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Target price breached; contra call justified
Persistent Systems achieved our target price of
Rs366/share justifying our Sell call on the scrip. We are
the only brokerage among 30 covering this stock with a
Sell rating. The consensus target price on the stock is
Rs490. Smaller addressable universe, lack of pricing
power, competition with captive ISV units/diversified IT
services players and worsening supply side issues are
the rationale for our negative view on the company
(Refer our initiation report “Positioning Trap” dated 25th
Oct 2010). We value the stock at 11x FY13E FDEPS for a
target price of Rs366. Higher than expected wage
increases and lower volume growth presents further
downside risks to our valuation while better realization
gain due to stronger than expected growth in IP-led
revenue could be the upside risk from current levels.
Stock’s underperformance justifies our contra call:
Persistent Systems has underperformed the BSE–IT
index by 16% since our initiation. This clearly vindicates
our negative stance on the company.
Our Rationale: A very high end and niche outsourced
product development (OPD) not only restricts the
addressable market of the company, it also makes it
prone to an exodus of talent and high wage pressure.
Also, the company’s inability to translate the high end
work into premium pricing works against it. On top of
this, the entry of diversified players into OPD is likely to
erode the market share of Persistent as larger diversified
players will benefit from vendor consolidation and
better cross selling opportunities.
Sharp decline in FY12 EPS will be followed by a
bounce back in FY13. We have factored in a sharp
decline in FY12E EPS due to margin contraction owing
to wage pressure and high tax rate. This will be followed
by a bounce back in earnings in FY13E driven by topline
growth of 18% and margin expansion as the company
utilizes its operating levers to cushion margin pressures.
Our FY12E and FY13E EPS estimates are 25% and 21%
below consensus expectations respectively.
Valuation: We value the company at 11x FY13e FDEPS
of Rs33.4 arriving at a target price of Rs366. We believe
most of the negatives that we factored in our model are
now reflected in the price.
Risks to our call: Higher than expected wage increases
in FY13 and lower volume growth due to market share
loss to diversified players (due to vendor consolidation)
presents further downside risk to our valuation. Higher
pricing yield due to stronger than expected growth in
IP-led revenue could be the upside risk from current
levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Target price breached; contra call justified
Persistent Systems achieved our target price of
Rs366/share justifying our Sell call on the scrip. We are
the only brokerage among 30 covering this stock with a
Sell rating. The consensus target price on the stock is
Rs490. Smaller addressable universe, lack of pricing
power, competition with captive ISV units/diversified IT
services players and worsening supply side issues are
the rationale for our negative view on the company
(Refer our initiation report “Positioning Trap” dated 25th
Oct 2010). We value the stock at 11x FY13E FDEPS for a
target price of Rs366. Higher than expected wage
increases and lower volume growth presents further
downside risks to our valuation while better realization
gain due to stronger than expected growth in IP-led
revenue could be the upside risk from current levels.
Stock’s underperformance justifies our contra call:
Persistent Systems has underperformed the BSE–IT
index by 16% since our initiation. This clearly vindicates
our negative stance on the company.
Our Rationale: A very high end and niche outsourced
product development (OPD) not only restricts the
addressable market of the company, it also makes it
prone to an exodus of talent and high wage pressure.
Also, the company’s inability to translate the high end
work into premium pricing works against it. On top of
this, the entry of diversified players into OPD is likely to
erode the market share of Persistent as larger diversified
players will benefit from vendor consolidation and
better cross selling opportunities.
Sharp decline in FY12 EPS will be followed by a
bounce back in FY13. We have factored in a sharp
decline in FY12E EPS due to margin contraction owing
to wage pressure and high tax rate. This will be followed
by a bounce back in earnings in FY13E driven by topline
growth of 18% and margin expansion as the company
utilizes its operating levers to cushion margin pressures.
Our FY12E and FY13E EPS estimates are 25% and 21%
below consensus expectations respectively.
Valuation: We value the company at 11x FY13e FDEPS
of Rs33.4 arriving at a target price of Rs366. We believe
most of the negatives that we factored in our model are
now reflected in the price.
Risks to our call: Higher than expected wage increases
in FY13 and lower volume growth due to market share
loss to diversified players (due to vendor consolidation)
presents further downside risk to our valuation. Higher
pricing yield due to stronger than expected growth in
IP-led revenue could be the upside risk from current
levels.
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