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Persistent Systems - Strong 3Q led by revenue growth
„Revenue trajectory on track; Buy
3Q beat our revenue estimates by 3% led by higher than expected strength in
mobility and pricing uptick. Demand indicators are encouraging given robust hiring
targets and likely increase in client R&D budgets. Co announced an interim wage
hike, as expected. Volume surge along with increase in utilization and IP based
revs should help mitigate impact from wage pressure. We tweak ests by -1 to
+1% and maintain our Buy rating with PO of Rs550 at a 13x FY13E PE.
Traction in mobility drives strong revenue performance
USD revs grew 7%qoq (3% ahead of our estimates) as enterprise mobility grew a
sharp 40%. Pricing improved 3%qoq helped by billing rate increase and improved
mix. EBITDA margins were in-line with our est. and saw a sequential decline
(107bps) on reversal of 1-x benefits and higher visa costs, as guided. PAT beat
our estimates by 10% helped by beat at operating level and higher forex gains.
Encouraging demand indicators
Demand outlook remains strong with clients likely to increase R&D budgets this
year and a robust fresher hiring target of 925 (vs. 400 last year). Deal flow and
new client additions remain good helped by partnerships with global tech vendors.
We expect new technology trends like cloud computing and mobility to result in
superior revenue growth for the company (26% CAGR over FY11-13).
Interim wage hike, as expected
Co announced an interim wage hike (~10%) effective Q4. We expect increases in
utilization and IP-based revs, widening of pyramid and cost optimization over
FY12 to help minimize the impact to margins. A decline in attrition rate as seen
this quarter may also help to moderate the wage hike in FY12
Revenue trajectory on track; Buy
3Q beat our revenue estimates by 3% led by higher than expected strength in
mobility and pricing uptick. Demand indicators continue to be encouraging given
robust hiring targets and likely increase in client R&D budgets. Co announced an
interim wage hike, as expected. Volume surge along with realization improvement
and increase in IP based revs should help mitigate impact from wage pressure.
We tweak ests by -1 to 1% and maintain our Buy rating with PO of Rs550 at
approximately 13xFY13 PE.
Our Buy rating for the stock hinges on 1) strong growth in operating profits (>30%
2-yr EBITDA CAGR), 2) attractive ROIC of ~30% and 3) cash rich books (cash
and equivalents comprise ~20% of the current market cap).
Revenues ahead of expectations
Enterprise mobility, top 2-5 clients lead growth
Revs grew 6.7% qoq (USD terms) as enterprise mobility saw a sharp jump of
~40% during the quarter helped by increasing demand trend for smart-phone
applications. Top 2-5 clients grew at 10% qoq.
Price realization shows an uptick
Price realization improved by ~3% in the quarter led by 1) increase in billing rates
for deals that were up for renewal and 2) higher realization in projects related to
cloud computing and enterprise mobility. The company expects pricing to have an
upward bias over the next few months led by mix improvement
Encouraging demand indicators
Higher visibility on client R&D spends vs. CY10
Company’s discussion with its clients indicates a higher degree of visibility on
R&D spends at the start of CY11 vs. CY10. Our analysis shows that after two
relatively slow years, R&D spending by Persistent’s target client group are
expected to show a sharp pick-up, in line with their improving sales outlook.
Robust fresher hiring target
In comparison with 400 campus hires last year, Persistent plans to make ~900
campus offers for this year. Broadening of the employee pyramid is also likely to
help offset margin pressure from wage hikes.
Interim wage hike, as expected
Co announced an interim wage hike (effective Q4FY11) in order to better manage
employee attrition. Wage hikes will likely impact Q4 operating margins by about
200-250bps. However, the impact is likely to be offset over the next few quarters
by increasing IP-based revs, broadening of employee pyramid & cost optimization
While the LTM attrition number has risen, the trend has reversed on a quarterly
basis with the months of November and December seeing a drop in exits. This is
likely to come down further post the wage hikes.
Price objective basis & risk
Persistent Systems (XPSYF)
Our PO of Rs550 is set at approx13xFY13 P/E, in-line with the current P/E
multiple on FY12 earnings. This implies a 5-10% premium vs. other mid-tier IT
services vendors, justified in our view given highest EBITDA growth and ROCE
vs. peers. Exceptional jump in tax rate from 9% (FY11) to 30%(FY12) impacts
implied P/E for FY12 (16x).
Downside risks to our price objective are a slowdown in th US technology sector,
sharp appreciation of the Rupee vs. the USD and higher-than-expected wage
inflation in India.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Persistent Systems - Strong 3Q led by revenue growth
„Revenue trajectory on track; Buy
3Q beat our revenue estimates by 3% led by higher than expected strength in
mobility and pricing uptick. Demand indicators are encouraging given robust hiring
targets and likely increase in client R&D budgets. Co announced an interim wage
hike, as expected. Volume surge along with increase in utilization and IP based
revs should help mitigate impact from wage pressure. We tweak ests by -1 to
+1% and maintain our Buy rating with PO of Rs550 at a 13x FY13E PE.
Traction in mobility drives strong revenue performance
USD revs grew 7%qoq (3% ahead of our estimates) as enterprise mobility grew a
sharp 40%. Pricing improved 3%qoq helped by billing rate increase and improved
mix. EBITDA margins were in-line with our est. and saw a sequential decline
(107bps) on reversal of 1-x benefits and higher visa costs, as guided. PAT beat
our estimates by 10% helped by beat at operating level and higher forex gains.
Encouraging demand indicators
Demand outlook remains strong with clients likely to increase R&D budgets this
year and a robust fresher hiring target of 925 (vs. 400 last year). Deal flow and
new client additions remain good helped by partnerships with global tech vendors.
We expect new technology trends like cloud computing and mobility to result in
superior revenue growth for the company (26% CAGR over FY11-13).
Interim wage hike, as expected
Co announced an interim wage hike (~10%) effective Q4. We expect increases in
utilization and IP-based revs, widening of pyramid and cost optimization over
FY12 to help minimize the impact to margins. A decline in attrition rate as seen
this quarter may also help to moderate the wage hike in FY12
Revenue trajectory on track; Buy
3Q beat our revenue estimates by 3% led by higher than expected strength in
mobility and pricing uptick. Demand indicators continue to be encouraging given
robust hiring targets and likely increase in client R&D budgets. Co announced an
interim wage hike, as expected. Volume surge along with realization improvement
and increase in IP based revs should help mitigate impact from wage pressure.
We tweak ests by -1 to 1% and maintain our Buy rating with PO of Rs550 at
approximately 13xFY13 PE.
Our Buy rating for the stock hinges on 1) strong growth in operating profits (>30%
2-yr EBITDA CAGR), 2) attractive ROIC of ~30% and 3) cash rich books (cash
and equivalents comprise ~20% of the current market cap).
Revenues ahead of expectations
Enterprise mobility, top 2-5 clients lead growth
Revs grew 6.7% qoq (USD terms) as enterprise mobility saw a sharp jump of
~40% during the quarter helped by increasing demand trend for smart-phone
applications. Top 2-5 clients grew at 10% qoq.
Price realization shows an uptick
Price realization improved by ~3% in the quarter led by 1) increase in billing rates
for deals that were up for renewal and 2) higher realization in projects related to
cloud computing and enterprise mobility. The company expects pricing to have an
upward bias over the next few months led by mix improvement
Encouraging demand indicators
Higher visibility on client R&D spends vs. CY10
Company’s discussion with its clients indicates a higher degree of visibility on
R&D spends at the start of CY11 vs. CY10. Our analysis shows that after two
relatively slow years, R&D spending by Persistent’s target client group are
expected to show a sharp pick-up, in line with their improving sales outlook.
Robust fresher hiring target
In comparison with 400 campus hires last year, Persistent plans to make ~900
campus offers for this year. Broadening of the employee pyramid is also likely to
help offset margin pressure from wage hikes.
Interim wage hike, as expected
Co announced an interim wage hike (effective Q4FY11) in order to better manage
employee attrition. Wage hikes will likely impact Q4 operating margins by about
200-250bps. However, the impact is likely to be offset over the next few quarters
by increasing IP-based revs, broadening of employee pyramid & cost optimization
While the LTM attrition number has risen, the trend has reversed on a quarterly
basis with the months of November and December seeing a drop in exits. This is
likely to come down further post the wage hikes.
Price objective basis & risk
Persistent Systems (XPSYF)
Our PO of Rs550 is set at approx13xFY13 P/E, in-line with the current P/E
multiple on FY12 earnings. This implies a 5-10% premium vs. other mid-tier IT
services vendors, justified in our view given highest EBITDA growth and ROCE
vs. peers. Exceptional jump in tax rate from 9% (FY11) to 30%(FY12) impacts
implied P/E for FY12 (16x).
Downside risks to our price objective are a slowdown in th US technology sector,
sharp appreciation of the Rupee vs. the USD and higher-than-expected wage
inflation in India.
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