Patni Computer Systems Limited (Patni) reported its second consecutive sequential revenue growth performance in 3Q 09, pointing towards a stabilized demand environment, much like its peers in the Indian IT services industry. Although y-o-y revenues continue to be lower, the rate of decline is slowing, as can be seen from the company's 4Q 09 top-line guidance. Whilst higher utilization and cost reduction measures resulted in improved y-o-y adjusted operating profitability, sequential performance disappointed. New client additions remained mute and witnessed a reduction on both a sequential as well as y-o-y basis, as did employee additions. 4Q 09 guidance suggests flattish to marginal q-o-q revenue growth. Although we believe the worst is over for the Indian IT services sector, particularly on the demand front, we are moderating our rating for the Patni ADR given the significant run-up in the stock price since our previous update report as we believe the market has already factored in expectations of a rebound in the sector. We will reassess our estimates and target price for Patni's ADR in the following weeks. We had rated the Patni Indian stock a SELL on anticipation of a negative currency impact over the next 6-12 months. However, given the significant run-up in stock price since our previous rating and considering our fundamental rating, we rate the Indian stock a HOLD until we reassess our rating and target price in the coming weeks.

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