Persistent Systems (Q2 FY13) – BUY

India Infoline News Service | Mumbai |

In Q2 FY13, even excluding the IP business, the growth was decent at ~3% qoq. On the pricing front, while the onsite pricing improved marginally by 0.6%, the offshore pricing improved impressively by 2.1% qoq.

CMP Rs427, Target Rs490, Upside 14.8%
 
  • Q2 FY13 dollar revenues for Persistent Systems (PSYS) were significantly ahead of estimates at US$60.1mn. Inorganically supported to an extent, the revenues grew 9.4% qoq against our expectation of ~3.5% qoq growth. As seen in past several quarters, majority of the growth was supported by strong IP revenue (+48% qoq). In Q2 FY13, even excluding the IP business, the growth was decent at ~3% qoq. On the pricing front, while the onsite pricing improved marginally by 0.6%, the offshore pricing improved impressively by 2.1% qoq.
  • Among the verticals, Telecom and Wireless continued its strong performance (boosted inorganically to an extent) growing ~25% qoq. Infrastructure & systems had a steady growth of ~6% qoq too. Across geographies, Europe grew the strongest at 17.3% qoq followed by US which grew 9.6% qoq. Top clients’ performance was impressive as also evidenced in the strong IP revenues growth. While the Top client grew at blistering rate of 27% qoq, top 2-5 too had a strong performance at 9% qoq. Out of the 48 logos added, six are large (having US$1bn+ in revenues), and hence have strong mining potential.
  • Q2 FY13 OPM expanded 40bps as against our expectation of 130bps correction. Strong IP led growth, material utilization expansion of ~350bps and SG&A leverage more than offset the negative impact of offshore salary hikes (-360bps) and adverse currency (-60bps). Material forex loss of Rs161mn resulted in a PAT of Rs446mn (+7.4% qoq).  While, employee headcount continued to correct (down 166 from Q1 FY13 base), it is expected to be a tail of the restructuring exercise. The company now expects to hire nearly 600 employees on net basis in H2 FY13. Attrition (LTM basis) cooled off materially to 16.9% from 18.9% last quarter.
  • In Q2 FY13, Persistent Systems furthered its inorganic growth objective by signing a definitive agreement to acquire ‘rCloud’ - a cloud based platform from Doyenz Inc. This platform provides backup and disaster recovery for physical and virtual servers on cloud for ~3500 of its Small & medium business (SMB) clients. With a US$4mn annual revenue run-rate, it is expected to accrue to Persistent’s IP revenue base from Q3 FY13.
  • We are impressed by the substantial beat on both revenue and margin front in Q2 FY13. Although the growth is largely driven by the IP revenues, the growth in traditional product engineering services too was credible at 3% qoq. Management commentary was upbeat with respect to growth opportunities in IP led business (both organic and inorganic) and traditional product engineering services. Its sell-with strategy is showing good traction too.  Factoring in the strong out-performance, acquisition of US$4mn run rate ‘rCloud’ platform and encouraging management commentary we now estimateFY12-14E dollar revenues to witness 14.5% CAGR (12% earlier). Nonetheless, as noted in our last note, the dominance of IP in the growth as well as change in client buying behavior could continue to lead to choppy sequential growth going ahead. Maintain BUY with an increased 9-month TP of Rs490.
Result table
(Rs mn) Q2 FY13 Q1 FY13 % qoq Q2 FY12 % yoy
Net sales 3,269 3,007 8.7 2,382 37.2
Operating profit 890 807 10.3 454 96.3
OPM (%) 27.2 26.8 41 bps 19.0 819 bps
Depreciation (189) (185) 2.5 (140) 35.5
Interest - - - - -
Other income (78) (47) 67.6 137 (157.1)
PBT 623 575 8.2 451 38.0
Tax (176) (160) 10.4 (127) 38.8
Effective tax rate (%) 28.3 27.7 - 28.2 -
Other provisions / minority etc - - - - -
Adjusted PAT 446 416 7.4 324 37.8
Adj. PAT margin (%) 13.7 13.8 (17) bps 13.6 5 bps
Reported PAT 446 416 7.4 324 24.7
EPS (Rs) 11.2 10.4 7.4 8.1 (0.1)
 Source: Company, India Infoline Research

Financial Summary
Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenues (Rs m) 7,758 10,003 12,998 14,380
yoy growth (%) 29.1 28.9 29.9 10.6
Operating profit 1,583 2,324 3,454 3,448
OPM (%) 20.4 23.2 26.6 24.0
Reported PAT (Rs m) 1,397 1,417 1,853 2,164
yoy growth (%) 21.5 1.5 30.7 16.8





EPS (Rs) 34.9 35.4 46.3 54.1
P/E (x) 12.3 12.1 9.2 7.9
Price/Book (x) 2.3 2.0 1.7 1.4
EV/EBITDA (x) 10.2 6.8 4.2 3.9
RoE (%) 20.1 17.8 20.0 19.5
RoCE(%) 21.6 24.7 27.8 26.7
Source: Company, India Infoline Research
BSE 650.60 3.95 (0.61%)
NSE 649.00 2.70 (0.42%)

***Note: This is a NSE Chart

 

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