Persistent Systems: In-line 2Q, below the line drives EPS beat :Macquarie Research,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Persistent Systems
In-line 2Q, below the line drives EPS
beat
Event
 Persistent reported in-line 2Q results at the top-line and EBIT levels. Strong
cost management and INR depreciation helped the company to improve EBIT
margins by 90bps. The 14% EPS beat was largely driven by below the line
items like higher treasury income, forex gains and a lower tax rate. OP
maintained.
Impact
 Conference call takeaways. 1) Volatility in the market place was the central
theme of the call; 2) no billing rate declines seen by clients; 3) sales and
marketing teams are to focus on new future business from growth areas; 4)
management described demand pipeline as stronger than ever before, though
deal closures are taking longer; and 5) the growth areas continue to contribute
~40% of revenues.
 Cost rationalizations bring margin improvements. Persistent raised its
EBIT margins by 90bps to 13.2% from 12.3%, despite a 9% wage hike to
offshore employees in July. This was made possible by containing sales and
marketing expenses and currency benefits.
 IP initiatives robust with strong top client growth. Persistent spent 5.5%
of the total technical time on IP initiatives (vs. 4.7% in 1Q). This is at a 10-
quarter high. Management explained this citing the bench strength and guided
to ~5% investment levels for the year.
 Tax free dividend income helps reduce the tax rate. We learned from
management that the tax rate for the rest of the year would likely remain at
30%. The lower tax rate of 28% seen in 2Q was due to tax free dividend
income earned by the company in the quarter.
 2Q results – financial and operational details. Persistent reported US$
revenues of US$51m (up 3% QoQ, 27% YoY). INR revenues were Rs2,382m
(up 6% QoQ and 27% YoY) and PAT came in at Rs324m (up 18% QoQ and
down 10% YoY). The company had net employee additions of 280. Utilisation
increased 110bps to 73.8%, and attrition eased off to 17.7% from 18.4%
earlier.
Earnings and target price revision
 Updating our model for 2Q results. Our estimate variance is 1-2% in FY12-13
EPS. No change in TP.
Price catalyst
 12-month price target: Rs350.00 based on a PER methodology.
 Catalyst: Large deal wins.
Action and recommendation
 OP maintained.