Buy Persistent Systems; target of Rs 638: FinQuest

“Persistent Systems Ltd. (PSL) came up with a decent set of numbers for Q3FY13. Revenue for the quarter came in at $60.8 mn, up 17.6percent Y-o-Y and 1.2percent sequentially lower than our estimate of $62.8mn. In rupee terms, the revenue was Rs.3.33bn, up 24.4percent Y-o-Y and 1.9percent sequentially. The muted revenue growth in the quarter was largely due to lower IP revenue which is lumpy by nature. It may be noted that IP revenue had a higher base in Q2FY13 as it was up 47.8percent Q-o-Q in that quarter.” 

“EBIDTA margins contracted 250 bps sequentially to 24.8percent on the back of higher employee and SG&A cost which grew 13.3percent sequentially. The company had hired senior employees along with 16 onsite employees which came in with the Doyenz acquisition while SG&A cost also went up with addition of new facilities. Though the sequential volume growth of 1.8percent in OPD was a bit muted due to seasonal weakness, a 1.9percent Q-o-Q rise in the billing rate was a major positive.”

“PSL is a mid-cap IT company having one of the best EBITDA margins amongst its peer set which is also comparable to some large Indian IT companies. On the other hand PSL has also delivered an earnings CAGR of ~23percent over the past 3 years. Due to these reasons we believe PSL should command better valuations compared to other mid-cap IT companies. We reiterate our buy rating on the stock and value the company at a slight premium compared to other midcap IT companies at 11x FY14 earnings arriving at a target price of Rs 638,” says FinQuest Securities research report. 

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