Persistent Systems Ltd.
Growth driven by IP-Led, Management confident to grow above industry
Results Highlights
⇒ Persistent Systems posted decent set of numbers for Q1 FY13, with top line coming in line with
our expectations while profits and margins were below expectations despite rupee depreciation.
⇒ The company top line grew 11.1% Q-o-Q and 34.4% y-o-y to Rs 3.0 bn, in line with our estimate
of Rs 3.0 bn, aided by strong volume growth of 3.9% in linear business (due to higher Utilization),
strong IP led revenues and 9.7% rupee depreciation in the quarter.
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⇒ The revenue in US$ terms grew 1.3% Q-o-Q and 9.8% y-o-y to US$ 54.9 mn due to higher IP-led
revenues (grew 16.4% q-o-q and 150.2% y-o-y to US$ 7.6 mn) however linear business remained
muted. Management has refrained from provide an absolute guidance number for FY13E but is
confident to beat NASSCOM guidance of 10-14% y-o-y growth.
⇒ EBITDA margin expanded only 34 bps sequentially to 22.8% vs. expectation of significant expansion
on back of rupee depreciation. This was primarily due to unexpected wage hike of 4.2% for
onsite employees, product acquisition (leading to hiring of 72 people in Malaysia and 12 in US)
and higher SG&A expenses. Offshore salary hike of 10% is due in Q2 hence margins will be under
pressure going forward.
⇒ Net profit stood at Rs 416 mn up 50.8% y-o-y and only 0.9% sequentially despite strong rupee
depreciation of 9.7% in the quarter due to lower margins performance and forex loss of Rs 92 mn.
Diluted EPS stood at Rs 10.4 below our estimate of Rs 13.5 for the quarter.
⇒ Volumes grew 3.9% sequentially, primarily due to higher utilization (74.1% vs 71.1% q-o-q) on
account of better productivity and better utilization existing employees. Attrition too remained stable
and stood at 18.9% in Q1 FY13 vs 18.3% in the last quarter.
⇒ Onsite pricing increased 1.5% sequentially while offshore pricing remained flat sequentially. We
believe pricing environment to remain stable in the coming quarters however demand uncertainty
and instability in the west can put some pressure going forward.
⇒ The company focus primarily onto new technological areas like cloud, mobility ,analytics and collaboration
and sees significant traction in these areas going forward. The company added 33 new
clients in the quarter (including 7 multi billion dollar clients) which we believe will fuel growth.
Higher margin IP led services to spur growth, Management optimistic
Persistent has strategically invested significantly in higher margin IP-led business and currently spend
5.4% of its technical man month into R&D up from 4.6% in the last quarter. Its contribution to total
revenues increased 780 bps y-o-y and 180 bps sequentially to 13.9% in Q1 FY13. Going forward we
expect the company is well poised to tap the immense opportunities present in IP-led services business
and thus will boost top line and provide support to margins. Management is also optimistic about
the growth prospects of IPs (IP-Led Services) and expects to beat average industry growth rate.
Outlook and Valuation
We believe that ongoing uncertainty in the west, unstable demand environment is the biggest risk
present at the moment, which can delay client decisions and impact IT spending. However management
is confident to grow above industry average largely due to significant traction in IP-led services
and investment in new technological areas. We believe that company’s ability to maintain long term
relationships with large marquee clients, significant focus on non linear revenue streams and foray
into new technological areas will help the company to achieve high growth rate along with expansion
in margins. We have assumed USD/INR of 53.7 for FY13E and 53 for FY14E. The stock currently
trades at a P/E of 9.3x and 8.0x FY12E and FY13E earnings which we think is at a discount to its
peers considering its high growth rate, healthy return ratios and higher margins. We maintain our
“BUY” rating on the stock increase our target price to Rs 468 (earlier Rs 425) an upside of 22.5% from
current levels.
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