Patni Computer Systems (Patni) reported a modest sequential growth of 4.2% to Rs. 8 bn for Q2’09, helped by the sharp depreciation of the rupee. The EBITDA margin jumped 163 bps qoq to 18.9% due to an improved SG&A leverage and utilisation.
We have reduced our revenue growth estimates by around 3.5% to 6.5% for CY08 and expect negative growth in revenues (around 6.5%) in CY09, in US dollar terms.
This is because we believe that the sales volume will contract for the next 2–3 years, which is also reflected in the decreasing client tally, elongated client decision cycles, and the Company’s guidance for Q4’CY08 (3.5%-4.1% decline in revenue growth).
Besides, we have assumed a negative net employee addition of 400 employees for CY08, considering the negative addition of 244 employees in 9M’CY08.
Moreover, we have assumed a negative billing growth of 2% and 4% for CY08 and CY09, respectively, as the Company may face severe price renegotiation from its large clients (top 10 clients contribute around 45% to the overall revenues).
We expect the EBITDA margin to remain under pressure and fall to around 13% in CY09E primarily due to increasing pricing pressure. Besides, we expect SG&A to increase by 8% and 12.5% for CY08 and CY09, respectively, offsetting the benefit from the operating efficiency.
At the current market price of Rs. 117.95, the stock is trading at a forward P/E of 3.6x and 4.7x for CY08E and CY09E, respectively.
The stock trades at a heavy discount to the industry average multiple of 7.9x and 7.2x for CY08 and CY09, respectively.
Besides, based on our DCF valuation, we have arrived at a target price of Rs. 142, assuming an 8% Rf, a 5% terminal growth rate, and a 13.1% WACC. Our target price provides an upside of 20.3% over the current levels; thus, we upgrade our rating to BUY.