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Persistent Systems Ltd. (CMP: Rs. 410/- M. Cap Rs. 16,400 Mn, P/E 14.3x FY10, Not Rated)
We attended Persistent System’s Technology Day on 17th December 2010. Key highlights include:
n Persistent Systems provides services across the value chain of product development- product conceptualisation, design, development, testing, and support. It has managed a foothold in the Outsourced Product Development (OPD) space by virtue of its ability to offer solutions across each stage of product development. Key Revenue contributions: Geographical Contribution USA 86%; Revenue Mix: Offshore:Onsite 90:10; Clientwise: Top Client 9%, Top 10 Clients 37%; Client Category wise: Independent Software Vendors (ISVs) 48%, Telecom 24%, Life Science 14%, Enterprise Solutions 14%.
n The company shared 10 technology trends currently emerging in the IT industry that includes Cloud Computing, Analytics, Collaboration, Social Networking, Life Science, Computers and Society etc. Some of these segments are pretty small in size presently, however the Company is investing its resources there to prepare itself to grab opportunities that arise from each new technology trend.
n Clear strategies towards $0.5 bn company (FY10 Revenue $127 mn)were demonstrated, which include 1) Creating Leadership and specialization in OPD space 2) Increasing penetration into existing client base (30 clients having revenues greater than $1 bn) 3) Efforts towards new technology trends like Cloud Computing, Analytics and Collboration. Persistent has tied up with Salesforce.com, Microsoft, Google for their Cloud offerings.
n The management indicated that it will not be pursuing any acquisition just for the purpose of increasing revenue size. However, it will certainly go ahead for the acquisition which strategically fit to Persistent’s goals or which adds to IP based revenues or adds some new clients.
n Mr. Sudin Apte from Offshore Insights (Ex Forrester India Head) shared his views during panel discussion. Large caps are becoming larger and mid caps are facing challenges in terms of scale. The future IT Industry will comprise of two sets of companies 1) Large Caps and 2) Niche Mid caps. Companies providing generalized services will struggle to continue their growth trajectory going forward. He also shared that OPD Industry size to increase from $8.1 Bn in FY2010 to $13.9 bn in 2013.
n Strengths of Persistent can be best summarized as 1) Focused management 2) Clear strategies towards their vision of becoming $0.5 bn company soon 3) Efforts towards new technology trends like Cloud Computing and Analytics 4) Good Corporate Governance Practices 5) Employee Friendly (20% of the shareholding lies with Employees/ employee trust) 6) Good clientele base. Key challenges include: 1) Skilled manpower 2) Execution challenges
n The company has guided for $ 155 Mn (+22% YoY) for Revenue and 18% Net Margin for FY11. It has done $ 80 Mn of Revenues (+43% YoY) and Rs. 708 Mn PAT (+ 58% YoY) for the H1FY11. At CMP of Rs. 410, the stock trades at 14.3x FY10 EPS of Rs. 28.8/- and 11.7x Guided EPS of Rs. 35/- for FY11.
Banking Sector Update; Mid-quarter review of Monetary Policy 2010-11
n RBI in its mid quarter policy review announced a permanent cut of 100bps in SLR to 24% wef Dec 18, and purchase of g-secs worth Rs480bn through OMO over the next one month
n SLR cut to result in 3bps improvement in banks’ margins, while OMO to infuse liquidity into the system easing short term interest rates
n RBI kept other key policy rate unchanged with Repo at 6.25%, Reverse repo at 5.25% and CRR at 6.0%
n Though rate hike on pause for now, inflationary pressures from domestic demand and higher global commodity prices to continue to guide the policy actions
GSFC Company Update; All time high caprolactam spread to drive earnings; Buy; Target: Rs 530
n Reiterate BUY on the back of sharp increase in caprolactam prices (+38% yoy in H1FY11) and strong valuations
n Benzene and caprolactam spread has increased to US$1800 / mt by Nov’10 as against average of US$1200 / mt in FY10 and US$1675 / in H1FY11
n Strong margins in chemicals segment may trigger H2FY11E earnings upgrade of ~15% while captive ammonia production has helped improve fertiliser segment margins
n Compelling valuations with FY11 P/BV of 0.9x, EV/EBITDA 2.2x and P/E 5.3x with investment value of Rs 120 / share support downside in the stock
Hero Honda Event Update; Near term concerns addressed, Upgrade rating to HOLD; Target: Rs1,720
n JV termination details has addressed near term concerns. Royalty to reduce from January 2011. Current branding to exist till June 2014 thereafter royalty outflow to cease
n Adequate time for making alternative arrangement on R&D front. Unrestricted access to export markets once the definitive agreement is signed (in next few weeks)
n Retain our FY11/FY12 volumes est. of 5.3/5.9mn units and EPS of Rs 107.2/122.8. Upgrade rating to HOLD from REDUCE, retain TP of Rs1,720
n Continue to have concerns in the medium term with respect to cost of R&D, entering the export markets, brand building and competition from Honda (from FY13)
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