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Persistent Systems — Mgmt meeting allays fears of margin underperformance
Estimate Change
Buy for ~40% upside
Post our recent co. meeting, Retain PSYS as preferred mid-cap IT pick (along
with Hexaware) with PO of Rs550 at 13xFY13P/E, 5-10% premium to mid-cap
peers. We were encouraged by (1) a strategic deal win reflecting continuing
momentum in IP-based revenues that should aid operating margin performance,
(2) a declining trend in attrition rates that should abate FY12 wage hike pressures
and (3) the recent acquisition of Infospectrum, which improves the company’s
presence in the European market.
Momentum in IP-based revs & other margin levers intact
The company recently closed a strategic deal win in the life-sciences space and
has another two in the pipeline. We have estimated IP-led revs to increase to
~12% in FY13 (vs. 8% in FY11) and is a key lever for the company to offset
impact of wage hikes. Widening of employee pyramid (925 campus hires for
FY12 vs. 400 last year) & improved utilization rates are the other margin levers.
Slowing attrition to moderate FY12 wage hike pressures
Company had declared an interim wage hike of 10% in Q3 to safeguard from any
potential impact to delivery (from high attrition) as it remains in a high growth
environment. Attrition rates are now showing a declining trend on a month-onmonth
basis vs Q3 (22% LTM). We believe that as attrition concerns abate
further, FY12 wage hikes at Persistent are likely to be lower than industry and
possibly staggered over the year.
Infospectrum acquisition to improve European presence
Recent acquisition of Infospectrum, another Offshore Product Development
player with focus on cloud computing, enterprise mobility improves presence in
the European market (currently just 5% of revs). Client overlap is minimal with
potential cost synergies to be realized in Persistent's Nagpur facility.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Persistent Systems — Mgmt meeting allays fears of margin underperformance
Estimate Change
Buy for ~40% upside
Post our recent co. meeting, Retain PSYS as preferred mid-cap IT pick (along
with Hexaware) with PO of Rs550 at 13xFY13P/E, 5-10% premium to mid-cap
peers. We were encouraged by (1) a strategic deal win reflecting continuing
momentum in IP-based revenues that should aid operating margin performance,
(2) a declining trend in attrition rates that should abate FY12 wage hike pressures
and (3) the recent acquisition of Infospectrum, which improves the company’s
presence in the European market.
Momentum in IP-based revs & other margin levers intact
The company recently closed a strategic deal win in the life-sciences space and
has another two in the pipeline. We have estimated IP-led revs to increase to
~12% in FY13 (vs. 8% in FY11) and is a key lever for the company to offset
impact of wage hikes. Widening of employee pyramid (925 campus hires for
FY12 vs. 400 last year) & improved utilization rates are the other margin levers.
Slowing attrition to moderate FY12 wage hike pressures
Company had declared an interim wage hike of 10% in Q3 to safeguard from any
potential impact to delivery (from high attrition) as it remains in a high growth
environment. Attrition rates are now showing a declining trend on a month-onmonth
basis vs Q3 (22% LTM). We believe that as attrition concerns abate
further, FY12 wage hikes at Persistent are likely to be lower than industry and
possibly staggered over the year.
Infospectrum acquisition to improve European presence
Recent acquisition of Infospectrum, another Offshore Product Development
player with focus on cloud computing, enterprise mobility improves presence in
the European market (currently just 5% of revs). Client overlap is minimal with
potential cost synergies to be realized in Persistent's Nagpur facility.
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