Patni - Karvy

In order to take the business model to the next level Patni over the last few years has enhanced its business by developing expertise in areas like product engineering and developing tools for the independent software vendors. Though it would be premature to see the positive impact on the profitability in the immediate future, Patni is going through a transformation from pure technology service providers to focusing on IT consulting - which in turn would give the company the edge in the global landscape and consequently give advantage to increase billing rates, which was the bane in the past. Though the growth in revenues would continue to be strong, the profits at the net level will decline by 8.5%, since the company has to tax provision for the preceding years."

"Over the past 4 quarters Patni added 30 (net) new clients taking the total to 199 at the end of CY05 and currently it has 61 million dollar clients, vis-à-vis 35 in CY04. We expect similar trends to continue, and as a result we have built in 40 odd new clients to be added to our assumption in CY06. Its engagement with GE includes several key service lines, across geographies and verticals, is probably maturing at the current levels after several years of robust growth. What we would like to add is the initial burst of growth came at the cost of billing rates and consequently, it had a negative impact on the margins. The revenues from GE in absolute terms are plateauing, and as a percentage of revenues it has declined to 22% in CY05 as against 32% in CY04. For CY06 we expect it would be hovering at 15% levels."Though we are optimistic that non-GE revenues\nwill continue to show growth momentum, we are conservative in\nforecasting its future revenue growth. We expect revenues in CY06 to\ngrow by 25% and for the subsequent two years expect the revenues to\ngrow 25% YoY. Though the company officially does not give the onsite\nand offshore billing rates - we expect the billing rates to improve by\n0.5% in CY06 and for the subsequent two years expect the billing rates\nto inch up 0.7% and 1%. We also expect the utilization rates to improve\nfrom the current 70% to 74% levels, by managing the bench better.\nThough we expect the offshore revenues to steadily inch up to 43%\nlevels (from the current 40%), we expect modest change to the\nT&M-to-FPP revenue mix from the current levels, which is hovering\naround 60 : 40 ratio to 55:45 over the next two years."
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\n"With\ncost structure increasing moving towards offshore and with utilization\nrates improving, the effect of the economies of scale and de-risking of\nrevenues by vertical, geography and delivery mix will enable the\nmargins to inch up by 20bps in CY06 and further 40bps in CY07. We for\nthe next 2 years expect the company to add close to 3000 people p.a.,\nsince the way to grow would be only through the volumes. On the back of\nimproving margins, the operating profit for CY06 would grow by 27% and\nfor CY07 expect the same to grow by 28%. Aided by a combination of\nrevenue growth, modest margin expansion the pre-tax profit for CY06 is\nexpected to grow by 34.2%, however the necessity to provide higher\ntaxes of the preceding years would lead to a decline in net profit by\n8.5%. On the lower base we expect the CY07 net profit to grow by 88%\nand for CY08 expect the same to grow by 29.4%. On the back of decent\ngrowth in earnings, ROCE would improve from 15% in CY2005 to 22% in\nCY2008, which though is lower in comparison to its peers, would improve\nif the company enters into a higher growth trail."",1] ); //-->

"Though we are optimistic that non-GE revenues will continue to show growth momentum, we are conservative in forecasting its future revenue growth. We expect revenues in CY06 to grow by 25% and for the subsequent two years expect the revenues to grow 25% YoY. Though the company officially does not give the onsite and offshore billing rates - we expect the billing rates to improve by 0.5% in CY06 and for the subsequent two years expect the billing rates to inch up 0.7% and 1%. We also expect the utilization rates to improve from the current 70% to 74% levels, by managing the bench better. Though we expect the offshore revenues to steadily inch up to 43% levels (from the current 40%), we expect modest change to the T&M-to-FPP revenue mix from the current levels, which is hovering around 60 : 40 ratio to 55:45 over the next two years."

"With cost structure increasing moving towards offshore and with utilization rates improving, the effect of the economies of scale and de-risking of revenues by vertical, geography and delivery mix will enable the margins to inch up by 20bps in CY06 and further 40bps in CY07. We for the next 2 years expect the company to add close to 3000 people p.a., since the way to grow would be only through the volumes. On the back of improving margins, the operating profit for CY06 would grow by 27% and for CY07 expect the same to grow by 28%. Aided by a combination of revenue growth, modest margin expansion the pre-tax profit for CY06 is expected to grow by 34.2%, however the necessity to provide higher taxes of the preceding years would lead to a decline in net profit by 8.5%. On the lower base we expect the CY07 net profit to grow by 88% and for CY08 expect the same to grow by 29.4%. On the back of decent growth in earnings, ROCE would improve from 15% in CY2005 to 22% in CY2008, which though is lower in comparison to its peers, would improve if the company enters into a higher growth trail."

"The receivable days have significantly improved in CY05 to 60 days from 80 in CY04, nevertheless we have factored slight increase in receivable days. Cash & bank in absolute terms were flat at last year levels, since the company raised Rs5.5bn through ADR cash & bank jumped upto Rs 12.1 billion from Rs 6.2 billion, which translates into cash per share of Rs 88, which is around 22% of the current stock price. During CY04 Patni raised Rs 3.05 billion from IPO, of which Rs1.5 billion went for paying out the Cymbal acquisition. In addition Patni generated cash of R2.2bn from operations during the last calendar year. Stock prices in the short term have a tendency to track the quarterly performance and the various matrixes that comes with it. The stock is currently trading at a PE of 18xCY06E and 9xCY07E with a PEG of 0.5x. Since the valuations are not looking very expensive over the medium term, and the client concentration is getting distributed across geographies and verticals would lead to further re-rating of the stock. This would lead the stock to rise by 25% to our target price of Rs 480 over the next one year's time.