Persistent Systems -Muted earnings in near term: Hold :: Anand Rathi

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Persistent Systems
Muted earnings in near term; maintain Hold
Low IP-based revenue proving a dampener, margin would stay
under pressure in the short term. Persistent’s 3Q revenue was
up 6.7% (in US dollar terms); of this, volume growth comprised
3.6%. Persistent would offer ~10% hikes in salaries, starting 1
Jan ’11, with management not ruling out further hikes in
1QFY12. We lower our target price to `500 from `515 and retain
our Hold rating on the stock.

 Key points in 3Q. Revenue contribution from the top client fell
190bps qoq to 14.4%, mainly due to less royalty. The company
added six clients (total 207 now). Asia Pacific was up 14.1% and
the US 4.1%, while Europe was down 7.9%. As per verticals, Life
Sciences and Telecom rose 14.1% and 19.9% qoq respectively.
FPP rose 320bps qoq to 13.9% and IP driven-revenue slid 70bps
to 7.5%. Persistent declared an interim dividend of `4 (including
a special dividend of `2 on account of its 20th anniversary).
 Change in estimate. We lower our FY11/FY12/FY13 EPS
estimates 3.2%/7.4%/4.8% respectively to account for the lower
IP-based revenue and lower margin outlook (on account of salary
hikes and high attrition).
 Valuation and risks. Our price target of `500 is based on target
PE of 14x Mar ’12e EPS (retaining our target multiple at 14x).
Risks: i) Competing with larger IT services companies and
captives of clients; ii) Continued investment in IP – success rate
critical to margin.