Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Persistent Systems Ltd.
Overweight
PERS.BO, PSYS IN
Decent quarter; revenue growth on a steady plane but
margins need to be watched; reiterate OW
• Decent revenue performance: Persistent’s 4Q FY11 results demonstrate that
the top line continues to grow nicely on the strength of its differentiated
technology positioning. In our view, this is sustainable. However, the company
will need to watch its costs carefully in FY12, particularly if wage inflation
flares up. Operating margin performance for the quarter fell 420bp, largely
expected due to intermediate wage hikes that took effect in this quarter. We
believe Persistent continues to build credibility in the four emerging technology
areas of cloud, mobility, collaboration and analytics that now constitute over
40% of its revenues.
• Good clients already present; investments in mining them are being made:
With some of its marquee clients (which include technology/software providers
and ISVs), Persistent has already forged strong relationships. We believe client
mining should be accorded the utmost importance at Persistent as product
conceptualization, development and implementation may be deemed less
repeatable and scalable than mainstream enterprise IT-Services. It is good to see
Persistent currently investing some of its sales and marketing dollars in mining
these relationships further to impart greater scalability to the business model.
• IP-based revenue stream is keeping up its momentum: For 4Q FY11, IPbased
revenues crossed 10% of revenues (the first time). We expect this to rise
in FY12 as the company benefits from its IP-based partnerships with big-ticket
clients. This richer revenue stream has beneficial consequences for margins.
• Margins may have bottomed out; several levers in place to offset the
negative impact of margins which can be significant: We calculate that
Persistent’s offshore-centric wage structure (offshore wages comprise almost
80% of overall wages) renders it more vulnerable to wage inflation. We have
modeled in a 10% increase in wages. Levers that exist to neutralize the impact
of this include a higher contribution of better-margin revenues from IP-led
revenues, leverage from growth itself, and a broadening of the pyramid to
include less-experienced and lower-cost employees.
• Maintain OW; introduce Mar-12 PT of Rs500: Our new PT implies 25%+
upside from the current sare price. Given the volatility in Indian IT mid-caps’
performance in general, and their vulnerability to wage rises, we believe
investors must seek 25%+ returns from such stocks. In this context, it may be
better for investors to view Persistent as an appropriate investment opportunity
for 25%+ returns at lower levels from the current stock price
Points worth noting
Organic US$ revenue growth at 7.7% was impressive and
pipeline appears to be strong as well
Persistent reported 4Q revenues of $47 million, implying Q/Q growth of 8.8%, 1.1%
of which was contributed by the Infospectrum acquisition. In rupee terms revenues
grew 9.2% to Rs213 billion. US$ revenue growth was primarily driven by volume
growth of 7.9%, while pricing was up modestly as increase in offshore pricing more
than offset the decrease in onsite pricing.
Management guided for $220 million in revenues for FY12, a ~30% increase from
FY11. Revenue growth should be supported by the Infospectrum acquisition, which
should contribute about 4.5 percentage points of growth. Management pointed out
that the demand environment is healthy. The deal size increase substantiates the
assertion, in our view, as the number of $10 million clients has increased from one
last year to three this year.
Product engineering and R&D spend is set to increase and
Persistent is well poised to benefit
As a general context, the outsourced product development (OPD) business originates
from the R&D and engineering spend of enterprises, which tends to decrease steeply
during the downturn, because it is discretionary in nature. However, clients tend to
spend aggressively when there is comfort about the macro environment, primarily to
catch up with the competitors or to build a niche. As we have gathered from our
channel checks, the spending environment is healthy and corporations are willing to
spend for R&D and product engineering.
Persistent is well placed to take advantage of the growing spending by clients. The
company has created a niche in the OPD space, and differentiates itself from the
competition by taking initiatives to work on a partnership kind of model with its
larger clients. Admittedly it is a high-risk strategy, but it strengthens the relationships
with large technology companies and ISVs. The company has also made significant
investments in the sales force, which aggressively focuses on client mining as well as
wining new clients, which is visible by the consistent strong revenue growth posted
by the company for a number of quarters
Some other highlights
• Top-10 clients contributed more than half of the company revenues, indicating
the strong relationships with clients. Revenues from the top client increased
about 29%, while revenues from top-10 clients grew about 16%. However,
revenues form non-Top-10 accounts increased only 2%, which we believe is
slightly concerning. The top client contributed 17.0% of total revenues in 4Q
FY11, and we believe the company would not want to mine it further due to
concentration risk. However, the large number of smaller accounts provides
significant potential for revenue growth if mined effectively.
• By vertical, the revenue growth was driven by Infrastructure and Systems
business with 14% Q/Q growth, while Life Sciences also witnessed growth of
more than 5%. Telecom lagged with 3% Q/Q revenue decline.
• Europe drove the growth by geography as revenues from this region increased
about 20%, while North America revenues grew slightly above 10%.
Interestingly, Asia-Pacific revenues decreased 7.3% after increasing steeply in
the last three quarters. Management commented that the company has won some
business in Japan.
• Persistent added 900 employees during the quarter, anticipating the increase in
demand in the future quarters. 202 of these employees came from Infospectrum
acquisition. The company plans to hire 2,300 employees in FY12, including
1,000 freshers and 1,300 lateral employees.
• Utilization levels were almost flat Q/Q at 73.0% compared to 73.2% last quarter.
• The number of billed clients increased meaningfully from 207 to 229 in 4Q
FY11.
Financials
We expect Persistent’s revenues to grow by 32% in FY12 and ~30% in FY13, as
the company enjoys differentiated positioning in the competitive landscape.
Persistent is a niche player in the mid-sized IT space and is well poised to benefit
from the increase in R&D spend driven by its investments in IP-based model and
four focus areas of cloud, mobility, collaboration and analytics.
We expect operating margins to decline slightly in FY12, primarily because of wage
rises. However, a significant part of the wage rise impact should be offset by bettermargin
revenues from IP-led revenues, leverage from growth, broadening of the
pyramid to include less-experienced and lower-cost employees.
We model FY12 EPS to decline by 8.5% to Rs.32 primarily because of an
increase in tax rate. Tax rate is expected to increase to 30% in FY12 from 7% in
FY11, because of expiry of STPI exemptions. We expect FY13 EPS to be Rs41.7, an
increase of 30% from FY12.
Change in estimates and price target
We trim our EPS estimates for FY12 from Rs37.3 to Rs32 and for FY13 from Rs43
to Rs41.7 due to weakness in margins and a higher tax rate. We are also rolling
forward our price target timeframe to Mar-12 from Mar-11. As a result, our price
target rises to Rs500 from Rs475.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Persistent Systems Ltd.
Overweight
PERS.BO, PSYS IN
Decent quarter; revenue growth on a steady plane but
margins need to be watched; reiterate OW
• Decent revenue performance: Persistent’s 4Q FY11 results demonstrate that
the top line continues to grow nicely on the strength of its differentiated
technology positioning. In our view, this is sustainable. However, the company
will need to watch its costs carefully in FY12, particularly if wage inflation
flares up. Operating margin performance for the quarter fell 420bp, largely
expected due to intermediate wage hikes that took effect in this quarter. We
believe Persistent continues to build credibility in the four emerging technology
areas of cloud, mobility, collaboration and analytics that now constitute over
40% of its revenues.
• Good clients already present; investments in mining them are being made:
With some of its marquee clients (which include technology/software providers
and ISVs), Persistent has already forged strong relationships. We believe client
mining should be accorded the utmost importance at Persistent as product
conceptualization, development and implementation may be deemed less
repeatable and scalable than mainstream enterprise IT-Services. It is good to see
Persistent currently investing some of its sales and marketing dollars in mining
these relationships further to impart greater scalability to the business model.
• IP-based revenue stream is keeping up its momentum: For 4Q FY11, IPbased
revenues crossed 10% of revenues (the first time). We expect this to rise
in FY12 as the company benefits from its IP-based partnerships with big-ticket
clients. This richer revenue stream has beneficial consequences for margins.
• Margins may have bottomed out; several levers in place to offset the
negative impact of margins which can be significant: We calculate that
Persistent’s offshore-centric wage structure (offshore wages comprise almost
80% of overall wages) renders it more vulnerable to wage inflation. We have
modeled in a 10% increase in wages. Levers that exist to neutralize the impact
of this include a higher contribution of better-margin revenues from IP-led
revenues, leverage from growth itself, and a broadening of the pyramid to
include less-experienced and lower-cost employees.
• Maintain OW; introduce Mar-12 PT of Rs500: Our new PT implies 25%+
upside from the current sare price. Given the volatility in Indian IT mid-caps’
performance in general, and their vulnerability to wage rises, we believe
investors must seek 25%+ returns from such stocks. In this context, it may be
better for investors to view Persistent as an appropriate investment opportunity
for 25%+ returns at lower levels from the current stock price
Points worth noting
Organic US$ revenue growth at 7.7% was impressive and
pipeline appears to be strong as well
Persistent reported 4Q revenues of $47 million, implying Q/Q growth of 8.8%, 1.1%
of which was contributed by the Infospectrum acquisition. In rupee terms revenues
grew 9.2% to Rs213 billion. US$ revenue growth was primarily driven by volume
growth of 7.9%, while pricing was up modestly as increase in offshore pricing more
than offset the decrease in onsite pricing.
Management guided for $220 million in revenues for FY12, a ~30% increase from
FY11. Revenue growth should be supported by the Infospectrum acquisition, which
should contribute about 4.5 percentage points of growth. Management pointed out
that the demand environment is healthy. The deal size increase substantiates the
assertion, in our view, as the number of $10 million clients has increased from one
last year to three this year.
Product engineering and R&D spend is set to increase and
Persistent is well poised to benefit
As a general context, the outsourced product development (OPD) business originates
from the R&D and engineering spend of enterprises, which tends to decrease steeply
during the downturn, because it is discretionary in nature. However, clients tend to
spend aggressively when there is comfort about the macro environment, primarily to
catch up with the competitors or to build a niche. As we have gathered from our
channel checks, the spending environment is healthy and corporations are willing to
spend for R&D and product engineering.
Persistent is well placed to take advantage of the growing spending by clients. The
company has created a niche in the OPD space, and differentiates itself from the
competition by taking initiatives to work on a partnership kind of model with its
larger clients. Admittedly it is a high-risk strategy, but it strengthens the relationships
with large technology companies and ISVs. The company has also made significant
investments in the sales force, which aggressively focuses on client mining as well as
wining new clients, which is visible by the consistent strong revenue growth posted
by the company for a number of quarters
Some other highlights
• Top-10 clients contributed more than half of the company revenues, indicating
the strong relationships with clients. Revenues from the top client increased
about 29%, while revenues from top-10 clients grew about 16%. However,
revenues form non-Top-10 accounts increased only 2%, which we believe is
slightly concerning. The top client contributed 17.0% of total revenues in 4Q
FY11, and we believe the company would not want to mine it further due to
concentration risk. However, the large number of smaller accounts provides
significant potential for revenue growth if mined effectively.
• By vertical, the revenue growth was driven by Infrastructure and Systems
business with 14% Q/Q growth, while Life Sciences also witnessed growth of
more than 5%. Telecom lagged with 3% Q/Q revenue decline.
• Europe drove the growth by geography as revenues from this region increased
about 20%, while North America revenues grew slightly above 10%.
Interestingly, Asia-Pacific revenues decreased 7.3% after increasing steeply in
the last three quarters. Management commented that the company has won some
business in Japan.
• Persistent added 900 employees during the quarter, anticipating the increase in
demand in the future quarters. 202 of these employees came from Infospectrum
acquisition. The company plans to hire 2,300 employees in FY12, including
1,000 freshers and 1,300 lateral employees.
• Utilization levels were almost flat Q/Q at 73.0% compared to 73.2% last quarter.
• The number of billed clients increased meaningfully from 207 to 229 in 4Q
FY11.
Financials
We expect Persistent’s revenues to grow by 32% in FY12 and ~30% in FY13, as
the company enjoys differentiated positioning in the competitive landscape.
Persistent is a niche player in the mid-sized IT space and is well poised to benefit
from the increase in R&D spend driven by its investments in IP-based model and
four focus areas of cloud, mobility, collaboration and analytics.
We expect operating margins to decline slightly in FY12, primarily because of wage
rises. However, a significant part of the wage rise impact should be offset by bettermargin
revenues from IP-led revenues, leverage from growth, broadening of the
pyramid to include less-experienced and lower-cost employees.
We model FY12 EPS to decline by 8.5% to Rs.32 primarily because of an
increase in tax rate. Tax rate is expected to increase to 30% in FY12 from 7% in
FY11, because of expiry of STPI exemptions. We expect FY13 EPS to be Rs41.7, an
increase of 30% from FY12.
Change in estimates and price target
We trim our EPS estimates for FY12 from Rs37.3 to Rs32 and for FY13 from Rs43
to Rs41.7 due to weakness in margins and a higher tax rate. We are also rolling
forward our price target timeframe to Mar-12 from Mar-11. As a result, our price
target rises to Rs500 from Rs475.
No comments:
Post a Comment