Ramp-down from clients are bottoming out: Persistent witnessed rampdown
from top clients due to end of projects and M&A activity (of clients).
Top clients, whose projects got shelved after acquisition, are already
captured in quarterly run-rate. Moreover, due to project completion with
other top-client, we may see some spill-over in Q2FY13. Nevertheless, the
company is working with the same client on other projects to back-fill the
gap. Hence, we expect it to recoup some of the negative impact.
New deal wins to offset deceleration: The management is very confident
of demand environment. The company has signed a large deal (end of lifecycle)
with one of the top clients. Also, new engagements with clients
(acquired from Openwave location based service product) are likely to
pick-up.
Growth outlook strong, margin to see uptick in H2FY13: The management
is confident of improving the growth rate and achieving better than
NASSCOM guidance of 11-14% YoY growth, but didn’t quantify the
guidance. The margin outlook for Q2FY13 continues to be weak due to
wage hike (Offshore: 9.9%) and full impact of S&M investment, which is in
line with our hypothesis. However, the management is confident of
recouping the margin in H2FY13. We expect margin performance in
H2FY13 to get boosted by revenue growth from IP, cost absorption of
wage hike and replacing attrition employees with the fresher (Fresher
addition: 1350).
Improving free cash flow conversion: As the company comes out of the
investment phase, FCF conversion is likely to improve. The earlier guidance
of Rs115cr included some expansion (land deal) that is likely to be
postponed. Hence, we expect FY13 FCF/EBITDA conversion to 67% (FY12:
7.4%, FY11:55%).
Valuation and Recommendation – BUY with a revised target price of
Rs460: We believe the option value of IP sales along with success of “Sell
with Partner” could spin a positive surprise. Currently, Persistent is traded
at 8.6x FY13E earnings estimate with 20% earnings CAGR (FY12-14E).
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