Persistent Systems (Persistent) is a credible offshore services provider in
the niche and growing outsourced product development (OPD) space.
Strong domain expertise, marquee client base, sound management and
healthy balance sheet are its key strengths. The company will ride the next
growth wave on back of surge in spending in new technology areas and
growth in traditional OPD market. We initiate coverage with ‘BUY’ and a
target price of INR508, implying 30% upside.
Investing in new technologies to fuel next leg of growth
Persistent has consistently invested in creation of IP-led solutions and has invested in
cloud computing, enterprise collaboration, analytics, enterprise mobility, which promises
significant growth opportunities. On an ongoing basis, 4-6% of the staff is dedicated to
building intellectual property (IP), imparting it an 18-24 month edge over competition.
Revitalising and strengthening front-end sales and marketing force
The company is investing in mining its large client relationships by strenghtening its
front-end hunting force and imparting executive responsibility for its top accounts. It
has forged partnerships with various ISVs to leverage their sales channels and adopted
a “sell-with” approach. This will help it develop relationships with the client’s
ecosystem and generate incremental revenue without additional selling expenses.
Focus on IP-led revenue to aid margin sustenance
Persistent has been consistently increasing its revenue from IP-led business with a stated
goal of reaching up to 20% of its expanded revenue base. Typically, this business’ gross
margin is ~50% versus the company’s 40%. Focus on this business will enable margin
sustenance in the long run. Scale up in IP-led revenue could be upside risk to target price.
Outlook and valuations: Equipped for growth; initiate with ‘BUY’
We believe Persistent is poised to capture high growth opportunities, and forecast
revenue and EBITDA CAGR of 17% and 18%, over FY12-14. This, coupled with sound
management and transparent governance, bolsters our confidence in the company. We
value the stock at INR 508/share based on P/E of 10x FY14E core EPS of INR41.8 and
INR90 cash per share. We initiate coverage on the stock with ‘BUY/SO’ recommendation.
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