Patni Computers

Incorporated in 1978, Patni Computers has grown to a leading Mid cap IT

services provider with offices in 28 countries and global delivery centres in 13

cities worldwide. It has five key service lines with across the board services and

majorly services the Insurance and Manufacturing industry. It is a Zero debt

company with a strong cash position. Early last year, Patni has undergone a top

management change with Narendra Patni being succeded by Jeya Kumar.

INVESTMENT RATIONALE

Micro Vertical focus: Patni computers has been focusing on developing IP led

solutions for niche verticals which would drive the differentiation in its solutions.

Also, this would aid in Client mining through the build up of domain expertise.

Focus on new geographies: Patni Computers is marking its entry into new

geographies (by investing in capacity & delivery capability) such as Continental

Europe, Japan, Australia, Middle East & India whose IT spends are expected to

grow at a faster pace than those of traditional US & UK markets.

Strong deal pipeline: With the Strategic outsourcing group in place for

focusing on larger deals & driving client engagements along with rise in

participation rates, the deal pipeline is in a strong position being built up over

the last three quarters & is expected to drive volumes.

Margins expected to hold: With cost rationalization program yielding results,

the EBITDA margins have trended up to 23% in Q4CY09 and we are confident

of Patni’s execution (with further cost optimisation possible in terms of HR

pyramid, Utilization, Offshore leverage, controlled SG&A at19%, efficiencies

in Fixed price) and model for operating margins at20-22% through CY10-12.

VALUATION

At a CMP of INR 475, the stock trades at 9.7x our CY10E EPS. This implies a

50% discount to the large caps such as TCS, Infosys which are trading at 19x

and 21x their FY11E EPS respectively. With volume led growth prospects (USD

volume growth at 12.5%,13.5% & 16% in CY10,11 & 12 respectively) and an

expected strong execution, we arrive at a target price of INR 590 which is 12x &

10.5x our CY10E & CY11E EPS respectively. Recommend BUY.