Hold Persistent Systems; target of Rs 390: Emkay

“Persistent reported inline revenues at US$ 54.9 mn (+1.3% QoQ) , however margins declined by ~180 bps QoQ to 26.8% despite ~10% currency depreciation impacted adversely by onsite wage hikes (~4% hikes), higher Sales and Marketing investments and taking over of a client’s team in Malaysia and US. Profits at Rs 416 mn (+1% QoQ) missed expectations (we estimated ~180 bps improvement in margins QoQ along with forex gains) impacted adversely by lower margins and forex losses of ~Rs 121 mn. Headcount continued to decline for the 3rd quarter in a row with attrition increasing slightly by ~60 bps QoQ to 18.9%. Top client grew by 5% QoQ however Top 5/10 clients declined by 7%/6% respectively driven by project ends in a key US financial services client with growth led by ~16% QoQ increase in IP revenues ( note that Persistent would have accounted for revenues from the recently signed IBM deal as part of IP revenues).”

“While management noted that the current weakness in the macro environment was impacting typical OPD business, co remains confident of pickup in growth from the key focus areas of Cloud Computing, Enterprise Analytics & Collabration and the ‘Sell With’ business through partnerships with SalesForce.Com, Cisco and IBM. Company management indicated that it continued to seeing smaller projects from clients than in the past and remained confident of continuing to increase the proportion of IP revenues ahead (IP revenues at ~14% of revenues in Q1FY13 V/s <9% in FY12). Co also intends to give offshore wage hikes of ~9.9% from Q2FY13 onwards as it targets a more comfortable attrition level of 15%.”

“We tweak our FY13/14E earnings higher by ~4%/1% to Rs 43.1/44.2. Valuations remain inexpensive at ~8.8x/8.6x FY13/14E P/E and limit any case for sharp downsides. However we await more predictability and consistency in operating performance to turn constructive on the stock (note that Persistent’s margins improved by ~950 bps in H2FY12 and declined by ~180 bps QoQ in June’12 qtr despite ~10 % currency depreciation).HOLD stays with an unchanged TP of Rs 390,” says Emkay Global Financial Services research report.  

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