Persistent Systems: 2Q FY11 results: IP revenue below our expectations:: Daiwa

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Persistent Systems (PSYS IN) Rating:2
2Q FY11 results: IP revenue below our expectations, our forecasts revised down



What has changed?
• Persistent Systems announced a muted US-dollar revenue rise of 2.6% QoQ to
US$40.5m for 2Q FY11, 3.5% lower than our forecast. Intellectual-property (IP)
revenue was US$3.28m, compared with our forecast of US$4m.
Impact
• As a result of the 6.6% QoQ decline in IP revenue from US$3.51m for 1Q FY11 to
US$3.28m for 2Q FY11, the yield per person per month declined by 4.7% QoQ,
from US$3,263 for 1Q FY11 to US$3,108 for 2Q FY11. Billing rates rose by 0.4%
QoQ for onsite services but declined by 0.4% QoQ for offshore services.
• The rise in US-dollar revenue was not impressive to us. However, as the Rupee
depreciated by 0.6% QoQ against the US dollar (according to the company’s
press release), Rupee revenue rose by 3.2% QoQ to Rs1,870m. The sequential
increase in onsite billing rates had a positive effect, as onsite revenue rose by
8% QoQ, while offshore revenue increased by just 2.1% QoQ due to the decline
in offshore rates.
• As there were no one-off bonus payments, personnel costs fell by Rs40m QoQ for
2Q FY11, offset by, in part, an increase of Rs22m QoQ in SG&A costs. The rise in
Rupee revenue of Rs60m QoQ due to the Rupee’s depreciation, and operating-cost
savings of Rs10m, led to an increase in the EBITDA margin of 3.2 percentage
points QoQ to 20.3%. EBITDA rose by 20.3% QoQ.
• The EBITDA improvement was mitigated by a decline of 80% QoQ in foreignexchange
income. As a result, other income fell from Rs124m for 1Q FY11 to
Rs59m for 2Q FY11. Though there were no major increases in provisions for
depreciation or tax, the fall in other income led to a net-profit rise of just 3.7%
QoQ. We forecast net-profit increases of 2.3% and 8.5% for each of the next two
quarters.
• As we have revised down our forecasts for US-dollar IP revenue, we have
revised down our Rupee-revenue forecasts down by 4.3%, 5% and 6.8% for
FY11, FY12 and FY13, respectively. As a result, we have revised down our
EPS forecasts by 6.2% for FY11, 5.2% for FY12 and 5.9% for FY13.
Valuation
• Notwithstanding the downward revisions to our forecasts, Persistent Systems’s
forward valuations look attractive to us, trading currently at PERs of 10.5x and 8.5x
on our FY12 and FY13 EPS forecasts, respectively. We have valued the company
at 2x our FY12 revenue forecast and have a assigned a target PER of 12.7x to our
FY12 EPS forecast to reach our maintained six-month target price of Rs504.
Catalysts and action
• We maintain our 2 (Outperform) rating on Persistent Systems. In order for is to
revise up our earnings forecasts, we believe the company would need to
generate IP revenue at a much faster run rate than at present.