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.
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New deal to offset organic revenue decline
Management stated that it has recently won a USD9mn deal from IBM which will offset the decline in organic revenue (~USD203mn for FY12). The company stated that this type of product deals have high margins. Further, it is seeing traction in its infrastructure and systems and telecom and wireless segments.
Further margin improvement in the offing
PSYS reiterated its continued endeavour to improve revenue contribution from IP led revenue (9% in FY12) as it believes this will aid offset cost pressures and improve the company’s margin profile. Further, it has planned fresher hires of ~350 only for FY13, which will enhance utilisation, leading to margin improvement from the current level (23.2% in FY12).
Outlook and valuations: Value pick; Not Rated
We believe increasing focus on delineation of revenue from headcount will lead to profitable growth for the company going ahead. Although the stock has run up 19% in the past six months, we consider valuations of P/E of 8.7x and 7.7x consensus EPS of INR40 and INR46 for FY13E and FY14E, respectively, attractive. We do not have a rating on the stock.
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