>Patni (MERRILL LYNCH)

PATNI COMPUTER SYSTEMS

Raise to Buy, worst likely over

New CEO in place; upgrade to Buy
We raise our rating on Patni from Underperform to Buy with a PO of Rs115 (vs Rs235), on a fair-value 2009 P/E of 6x, as it should be rerated after strengthening management. P/E reflects historic average 30-50% discount to larger peers. It completed its CEO search in February, to catalyze investment initiatives and up management effectiveness. Cash per share of Rs115 offers comfort in our view.

Succession planning complete; upping management efficacy
Patni completed its CEO search with Jeya Kumar, ex-MphasiS CEO and member of the executive management group of Sun Microsystems, coming on board in February 2009. Soon after, it also strengthened its European management, appointing four key members, ex-global vendors. A strengthened management should help strategy planning, win clients and tighten operations.

Sharp earnings drop in 2009, but 1Q likely to mark bottom
We forecast around a 27% decline in 2009 EPS on a 12% decline in US-dollar revenues and 300bp drop in EBIT margins (ex forex), offset by share buy backs. It is likely to face stiff bill rate pressure from top client, GE (which makes up 10% of revenue) and in discretionary IT-based services (over 50% of revenue). We believe Patni’s 1Q guidance for 12% QoQ revenue fall and 51% PAT decline, reflects bill rate cuts, visa costs & higher taxes, and should mark the bottom.

Strong balance sheet; trading below cash per share
Patni is debt free with 40% of its 2008 balance sheet in cash. It trades below cash per share. We think it is likely to conserve or use cash for EPS accretive M&A.

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