>PATNI COMPUTER SYSTEMS (INDIABULLS)

Tough operating environment in the near term

Patni Computer’s (Patni) net sales at USD 156.4 mn in Q1’09 was ahead of its guidance of USD 154-155 mn, however, it declined 11.4% both yoy and sequentially. In rupee terms net sales stood at Rs 7.76 bn. The fall can be attributed primarily to a 9% decline in volume growth. Moreover, EBITDA margin at 13.9% was 144 bps lower than Q1’08 due to lower utilization and
decline in pricing. Although the Company enjoys high liquidity (Rs. 108 per share) with its investment portfolio and cash position, which provides a strong support to the stock, we expect a tough time for the IT industry to prevail at least for the next three-four quarters. Besides, the stock has shot up over 150% from our last report. Moreover, our DCF valuation gives a fair
value of Rs. 241 for the stock. Hence, we downgrade our rating on the stock from Buy to Hold.

Lower pricing to restrict revenue growth: In Q1’09 there has been a 1.5% decline in pricing. As the economic environment still remains weak and many of Patni’s clients are renegotiating their contracts, we expect pricing to decline by 1-2% qoq for next two-three quarters on constant currency basis. However, we believe that the Company may show some pricing gains in the
first half of CY10.

Volume to remain under pressure in the near-term: Patni has faced substantial volume pressure in recent time due to an overall cut in the discretionary spending. However with early signs of economic recovery visible in developed economies we expect the volume to start picking up from CY10. Moreover, in order to minimize the negative impact of volume decline, the company is focusing on conversion of contracts to fixed price type, which is likely to restrict the adverse impact of volume decline on the margins.

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