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Persistent Systems- If no scale, go for niche
Recent management interaction suggests demand stays strong
Infospectrum buy-out in line with company's long-term roadmap
Revising estimates to factor in mid-term wage hike announced in 3Q
We see the stock as a key long-term portfolio addition; retain BUY
Growth momentum stays strong
We reiterate BUY on Persistent Systems
after our recent management discussions.
We believe FY11 is likely to close at the
upper end of the company’s USD revenue
guidance of USD167m-170m. Momentum
in Persistent’s four focus areas (cloud,
mobility, collaboration and analytics)
remains strong with the company on track
to increase its revenue contribution to
close to 45% (from ~40% now) by FY12E.
With healthy demand continuing in the
outsourced product development market,
we see our ~30% FY12 USD revenue
growth estimate as being achievable, and
expect the company to conservatively guide for 26-29% growth in April.
Recent acquisition in line with long-term roadmap
We believe Persistent’s recent acquisition of Infospectrum (for USD6m)
fits with its roadmap to achieve USD500m in revenue, the key aspects of
which remain: 1) expanded offerings, 2) better client management, 3)
efficient HR strategy, and 4) niche acquisitions in select verticals and in
the four focus areas. Infospectrum’s focus on maritime, industrial
automation, aerospace and defense verticals would expand Persistent’s
footprint. We understand the integration process has been completed
and revenue contribution from Infospectrum has started.
Mid-term wage hike drives our earnings cuts
We revise our estimates to factor in the 3Q results and the company’s
announcement of a mid-term wage hike of ~10% in 4Q to counter
attrition. Thus, we lower our FY12-13 EBIT margin estimates 130-
140bps, leading to 5-6% EPS cuts. But our view of Persistent as a growth
stock stays unchanged given we are still looking for FY11-13 revenue
and PBT CAGR of 26% and 28% respectively. We expect EPS growth to
resume in FY13 once higher tax rates are factored in for FY12.
BUY: If no scale, go for niche
At a time when mid-cap IT services business models are coming into
question and leading to weak valuations, we see Persistent as one that
stands out because of its unique business. We see the stock as a
leveraged play on the structural shifts that the software industry is
undergoing (i.e., cloud computing, etc), and thus as a key long-term
portfolio addition. We trim our DCF-based TP to INR510.00 (from
INR530) to reflect the earnings revision. Our TP implies an FY13E P/E of
11.9x, in line with the current 12-m forward multiple. Risks: macro and FX
uncertainty, and continued wage pressure.
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Persistent Systems- If no scale, go for niche
Recent management interaction suggests demand stays strong
Infospectrum buy-out in line with company's long-term roadmap
Revising estimates to factor in mid-term wage hike announced in 3Q
We see the stock as a key long-term portfolio addition; retain BUY
Growth momentum stays strong
We reiterate BUY on Persistent Systems
after our recent management discussions.
We believe FY11 is likely to close at the
upper end of the company’s USD revenue
guidance of USD167m-170m. Momentum
in Persistent’s four focus areas (cloud,
mobility, collaboration and analytics)
remains strong with the company on track
to increase its revenue contribution to
close to 45% (from ~40% now) by FY12E.
With healthy demand continuing in the
outsourced product development market,
we see our ~30% FY12 USD revenue
growth estimate as being achievable, and
expect the company to conservatively guide for 26-29% growth in April.
Recent acquisition in line with long-term roadmap
We believe Persistent’s recent acquisition of Infospectrum (for USD6m)
fits with its roadmap to achieve USD500m in revenue, the key aspects of
which remain: 1) expanded offerings, 2) better client management, 3)
efficient HR strategy, and 4) niche acquisitions in select verticals and in
the four focus areas. Infospectrum’s focus on maritime, industrial
automation, aerospace and defense verticals would expand Persistent’s
footprint. We understand the integration process has been completed
and revenue contribution from Infospectrum has started.
Mid-term wage hike drives our earnings cuts
We revise our estimates to factor in the 3Q results and the company’s
announcement of a mid-term wage hike of ~10% in 4Q to counter
attrition. Thus, we lower our FY12-13 EBIT margin estimates 130-
140bps, leading to 5-6% EPS cuts. But our view of Persistent as a growth
stock stays unchanged given we are still looking for FY11-13 revenue
and PBT CAGR of 26% and 28% respectively. We expect EPS growth to
resume in FY13 once higher tax rates are factored in for FY12.
BUY: If no scale, go for niche
At a time when mid-cap IT services business models are coming into
question and leading to weak valuations, we see Persistent as one that
stands out because of its unique business. We see the stock as a
leveraged play on the structural shifts that the software industry is
undergoing (i.e., cloud computing, etc), and thus as a key long-term
portfolio addition. We trim our DCF-based TP to INR510.00 (from
INR530) to reflect the earnings revision. Our TP implies an FY13E P/E of
11.9x, in line with the current 12-m forward multiple. Risks: macro and FX
uncertainty, and continued wage pressure.
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
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