Persistent Systems (Q2 FY14)

India Infoline News Service | Mumbai |

Persistent Systems’ Q2 FY14 revenue performance was a strong beat to our estimates. The dollar revenues came in at US$68.5mn (+8.6% qoq) versus our expectation of US$66.3mn.

CMP Rs740, Target Rs821, Upside 11%
 
  • Persistent Systems’ Q2 FY14 revenue performance was a strong beat to our estimates. The dollar revenues came in at US$68.5mn (+8.6% qoq) versus our expectation of US$66.3mn. The materially better-than-expected performance was on the back of robust 38% growth in IP business and sustained performance of the Product engineering services (+3.5% qoq). In rupee terms, the consolidated revenues expanded 21% qoq to Rs4.3bn.


  • The key growth drivers for the IP-led business were the inorganic addition from HP Client automation (HPCA) product and a new deal for its Location product in South Africa. The IP led growth in expected to be strong in H2 considering the seasonal strength as well as incremental revenues from the HPCA and Location business. On the services business, large part of the growth was volume driven with onsite and offshore volumes expanding 7.6% qoq and 2.6% qoq respectively. On the flip-side, there was a marginal correction of 1.9% in the onsite price realisation during the quarter.


  • Amongst the key verticals, growth was driven by Infra and Life sciences/healthcare verticals which grew 8.8% qoq and 40.5% qoq growth respectively. Due to project delays, the telecom vertical continued to show de-growth (7.7% qoq in Q2 FY14). Within geographies, the key market of NA continued to register strong 4%+ qoq growth in dollar terms. Among clients, growth was driven by Top, Top2-5 and Non Top10 clients which registered sequential growth of 15%, 9% and 9% respectively. The quality of client additions too was good with 5 out of the 36 accounts added being large clients (US$1bn+ revenue base).


  • The OPM performance too was far ahead of expectation with the operating margin expanding 421bps to 26%. Strong IP led revenue growth (which has higher margin profile), rupee depreciation (+270bps) and  SG&A leverage (+170bps) were the key tailwinds which materially offset the wage hike impact (-310bps). Much better than expected performance on both revenue and margin front resulted in PAT (Rs608mn) coming in 8% ahead of estimate despite higher forex losses. The employee addition was strong with the total employee base growing 4.4% qoq. The hiring guidance of 600+ employees for rest of the year too was confidence enhancing. On the flip side, weak seasonality in Q3, strong hiring and sustained tech investments may preclude material margin improvement going forward in FY14.


  • Overall, the Q2 FY14 performance for Persistent Systems was materially better than expected. While a large part could be attributed to the in-organic addition from HPCA, we think the sustained performance in the PE services business (80% of revenues) and improving traction for some of the previously acquired IP products like Location and TNPM are key positives. Management commentary on demand pipeline for traditional PE services from ISVs as well as enterprises is also enthusing. A 14%+ dollar revenue growth in H1 FY14 as well decent pipeline and incremental IP revenue growth imply that company should grow above industry average for FY14. Our detailed company report on Persistent on 23rd September (25%+ returns till date) also had alluded to these strong growth levers at Persistent. We increase our earnings estimate for FY14/15E by 8%/10% respectively. We maintain BUY with increased 9-month TP of Rs821.

Results Table
(Rs mn)
Q2 FY14
Q1 FY14
% qoq
Q2 FY13
% yoy
Net sales
4,324
3,573
21.0
3,269
32.3
Operating profit
1,122
777
44.4
890
26.0
OPM (%)
26.0
21.7
421 bps
27.2
(128) bps
Depreciation
(263)
(237)
11.0
(189)
39.0
Other income
(24)
263
(109.2)
(78)
(69.0)
PBT
835
803
4.0
623
34.1
Tax
(227)
(232)
(2.2)
(176)
28.8
Effective tax rate (%)
27.2
28.9
-
28.3
-
Adjusted PAT
608
571
6.5
446
36.1
Adj. PAT margin (%)
14.1
16.0
(192) bps
13.7
40 bps
Reported PAT
608
571
6.5
446
36.1
EPS (Rs)
15.2
14.3
6.5
11.2
36.1
Source: Company, India Infoline Research
 
Financial summary
BSE 645.50 [2.65] ([0.41]%)
NSE 646.35 [3.20] ([0.49]%)

***Note: This is a NSE Chart

 

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Y/e 31 Mar (Rs m)
FY12
FY13
FY14E
FY15E
Revenues (Rs m)