA margin declined 874 bps to 10.9%, owing to a weak operational performance during the quarter.
In our view, the EBITDA margin might remain under pressure and fall to around 11% in the next 2 years, owing to the falling utilization levels due to delays in the finalization of budgets and the slowdown in the deals inflow and the increasing pricing pressure.
However, effective cost containment including decreasing SG&A expenses and the expected cut in the variable pay/bonuses might help improve the EBITDA margin beyond CY10.
Outlook and valuation
Patni has given a weak revenue growth guidance for Q1’CY09 (down 12% sequentially), owing to the continually weakening macroeconomic environment.
Besides, over-dependence on large clients (top-10 clients contribute ~45% to the overall revenue) and the declining discretionary IT spend leaves the company in an unenviable position to renegotiate pricing in the renewals and upcoming new deals.
Consequently, we expect the billing rate to decline by ~16% in CY09 and by ~3% in CY10; this is likely to drag the overall revenue growth for the next 2 years.
Although we have reduced our target price to Rs123 from Rs142, we maintain our BUY rating on the stock. At the current market price (CMP), the stock is trading at its historically low P/E of 4x, compared with an average of 7x for its close peers.
We believe that the negative outlook of the IT sector is already factored in the CMP. Moreover, the Company is trading at a very low level of EV/EBITDA of 2.8x, compared with 5.5x for its peers.
Besides, the Company enjoys high liquidity with its strong investment portfolio (largely in liquid funds) and cash position ($60 million), which should support the current price levels.