Persistent Systems (Q1 FY14)

India Infoline News Service | Mumbai |

Persistent’s revenue performance, though, largely in with expectation, was impacted by the volatile IP related business.

CMP Rs528, Target Rs605, Upside 14.6%
  • Q1 FY14 dollar revenues for Persistent Systems came marginally ahead of expectation growing 1.5% qoq to US$63mn. The IP business was weak de-growing 12.4% on a sequential basis. On the other hand, the Product engineering as well as the platform business showed robust growth of 4.4% qoq in dollar terms. The growth of the non-IP business was volume led with billed efforts expanding 3% on a sequential basis.  Onsite realisation too showed decent up-tick growing 4%.

  • From the IP business perspective, Management alluded that delay in the contract renewals for the HPCA (HP client automation) licenses resulted in revenues being pushed out to next quarter. The strong growth in the Product engineering and platform business was largely driven by higher onsite efforts (+10.5% qoq) with offshore volumes growth tepid at 1.5% qoq.

  • Amongst the key verticals, growth was driven by Infrastructure and Systems which grew 5.4% qoq in dollar terms. On the flip side, Telecom and Life Sciences verticals saw de-growth of 7.9% and 3.3% qoq in dollar terms. Within geographies, America continued to be the key driver of performance, growing 4.5% qoq in dollar terms. Management commentary on growth of demand pipeline, ISV spending as well as deal traction in SMAC (social, mobile, analytics and cloud) was strong for the US geography. On the flip-side Europe continued its weak traction de-growing 14.5% qoq. Amongst clients, Top 2-5 and non Top 10 clients drove the performance growing 2% /3 % respectively.

  • The OPM performance for Persistent Systems was materially below expectation correcting 310bps versus our expectation of 190bps correction. The key headwinds from the margin perspective were – higher S&M (110bps impact), additional visas costs (150 bps impact), correction in utilization (100 bps impact), doubtful debt provisions (120bps impact) and HPCA transition costs (40 bps impact). With a singular tailwind of rupee depreciation (180bps impact), the operating margin resultantly corrected to 21.7% for the quarter.  Lower operating profitability coupled with better than expected other income resulted in a PAT of Rs571mn for the quarter. On the employee front, net addition continued to be decent (+2.5% qoq) and attrition remained under control at 14.2% for the quarter. From Q2 FY14 perspective, strong fresher hiring (~500 additions) as well as offshore salary hikes are expected to be key headwinds possibly keeping the OPM subdued.

  • Persistent’s revenue performance, though, largely in with expectation, was impacted by the volatile IP related business. The de-growth in the IP business was supported by the robust performance of the product engineering and platforms business. As the IP revenues from the HPCA business ramp-up, we expect H2 FY14 to be growth to be relatively robust. We adjust our operating margin expectation on the back of the lower than expected OPM in Q1 FY14 and now expect the same to correct 230bps over FY13-15E. With improving management commentary especially in context of the traction in the US business should help the company to maintain decent growth momentum (15% dollar revenue CAGR over FY13-15E). We tweak estimates but maintain our BUY recommendation and 9-month TP of Rs605.
Results Table
(Rs mn)
Q1 FY14
Q4 FY13
% qoq
Q1 FY13
% yoy
Net sales
3,573
3,340
7.0
3,007
18.8
Operating profit
777
831
(6.5)
807
(3.7)
OPM (%)
21.7
24.9
(313) bps
26.8
(508) bps
Depreciation
(237)
(212)
11.9
(185)
28.3
Other income
263
102
156.9
(47)
(662.7)
PBT
803
722
11.3
575
39.6
Tax
(232)
(203)
14.5
(160)
45.4
Effective tax rate (%)
28.9
28.1
-
27.7
-
Adjusted PAT
571
519
10.1
416
37.3
Adj. PAT margin (%)
16.0
15.5
45 bps
13.8
215 bps
Reported PAT
571
519
10.1
416
37.3
EPS (Rs)
14.3
13.0
10.1
10.4
37.3
Source: Company, India Infoline Research

Financial summary
Y/e 31 Mar (Rs m)
FY12
FY13
FY14E
BSE 645.50 [2.65] ([0.41]%)
NSE 646.35 [3.20] ([0.49]%)

***Note: This is a NSE Chart

 

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