CSEC Research: Earnings Update - Persistent

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Persistent Systems -Where’s the margin of safety? :: ICICI Securities, report

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

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Persistent Systems - In Right Space at Right Time :: Edelweiss, link

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Buy Persistent Systems Ltd :: HDFC Sec, link

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Lofty valuations weigh on sound fundamentals… • Persistent Systems:: ICICI Securities, PDF link

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Persistent Systems - Decent show; prudent investments to continue:: Edelweiss, PDF link

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Technicals - Axis bank, Insecticides India, BEML, United Bank of India, Mindtree, Persistent Systems, Max India :: Business Line

PERSISTENT SYSTEMS :: BNP Paribas

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.

Nirmal Bang - Persistent Systems Ltd

Q1FY14 quarter results were mixed wherein revenues were in
line with our expectations which grew by 7% QoQ; however
margins disappointed which witnessed pressure of 320 bps QoQ
due to onsite wage hikes and higher visa costs. The management
has cited better growth in H2FY14 on the back of increased
demand momentum in Product engineering in North America
and uptick in IP led revenues. At CMP the stock is trading at a P/E
of 9.4x/8.6x its FY14E/FY15E earnings and investors can
accumulate the stock on dips since outlook continuous to be
positive.
Quarter highlights:
Revenues in USD terms grew 1.5% QoQ to $ 63.03mn driven by 4.5%
growth in product engineering business. This business witnessed 3%
growth in volume and 1.5% growth in realisation. However, IP
revenues dipped 12.9% QoQ/ 24% growth YoY and contributed
15.1% to total revenues from 17.5% in Q4FY13.
Revenues in INR terms grew by 7% QoQ and 18.8% YoY at Rs.357.3
crore.
EBIDTA margins were down by 320 bps QoQ to 21.7% erasing the
currency gain of 180 bps due to higher visa costs, addition in sales
team in the US and onsite wage hikes. Company is giving salary hikes
to offshore employees of ~ 8-9% in the current quarter which we
believe would keep the margins under pressure in Q2FY14 as well.
Adjusted PAT for the quarter (forex gain of Rs.18.3 cr/Rs.4.2 crore in
Q1FY14 and Q4FY13 respectively) was down by 9.9% QoQ to Rs
44.05 crore.
IP revenues have been subdued for the last 3 quarters and
management is optimum of better Q3 and Q4FY14 on this front.
Concall highlights:
Onsite revenues grew by 14.6% QoQ (Volume +10.5%, +3.9%
realisation) and offshore revenue grew by 1.5% (+2.3% volume ,
-0.8% realization).
IP revenues would pick up in Q3 and Q4FY14, with revenues from
HP’s Radia Client Automation (HPCA) to start flowing in.
During the quarter, company has won 16 new clients (2 multibillion
dollar clients).

Persistent System: Buy Target : Rs. 603 :FinQuest

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.

Persistent Systems: Buy :: Business Line

Persistent Systems Soft performance; Reiterate ‘ACCUMULATE’ ::Prabhudas Lilladher

Persistent Systems’ (Persistent’s) Q3FY13 results were touch softer than
consensus/PLe estimates. Revenue performance missed estimates by a whisker;
whereas, margin was softer due to higher investment in S&M and softness in IP-led
revenue. We retain “Accumulate” rating and revise our TP to Rs 580 (Old: Rs540) as
we tweak our model for higher revenue growth and margin for FY14. (Exhibit 2)
! Revenue in line, margin softer: Persistent’s Q3FY13 results have missed
PLe/Consensus expectation on all counts. Revenue grew 1.9% QoQ to
Rs3,329.9m (PLe: Rs3,316m Cons: Rs3,317m) and 1.2% QoQ in USD terms to
$60.8m (PLe: US$61m). EBITDA margins eroded by 249bps to 24.7% (PLe: 26.5%,
Cons: 26%) despite higher utilization (180bps) & currency depreciation (0.7%)
due to higher investment in S&M and G&A. EPS grew by 10.9% QoQ to Rs13.13
(PLe: Rs14.5, Cons: Rs13.8). (Exhibit 1)
! Investment in S&M effort holds the key for future growth: In line with our
hypothesis, the investment in S&M has been ramped up in the quarter. The
company has accelerated the investment to 7.9% QoQ. Moreover, the increase
in G&A by 15.5% QoQ was largely due to higher provision of doubtful debts, rent
for SEZ and Seattle facility for Doyenz business (Exhibit 3). As the utilization
reaches an all-time high to 79.5% (180bp increase QoQ), the company needs to
push-up the hiring to address the future growth need.
! Inorganic growth – Acquired NovaQuest: Persistent acquired Novaquest, a
Product Lifecycle Management (PLM) and Search-Based technology solutions
company, thereby, entering into a strategic partnership with Dassault Systèmes
to sell and offer support, maintenance and deployment services as an
authorized VAR for Dassault Systèmes’ in the US.
! Valuation & Recommendation: Persistent has successfully pushed the margin
and revenue performance in H1FY13. But, as the company enters investment
phase to address the need of growth, we expect margin expansion to halt. We
reiterate ‘Accumulate’ rating, as we see limited upside from the current level.

Sizzling Stocks - Indian Hotels Co. , Persistent Systems :: Business Line

 

Persistent Systems :: Prabhudas Lilladher MID-CAP top pick

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).

Buy Persistent System :Centrum

Persistent is a global company specializing in software product and technology innovation. For more than two decades, the company has partnered closely with pioneering start-ups, innovative enterprises and the world’s largest technology brands. The company has utilized fine-tuned product engineering processes to develop best-in-class solutions for customers in technology, telecommunication, life science, healthcare, banking, and consumer products sectors across North America, Europe, and Asia.
After the recent acquisition of Patni by iGate, we believe that there can be further consolidation in the mid and small sized IT companies as a strategy for growth. This would lead to a shift in valuations of mid and small sized IT firms from their current PE multiple of 7-8x to around a PE multiple of at least 10-12x
In FY2012, PSL’s revenues crossed Rs.1,000 crore mark, with operating income growing by 29%. Operating profit grew by 34% to Rs.258 crore, while PAT grew by just 1.5% to Rs.142 crore on the backdrop of rise in tax rate from 8% to 28% and increase in deprecation on the back of significant rise in gross block to Rs.604 crore (from Rs.454 crore). The positive impact of expansion would be felt going forward. The cash and liquid investments in the books at the end of FY2012, is around Rs.90/share, which is around 24% of the CMP. PSL is confident of achieving revenue growth bettering NASSCOM’s FY2013 estimates of 11-14% growth for the industry. PSL is also confident of maintaining or improving its EBIDTA margins for FY2013
During Q1FY12, the company registered 34.4% YoY growth (11.1% YoY) in revenue to Rs.300.7 crore and net profit grew by 50.8% YoY (0.9% QoQ) to Rs.41.6 crore.
For more than two decades, Persistent has been an innovation partner for the world’s largest technology brands, leading enterprises and pioneering start-ups. With a global team of 6,600+ employees, Persistent has 350+ customers spread across North America, Europe, and Asia. The company enjoys a zero debt status and has a strong focus on its IP led business by making key investments in technology areas like cloud computing, BI & analytics, mobility and collaboration
The new initiatives have contributed almost 40% of the revenues for the company during FY2012. Management has aggressive focus on improving productivity and employee efficiency and controlling administrative cost
At the CMP of Rs.340. PSL trades at 7.7x P/E its FY2014E EPS of Rs.44. We expect PSL to improve revenues and margins going forward. Also, with the likely consolidation in mid and small sized IT companies, we expect the stock to trade around at least 10x its FY2014E EPS of 44. Hence, we recommend investors to consider accumulating PSL for a target of Rs.440, which is an upside of 28% from its current price.

PERSISTENT SYSTEMS Value pick ::Edelweiss

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.

Persistent Systems-Growth driven by IP-Led:: BP Equities

Persistent Systems Ltd.

Growth driven by IP-Led, Management confident to grow above industry
Results Highlights
⇒ Persistent Systems posted decent set of numbers for Q1 FY13, with top line coming in line with
our expectations while profits and margins were below expectations despite rupee depreciation.
⇒ The company top line grew 11.1% Q-o-Q and 34.4% y-o-y to Rs 3.0 bn, in line with our estimate
of Rs 3.0 bn, aided by strong volume growth of 3.9% in linear business (due to higher Utilization),
strong IP led revenues and 9.7% rupee depreciation in the quarter.

Persistent Systems :NEW SERVICE LINES WILL DRIVE GROWTH: IFCI research

Focus on key service lines to drive next wave of growth
Persistent Systems has bet big on new service lines like cloud, enterprise mobility, enterprise collaboration and business analytics to drive growth. Contribution from these service lines is expected to grow from 45% in FY12 to 60% in FY14. All these service lines have witnessed double-digit growth on a sequential basis over the last four quarters.

Persistent Systems - IP business to boost growth; visit note; :Edelweiss PDF link

Persistent Systems (PSYS IN, INR 352, Not Rated)

We recently met the management of Persistent Systems (PSYS) for a business update and outlook going forward. Management’s optimistic FY13 growth outlook springs from the new IBM deal, which is likely to offset the decline in organic business. Also, rising proportion of IP revenue and utilisation improvement bode well for margin surge. We believe the stock will re-rate as the company capitalises on new deals and its margin profile improves further. We do not have a rating on the stock.