Patni: It makes sense to exit

In the absence of any first quarter guidance, the market expects the stock to correct after the open offer

Patni Computers’ fourth quarter results for CY10 have been pretty much in line with analyst estimates. Net income stood at Rs 57.4 crore, aided by tax write-backs ($7.5 million in the fourth quarter of CY10) and other income of Rs 28 crore. Patni signed two deals with total value of $30 million each.

The company’s operating margin took a hit in the fourth quarter, on account of low utilisation, necessitated by higher attrition levels. With not much clarity on integration and utilisation levels in the forthcoming quarter, the Street remains negative on the near-term outlook, as further dips could be likely on account of retention payouts. ICICI Securities recommends investors should take advantage of the open offer and tender their shares, as there is limited visibility on transition and integration.

The earnings before interest and taxes declined 170 basis points sequentially to 13.7 per cent, which is significantly worse than the market’s expectation of a 20 basis point decline. High attrition has forced the company to operate at a low utilisation rate, which has dropped 750 bps over the past three quarters. Attrition remains high at 25.2 per cent. With the company not issuing any guidance for the first quarter, the market is nervous about the integration with iGate, which may not be very smooth. Attrition-led revenue loss, or margin erosion due to retention payouts, could lead to a valuation de-rating. Nomura expects the stock to correct after the open offer (March 23).