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Persistent Systems Ltd
OW(V): Strong top-line growth in 4Q; FY12 guidance in
line with expectations
Strong top-line growth; growth outlook buoyant as clients
accelerate investments in cloud and mobility
FY12e EBITDA margin, expected to be flat y-o-y, remains the
key risk to estimates, in our view
Reiterate our Overweight (V) rating with INR475 target price
Results for 4Q: Persistent Systems reported robust top-line (USD) growth of 8.8% q-o-q
vs our expectation of 6.1%, led by volume growth of 8% and pricing improvement of
0.9%. However, wage inflation of 10% led to a margin decline of c400bps, and therefore
EPS of INR8.3 was just in line with our estimate.
In a positive development, the company provided guidance for FY12 revenues of
USD220m, up c30% y-o-y, and a flat EBITDA margin. This is in line with our
expectation of USD227m in revenues and a flat EBITDA margin. Also, the company
improved its IP-based revenue contribution to 10% in 4Q and expects overall pricing to
improve by 200bps in FY12, as the proportion of revenues from IP-based projects
continues to increase. Hiring of 1,000 fresh graduates (campus hires) totaling 2,500 and
improvement in utilization by 200bps from the current 73% should be the key margin
levers. As Persistent offers another round of wage increments in June 2011, maintaining
existing EBITDA margins in FY12 will be the key risk to our estimates and company
guidance, we believe.
Valuation: The stock is trading at 12x our FY12e EPS. We continue to value the stock at
12x our CY12e EPS, generating our 12-month target price of INR475. Though the latest
results topped expectations, these seem unlikely to materially upgrade FY12 estimates. In
that regard, we believe that the stock could remain range-bound in the near term following
a c15% run-up since 22 March 2011. We reiterate our Overweight (V) rating.
Highlights of 4Q FY11 results
Persistent reported revenues of USD47m, up 8.8% q-o-q, better than our estimate of USD46m. In INR
terms, revenues were INR2128m, up 9.2% q-o-q. Driven by strong growth of 16% q-o-q in its top ten
accounts, volumes grew 7.9% q-o-q. EBIT margin decreased to 12.3% from 16.5% in 3Q11, or 258bps
lower than our expectation. Margins declined due to higher employee cost, taking into account wage
increases offered in January and the net addition of 900 employees in the latest quarter. The results and
guidance were in line with our earnings estimates for FY12, as we continue to expect robust top-line
growth in view of a strong IT demand environment.
Infrastructure and systems led the growth, up 14% q-o-q, following two sluggish quarters. The focus now
is on four areas, namely Cloud, c10% of total revenues in FY11; Analytics, c10%; Mobility, c15%; and
Collaboration, c7%. North America, 10% q-o-q, and Europe, 19% q-o-q, have both contributed to the topline growth.
Utilization (excluding trainees) remained flat at 73%. The net employee addition was 900, of which 202
were added from the acquisition of Infospectrum. Persistent also made significant additions to its Sales
and Business Development team, expanding it to 108 from 94. The total headcount at the end of quarter
was 6,360, +16.5% q-o-q. Attrition was reported at 19.6% (LTM basis). Revenue guidance for FY12 is
USD220m, in line with our estimate of USD227m in revenue and a flat EBITDA margin.
Valuation and risks
The stock is trading at 12x our FY12e EPS. We expect the stock to continue to trade at these valuations,
and we value it at 12x our CY12e EPS, in line with the historical Indian mid-cap IT sector and generating
our 12-month target price of INR475. Though the latest results were above expectations, they are unlikely
to materially upgrade FY12 estimates, we believe. In that regard, the stock could remain range-bound in
the near term following a c15% run-up since 22 March 2011.
Under our research model, for stocks with a volatility indicator, the Neutral band is 10ppts above and
below our hurdle rate for Indian stocks of 11%, or 1-21% around the current share price. Our target price
implies a potential return, including a 1.4% dividend yield, of 22.5%, which is above the Neutral band;
thus, we reiterate our Overweight (V) rating.
Downside risks, in our view, include INR appreciation, macroeconomic weakness, and further pressure
on margins due to wage inflation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Persistent Systems Ltd
OW(V): Strong top-line growth in 4Q; FY12 guidance in
line with expectations
Strong top-line growth; growth outlook buoyant as clients
accelerate investments in cloud and mobility
FY12e EBITDA margin, expected to be flat y-o-y, remains the
key risk to estimates, in our view
Reiterate our Overweight (V) rating with INR475 target price
Results for 4Q: Persistent Systems reported robust top-line (USD) growth of 8.8% q-o-q
vs our expectation of 6.1%, led by volume growth of 8% and pricing improvement of
0.9%. However, wage inflation of 10% led to a margin decline of c400bps, and therefore
EPS of INR8.3 was just in line with our estimate.
In a positive development, the company provided guidance for FY12 revenues of
USD220m, up c30% y-o-y, and a flat EBITDA margin. This is in line with our
expectation of USD227m in revenues and a flat EBITDA margin. Also, the company
improved its IP-based revenue contribution to 10% in 4Q and expects overall pricing to
improve by 200bps in FY12, as the proportion of revenues from IP-based projects
continues to increase. Hiring of 1,000 fresh graduates (campus hires) totaling 2,500 and
improvement in utilization by 200bps from the current 73% should be the key margin
levers. As Persistent offers another round of wage increments in June 2011, maintaining
existing EBITDA margins in FY12 will be the key risk to our estimates and company
guidance, we believe.
Valuation: The stock is trading at 12x our FY12e EPS. We continue to value the stock at
12x our CY12e EPS, generating our 12-month target price of INR475. Though the latest
results topped expectations, these seem unlikely to materially upgrade FY12 estimates. In
that regard, we believe that the stock could remain range-bound in the near term following
a c15% run-up since 22 March 2011. We reiterate our Overweight (V) rating.
Highlights of 4Q FY11 results
Persistent reported revenues of USD47m, up 8.8% q-o-q, better than our estimate of USD46m. In INR
terms, revenues were INR2128m, up 9.2% q-o-q. Driven by strong growth of 16% q-o-q in its top ten
accounts, volumes grew 7.9% q-o-q. EBIT margin decreased to 12.3% from 16.5% in 3Q11, or 258bps
lower than our expectation. Margins declined due to higher employee cost, taking into account wage
increases offered in January and the net addition of 900 employees in the latest quarter. The results and
guidance were in line with our earnings estimates for FY12, as we continue to expect robust top-line
growth in view of a strong IT demand environment.
Infrastructure and systems led the growth, up 14% q-o-q, following two sluggish quarters. The focus now
is on four areas, namely Cloud, c10% of total revenues in FY11; Analytics, c10%; Mobility, c15%; and
Collaboration, c7%. North America, 10% q-o-q, and Europe, 19% q-o-q, have both contributed to the topline growth.
Utilization (excluding trainees) remained flat at 73%. The net employee addition was 900, of which 202
were added from the acquisition of Infospectrum. Persistent also made significant additions to its Sales
and Business Development team, expanding it to 108 from 94. The total headcount at the end of quarter
was 6,360, +16.5% q-o-q. Attrition was reported at 19.6% (LTM basis). Revenue guidance for FY12 is
USD220m, in line with our estimate of USD227m in revenue and a flat EBITDA margin.
Valuation and risks
The stock is trading at 12x our FY12e EPS. We expect the stock to continue to trade at these valuations,
and we value it at 12x our CY12e EPS, in line with the historical Indian mid-cap IT sector and generating
our 12-month target price of INR475. Though the latest results were above expectations, they are unlikely
to materially upgrade FY12 estimates, we believe. In that regard, the stock could remain range-bound in
the near term following a c15% run-up since 22 March 2011.
Under our research model, for stocks with a volatility indicator, the Neutral band is 10ppts above and
below our hurdle rate for Indian stocks of 11%, or 1-21% around the current share price. Our target price
implies a potential return, including a 1.4% dividend yield, of 22.5%, which is above the Neutral band;
thus, we reiterate our Overweight (V) rating.
Downside risks, in our view, include INR appreciation, macroeconomic weakness, and further pressure
on margins due to wage inflation.
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