A lot of midcaps have been moving around and notable among them are some of the midcap tech companies. In the last few days, we have seen very good moves in stocks like Patni, Polaris, i-Flex and that seems to be a good hunting ground for traders right now.
Internationally too, they are being noticed because Jefferies and Company, which had downgraded Patni Computers to hold in May, has come out with a big upgrade and in fact they have upgraded their price target by more than 20 per cent from $19-23.
Joseph Vafi, managing director of Jefferies and Company says that the worst may be over for Patni.
He adds that Patni's margin pressures have eased and their topline growth is robust. He expects a 25-30 per cent topline growth for Patni.
He says that Jefferies and Co has upped the EPS estimates for Patni to $1.25/ADS for 2007. He further adds that Patni's ADR has been upgraded to a 'buy' rating.
Excerpts of CNBC-TV18's exclusive interview with Joseph Vafi:
What is behind your upgrade and why are you feeling more optimistic about Patni now?
We upgraded Patni with respect to ADR and ADS, which trade in the United States. At least for the next few quarters, we think that the worst is behind Patni.
They have had a little bit of trouble with their margins over the last few quarters. But given that annual salary hikes for the year are mostly behind them now and the fact that the topline, revenue line continues to grow at a very strong 30 per cenr, we think that relative to valuations that one has, it is quite cheap. The stock was looking pretty attractive given their topline growth.
What are your revenue targets for Patni now; both for 2006 and 2007 and your earnings per ADS as well?
We upped our earnings per ADS for FY07 to about $.25. But overall, we continue to look for a strong 25-30 per cent topline for Patni and given those earnings and revenue, the stock is looking pretty cheap. For the next few quarters, we could see nice sequential gains in earnings power, given that their annual salary hikes are now behind them.
Do you think their margin woes are over because they have particularly had a torrid time over the last few quarters with their margins? Also maintaining consistent margins, do you expect to see some consistency there over the next four quarters?
When we look at stocks, we all look at everything relative to valuation. Given the fact Patni was trading at 12-14 times, our estimates for FY07 for the ADS is very cheap relative to what it will be probably for the next few quarters where there is less risk to margins because the topline is growing and the salary hikes are behind them. So everything is not fixed but stocks have certain prices and we saw that the shares have attracted value earlier this week.
Do you have any concerns that it actually had an earnings downgrade and that it has suspended profit guidance as a policy, going ahead?
It is somewhat of a concern; they continue to provide an earnings guidance outlook, one-quarter out. But we continue to look for appropriate valuation, given the risk profile. We saw that stocks had traded off so severely that even without an annual guidance number and without having everything fixed on the margin perspective, the stock was looking pretty cheap at least in the United States.
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