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Muted revenue growth; maintain Hold
Muted revenue growth, robust margin. Persistent’s 2Q
revenue was up only 2.6% (in dollar terms), on account of a
revenue delay of ~US$1.5m, which is expected to roll over to
3Q. However, margins were up 400bp qoq, owing to lower
salary costs (costs related to gratuity). We retain our target
price of `515 and Hold rating on the stock.
Key points in 2Q. Revenue contribution of the top client
increased 270bp qoq to 16.3%. The company added five
clients (total 201). Geographically, Asia Pacific was up 4.5%
and the US 3.7%, while Europe was down 4.7%. As per
vertical, Life sciences and Telecoms were up respectively
11.7%, and 11.6% qoq. FPP increased 90bp qoq to 10.7%
and IP driven-revenue slipped 70bp to 8.2%.
Change in estimates. We raise our FY11/12/13 EPS
estimates 3.2%, 0.4% and 0.7% respectively to account of the
margin improvement in the quarter.
Valuation and risks. Our target of `515 is based on a target
PE of 14x Sep ’11 EPS (retaining our target multiple at 14x).
This multiple of 14x 12-month forward EPS is at a 20%
premium to mid-cap IT companies. Risks to our call: i)
Competing with larger IT services companies and captives of
clients; ii) Continued investment in IP – success rate critical
to margins.
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