ersistent Systems Ltd. (PSL) came up with a decent set of numbers for Q4FY13. Revenue
growth was driven by the traditional IT services business while IP revenue was slightly subdued.
The sequential revenue growth was led by pricing despite soft volumes aided by IP revenue.
INR revenue growth affected by appreciation of INR but in $ terms looks decent
Revenues came in at $62.1 mn up 2.2% sequentially but the rupee revenue rose by a modest
0.3% Q-o-Q mainly due to lower realizations of INR/USD (53.8 in Q4FY13 Vs 54.8 Q3FY13).
Revenue growth was led by traditional business (up 3.1% Q-o-Q) while IP revenue declined
1.7% sequentially. Lumpy nature of IP coupled with soft ramp-ups in certain IPs led to a modest
decline in IP revenues resulting in a 70 bps decline in contribution to 17.5%.Coming to mix,
onsite revenues grew 12.7% sequentially led by volume (+2.7%) and pricing (+9.7%) while
offshore growth of 0.5% was driven by pricing (+2.8%) as volumes declined 2.1% Q-o-Q.
Appreciation of INR and higher royalties' impact EBITDA margins: The EBITDA margin in
Q4FY13 came in at 23.6% down 121 bps sequentially and was primarily impacted due to
1.9% appreciation of the rupee in the quarter and higher royalties payments to IBM and HP.
However EBITDA margin benefitted from flattish employee costs sequentially. On the other
hand net profit growth of 4.8% Q-o-Q was better, aided by higher extraordinary income (forex
gains of Rs 66mn & excess provisions written back Rs 44mn).
Utilization dips on employee additions but fresh hiring brings in optimism: The company
added 251 employees as attrition declined from 16% in Q3FY13 to 14.4% in Q4FY13. On the
other hand utilization declined to 72.5% from 77.3% in last quarter. Company plans to hire
600-800 employees in FY14 and has already made 500 offers to fresh graduates who will be
joining in Q2 and Q3. The company plans to hike the wages by at 8.5-9% for FY14.
Recent acquisitions to boost revenue in FY14: The Company's acquisition of Novaquest in
Jan'13 contributed to $1.8mn of revenue in the quarter. Novaquest and its earlier acquisition
Doyenz continues to do well with client addition, though small in size. As part of the Client
Automation business from HP last quarter, PSL has inherited hundreds of customers globally,
some very large. PSL plans to now offer various endpoint and device management capabilities
to these new enterprises and expects the contribution from them to start flowing in the next 2-
3 quarters. Company added 54 new accounts during the quarter with 3 being large.
Management guides for a robust FY14: Management commentary on the product pipeline
was upbeat and expects FY14E growth to be higher than Nasscom guidance of 12-14% primarily
led by new deal wins, acquired IP ramp-ups and cross selling to customers of the acquired IPs.
However, we feel the company could face some pressure on margins due to rising VISA cost
and integration costs of its latest acquisitions. The company has guided for stable margins and
a capex of Rs 1,250 mn for FY14.
Going ahead, PSL is expected to cash in on the rising demand in its key areas of cloud, mobility,
analytics and collaboration. PSL has the benefit of an early mover in this space but however the
deal sizes have been low. We now expect revenue, EPS to grow 17%, 18% in FY14E and 17%,
17% in FY15E, respectively. We expect EBITDA margins to decline 154 bps in FY14E to 24.1%
led by HP related transition costs, partially offset by higher IP revenues. PSL is a mid-cap IT
company having one of the best EBITDA margins amongst its peer set by catering to high end
next gen technologies. On the other hand it has also delivered proforma earnings growth of
~17% over the past 3 years. Due to these reasons we believe PSL should command better
valuations compared to other mid-cap IT companies. We reiterate our Buy rating on the stock
and value the company at a slight premium compared to other midcap IT companies at 11x
FY14 earnings arriving at a target price of Rs 603.
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growth was driven by the traditional IT services business while IP revenue was slightly subdued.
The sequential revenue growth was led by pricing despite soft volumes aided by IP revenue.
INR revenue growth affected by appreciation of INR but in $ terms looks decent
Revenues came in at $62.1 mn up 2.2% sequentially but the rupee revenue rose by a modest
0.3% Q-o-Q mainly due to lower realizations of INR/USD (53.8 in Q4FY13 Vs 54.8 Q3FY13).
Revenue growth was led by traditional business (up 3.1% Q-o-Q) while IP revenue declined
1.7% sequentially. Lumpy nature of IP coupled with soft ramp-ups in certain IPs led to a modest
decline in IP revenues resulting in a 70 bps decline in contribution to 17.5%.Coming to mix,
onsite revenues grew 12.7% sequentially led by volume (+2.7%) and pricing (+9.7%) while
offshore growth of 0.5% was driven by pricing (+2.8%) as volumes declined 2.1% Q-o-Q.
Appreciation of INR and higher royalties' impact EBITDA margins: The EBITDA margin in
Q4FY13 came in at 23.6% down 121 bps sequentially and was primarily impacted due to
1.9% appreciation of the rupee in the quarter and higher royalties payments to IBM and HP.
However EBITDA margin benefitted from flattish employee costs sequentially. On the other
hand net profit growth of 4.8% Q-o-Q was better, aided by higher extraordinary income (forex
gains of Rs 66mn & excess provisions written back Rs 44mn).
Utilization dips on employee additions but fresh hiring brings in optimism: The company
added 251 employees as attrition declined from 16% in Q3FY13 to 14.4% in Q4FY13. On the
other hand utilization declined to 72.5% from 77.3% in last quarter. Company plans to hire
600-800 employees in FY14 and has already made 500 offers to fresh graduates who will be
joining in Q2 and Q3. The company plans to hike the wages by at 8.5-9% for FY14.
Recent acquisitions to boost revenue in FY14: The Company's acquisition of Novaquest in
Jan'13 contributed to $1.8mn of revenue in the quarter. Novaquest and its earlier acquisition
Doyenz continues to do well with client addition, though small in size. As part of the Client
Automation business from HP last quarter, PSL has inherited hundreds of customers globally,
some very large. PSL plans to now offer various endpoint and device management capabilities
to these new enterprises and expects the contribution from them to start flowing in the next 2-
3 quarters. Company added 54 new accounts during the quarter with 3 being large.
Management guides for a robust FY14: Management commentary on the product pipeline
was upbeat and expects FY14E growth to be higher than Nasscom guidance of 12-14% primarily
led by new deal wins, acquired IP ramp-ups and cross selling to customers of the acquired IPs.
However, we feel the company could face some pressure on margins due to rising VISA cost
and integration costs of its latest acquisitions. The company has guided for stable margins and
a capex of Rs 1,250 mn for FY14.
Going ahead, PSL is expected to cash in on the rising demand in its key areas of cloud, mobility,
analytics and collaboration. PSL has the benefit of an early mover in this space but however the
deal sizes have been low. We now expect revenue, EPS to grow 17%, 18% in FY14E and 17%,
17% in FY15E, respectively. We expect EBITDA margins to decline 154 bps in FY14E to 24.1%
led by HP related transition costs, partially offset by higher IP revenues. PSL is a mid-cap IT
company having one of the best EBITDA margins amongst its peer set by catering to high end
next gen technologies. On the other hand it has also delivered proforma earnings growth of
~17% over the past 3 years. Due to these reasons we believe PSL should command better
valuations compared to other mid-cap IT companies. We reiterate our Buy rating on the stock
and value the company at a slight premium compared to other midcap IT companies at 11x
FY14 earnings arriving at a target price of Rs 603.
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