We believe in the possibility of the rupee hovering around the level of Rs 42.5 = $1 for FY08 which will help Patni while an increase in wages is forecasted as the company's attrition rate remains higher than the industry average.
As a result, there could be an expansion in revenues and an expansion of costs that could maintain earnings at the projected levels. We project the pre-tax margin to fall by 700 basis points for the full year 2008 compared to FY07, excluding foreign exchange gains.
Lackluster guidance, margin pressures and possibility of a consumer-driven recession in U.S.A. imply subdued business momentum. Patni has not been able to grow to a scale reached by other comparable Indian IT companies and is yet to cross $1 billion in revenues and we believe that the stock will be range bound until the second half of 2008. We continue to rate PTI a Hold and we have fixed our price target at $10.90 or 8.86x our 2008 earnings estimate of $1.23 per ADR.
Cleveland-Cliffs Standing Tall
Rising prices and strong demand are pushing Cleveland-Cliffs Inc.'s (CLF) performance. Robust industrial growth in China has triggered demand for steel, resulting in higher demand for iron ore. The company's portfolio of established and recent iron ore and metallurgical coal assets positions it to capitalize on global industry dynamics in 2008 and beyond.
Moreover, the merger with Alpha Natural Resources (ANR) will help Cliffs to meet the increasing global demand for coal, consolidate the supplier base and generate substantial free cash flow. We also believe the strong commodity price regime should significantly boost revenues for Cliffs. As a result, we rate the shares a Buy with a target of $130.00.
Prices for iron pellets are moving up in 2008. Cliffs has incorporated reported settlement increases of 65% for iron ore fines and 87% for iron pellets into its estimates for pricing projections. Cliffs' managed iron ore pellet production in North America is expected to be 35.6 million tons in 2008. The company's share of this production is expected to be 23 million tons. Further, the company expects to increase this share over 24 million tons in 2009.
In 2008, sales are estimated at 24 million tons, with revenue per ton of $85. Asia-Pacific Iron Ore segment's expected production volume is 7.8 million tons and sales volume is 8.0 million tons. The company expects Asia-Pacific revenue per ton to be $102. This estimate assumes 80% and 97% increase in the 2008 international settlement price for fines and lump respectively. Cliffs is also taking initiatives to penetrate new markets.
