Buy Persistent Systems; target of Rs 403: BP Equities

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Buy Persistent Systems; target of Rs 403: BP Equities

BP Equities is bullish on Persistent Systems and has recommended buy rating on the stock with a target of Rs 403 in its January 27, 2012 research report.

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BP Equities is bullish on Persistent Systems and has recommended buy rating on the stock with a target of Rs 403 in its January 27, 2012 research report.

"Persistent Systems posted decent set of numbers for Q3 FY12, both top line and profits came in line with our expectations while were above street's expectations. The company top line grew 12.1% Q-o-Q and 37.3% Y-o-Y to Rs 2.67 bn, in line with our estimate of Rs 2.69 bn, aided by 11% rupee depreciation and higher utilization. The revenue in US$ terms grew only 0.3% Q-o-Q and 19.6% Y-o-Y to US$ 51.7 mn, slowed down due to consolidation in some top accounts & delays in decision making due to uncertainty in the macroeconomic environment. As a result management also lowered its full year revenue guidance for FY12E to $205-210 mn from $220 mn. Management believes that to spur top line growth it will have to grow partnership with existing clients (OPD business), "Sell with partners" for building services on technology platforms and will have to develop IPs (IP-Led Services) and focus primarily into new technological areas like cloud, mobility ,analytics and collaboration."

"Net profit stood at Rs 406 mn up 12.0% Y-o-Y and 25.2% sequentially aided by outstanding margins performance offset by forex losses of Rs 41mn in the quarter. Diluted EPS stood at Rs 10.1 inline with our estimate of Rs 10.2 for the quarter. EBITDA margin expanded 547 bps sequentially and 225 bps Y-o-Y to 24.2%, aided by rupee deprecation of 12.4% in the quarter, higher nonlinear revenues, higher Utilization rates and reduction in total no of employees. Volumes grew only 0.7% sequentially, primarily due to lower no of working days and lower employee addition in the quarter. Onsite pricing environment remained under pressure and declined 2.2% sequentially while offshore pricing remained flat sequentially. We believe pricing environment to remain stable in the coming quarters however demand uncertainty and instability in the west can put some pressure going forward. Utilization excluding trainees improved 30 bps to 74.1% which we expect to improve further going forward. Attrition too improved and stood at 17.4% in Q3 FY12 vs 17.7% in the last quarter."

"Persistent has strategically invested significantly in higher margin IP-led business and currently spend 6.0% of its technical man month into R&D up from 5.5% in the last quarter. Its contribution to total revenues increased 160 bps sequentially to 9.2% in Q3 FY12. Going forward we expect the company is well poised to tap the immense opportunities present in IP-led services business and thus will boost top line and provide cushion to margins. Revenue contribution from Top 1/5/10 clients declined 10/160/110 bps sequentially and stood at 15.9%/37.0%/48.3% respectively."

"We believe that ongoing uncertainty in the west, unstable demand environment is the biggest risk present at the moment, which can delay client decisions and impact IT spending, making it difficult for the company to maintain high growth rate in FY13E. Management too is witnessing some delays in decision making from clients (specially large deals) and believes that consolidation within some large client base can impact business. However, we believe that company's ability to maintain long term relationships with large marquee clients, significant focus on non linear revenue streams and foray into new technological areas will help the company to achieve ~15% growth in US$ terms in FY13E. We expect the company revenue and Diluted EPS to grow at 20.1% and 20.0% to Rs 12.0 bn and Rs 40.7 respectively in FY13E. For Q4 FY12E and FY13E we have assumed USD/INR rate of Rs 50. The stock currently trades at a P/E of 9.4x and 7.9x FY12E and FY13E earnings which we think is at a discount to its peers considering its high growth rate, healthy return ratios and higher margins. We maintain our "BUY" rating on the stock and give a DCF based target price of Rs 403 an upside of 25.8% from current levels," says BP Equities research report. 

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