Persistent Systems’ Q1 FY13 revenue performance was in-line with expectations, growing 1.3% qoq to US$54.9mn. Strong 15.6% qoq dollar revenue growth for IP-led business supported the overall topline growth during the quarter. Excluding the IP business, the dollar revenues fell by 1.5% sequentially. Pricing improved during the quarter, with onsite and offshore pricing up 1.5% and 0.1% qoq, respectively.

Among the verticals, Telecom and Wireless continues to drive growth, posting a robust 16% dollar revenue up-tick qoq, followed by Life Sciences (+1.5% qoq growth). Among the geographies, US and EU grew well qoq, notching 4.7%/14.9% dollar revenue growth respectively. Within the client buckets, Top client and Top 6-10 clients grew at a fast clip, registering 4% and 7% growth qoq, respectively. Top 2-5 clients witnessed weakness, as a project for a large banking client got completed during the quarter. The Company added 33 new logos during the quarter, of which seven are large (having US$1bn+ in revenues), and hence have strong mining potential.

We were disappointed by the OPM performance during the quarter, which corrected 175bps qoq. This was despite the strong rupee depreciation tailwind (1% rupee depreciation leads to 50-60bps up-tick on the OPM). Company attributed the margin compression to onsite salary hikes, higher onsite employee costs (post absorption of acquired resources – 72 employees in Malaysia and 12 in USA), visa costs, renting of new SEZ premises and increased S&M costs. The Company has guided for a 10% increase in offshore salaries, which is expected to impact margin in the next quarter. Lower than expected OPM and in-line Other Income led to lower than estimated PAT at Rs416mn.

On the back of the cost efficiency drive and re-positioning of sales strategy, the number of technical employees/sales employees continued to be in a flux. The total employee base came down by 91 on a sequential basis. Management indicated that new employee additions in its focus areas of Cloud Computing, Mobility, Collaboration and Analytics will happen based on needs. The company has also given offers to various high level sales and marketing personnel, especially in Europe to drive sales in its core areas. The relatively higher wage hikes planned by the company (4.4% onsite and 9.9% offshore) is on the back increased attrition, which has climbed to ~19%. 

Though the overall revenue performance for Q1 FY13 was largely in-line with estimate, the softness in ex-IP led business and lower than estimated OPM were key dampeners.  Going forward, we believe,  the shifting demand/execution environment from low cost people based offshoring to more project based solutioning is and should continue to result in volatility in the business (at least in the near term). This change in business execution has also reflected in the continued flux in the employee base. We anticipate re-alignment of Persistent’s sales/execution towards the new demand dynamics to continue at least in the near future. Also, the emphasis on IP led revenues as well as platform based solutions may lead to choppiness in the revenue performance. We forecast 12% dollar revenue CAGR over FY12-14E and rebase our exchange rate (USD-INR) estimate to Rs.53.6/53 for FY13/14. Maintain BUY with 9-month TP of Rs450.