Persistent -Living the digital dream… ::ICICI Securities, link

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Living the digital dream…
We attended Persistent’s (PSYS) analyst day, a full house event last week.
The event was akin to product launches of technology companies as
presentations were demonstrations rather than slides. PSYS is spending
considerable sales dollars to 1) differentiate itself from other IT vendors
by focusing on ‘how’ of digital vs. what & why, and 2) create awareness in
existing/potential customers on enterprise digital transformation, its
niche, vs. IT modernisation (considered digital business by most large
Indian IT vendors in Persistent’s view). We acknowledge PSYS is
attractively positioned to capture wallet share in newer technologies that
could shape the IT landscape for a couple of years. However, 18x FY16E
consensus EPS (| 88.6) likely captures inherent positives & leaves modest
margin of safety. Use sell-offs to accumulate.
Living the digital dream within…
In early 2000s, Persistent differentiated itself by defining the outsourcing
product development (OPD) as a category that exclusively focused on
product development cycles of ISVs. Later on, the company’s ‘sell-with’
platform strategy helped gained entry into enterprises. Persistent also had
a first mover advantage in newer technologies as it defined cloud,
analytics, collaboration and mobility as a category, much ahead of
Gartner, who later defined it as Social, Mobility, Analytics and Cloud
(SMAC) in 2010. Currently, it is trying to create an ecosystem/category of
enterprise digital transformation (EDT), which, it believes, is different from
IT modernisation (ITM). Interestingly, the company itself has undergone
enterprise level digital transformation that could act a reference template.
Though industry analysts, of late, have acknowledged the need for CIOs
to have bi-modal IT strategy (one vendor each for services & digital
transformation) to succeed in their digital transformation, PSYS’ entry in
enterprises continues to be challenged given existing relationships with
large IT vendors. That said, sizeable opportunity coupled with
investments (building own products brand – Accelerite) and early mover
advantage in SMAC may help gain digital wallet share as customers align
to the technology shift.
EDT vs. ITM – focussing on former…
Industry analysts predict a shift to digital could disrupt $30 trillion of
market capitalisation while enterprise may spend ~$70 billion to stay
competitive. Interestingly, digital related spends could grow at 26% CAGR
to $230 billion by 2020. While tier-I players continue to dominate the ITM
given significant mindshare among large enterprises and vertical
specialisation, PSYS envisages to be the leader in EDT given it is a
horizontal play and Persistent is best equipped to execute. The company
is working on establishing leadership position by 1) partnering with
Zinnov to define and demarcate EDT and ITM categories and build
consumer awareness, 2) increase acceptance of bi-modal strategy at CIO
level and 3) showcase PSYS' strength.
Lofty valuations ahead of earnings growth; maintain HOLD
We estimate Persistent will report rupee revenue, earnings CAGR of 16%,
22% over FY14-16E (average 23.5% EBITDA margins in FY15-16E), vs.
23%, 30% reported during FY09-14 (average 24.9%), driven by
acceleration in recently acquired IPs and mining of enterprise accounts
acquired through platform business. We value PSL at | 1,500 i.e. at 16x
(13x earlier) its FY16E EPS of | 91. Potential acceleration in revenue
growth warrants a raise in target multiple.

LINK
http://content.icicidirect.com/mailimages/IDirect_Persistent_CoUpdate_Dec14.pdf