Positive catalysts lined up
RESULTS REVIEW
In-line 1Q operationally, EPS beat on higher other income
Persistent’s 4Q USD revenue (1.5% q-q) and INR EBITDA were in line with
our view, but the latter missed Street forecasts. EBITDA margin fell 310bp
q-q on onsite wage hikes, visa costs, conservative provision of doubtful
debts (+1.2 ppt q-q) and HPCA-related expenses, which came in ahead of
revenue from the deal. EPS beat our estimate by 29% on other income.
SUMMARY
IP revenue should recover from 2Q from HPCA contribution
IP contribution was down 12.7% q-q (+24.1% y-y) as revenue from the
recently acquired HPCA product was pushed into 2Q on renewal
paperwork delays. IP revenue has stabilized in the USD9m-11m range
over the past four quarters, but PES and platforms grew a healthy 4.5% qq (1.5% from pricing), signalling a recovery in the traditional business.
VALUATION
High-margin growth drivers for rest of FY14; attractive valuations
Despite its lumpiness, we believe IP is the key driver for Persistent. The
HPCA licenses, TNPM deal, and Doyenz (SMB platform) and Novaquest
(PLM) acquisitions continue a strategy of capability building. We expect IP
revenue to increase from the current 15% of sales to over 25% by FY16.
We see growth drivers for the rest of FY14 in HPCA renewals and client
investments in cloud, analytics, mobility and collaboration (c.50% of
revenue). Other positives include a revival in the services business,
continued sales hires (+20 in 1Q) and falling attrition (14.2% vs 18.9% yy). We believe the current valuations of 5x FY14E EV/EBITDA and 10x P/E
are attractive given Persistent’s unique growth drivers.
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RESULTS REVIEW
In-line 1Q operationally, EPS beat on higher other income
Persistent’s 4Q USD revenue (1.5% q-q) and INR EBITDA were in line with
our view, but the latter missed Street forecasts. EBITDA margin fell 310bp
q-q on onsite wage hikes, visa costs, conservative provision of doubtful
debts (+1.2 ppt q-q) and HPCA-related expenses, which came in ahead of
revenue from the deal. EPS beat our estimate by 29% on other income.
SUMMARY
IP revenue should recover from 2Q from HPCA contribution
IP contribution was down 12.7% q-q (+24.1% y-y) as revenue from the
recently acquired HPCA product was pushed into 2Q on renewal
paperwork delays. IP revenue has stabilized in the USD9m-11m range
over the past four quarters, but PES and platforms grew a healthy 4.5% qq (1.5% from pricing), signalling a recovery in the traditional business.
VALUATION
High-margin growth drivers for rest of FY14; attractive valuations
Despite its lumpiness, we believe IP is the key driver for Persistent. The
HPCA licenses, TNPM deal, and Doyenz (SMB platform) and Novaquest
(PLM) acquisitions continue a strategy of capability building. We expect IP
revenue to increase from the current 15% of sales to over 25% by FY16.
We see growth drivers for the rest of FY14 in HPCA renewals and client
investments in cloud, analytics, mobility and collaboration (c.50% of
revenue). Other positives include a revival in the services business,
continued sales hires (+20 in 1Q) and falling attrition (14.2% vs 18.9% yy). We believe the current valuations of 5x FY14E EV/EBITDA and 10x P/E
are attractive given Persistent’s unique growth drivers.
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