Madhuchanda Dey Moneycontrol Research
After a weak Q4 FY18, Persistent Systems had a better Q1 FY19 with revenue at $123.6 million, up 5.7 percent sequentially and 9.4 percent year-on-year (YoY), driven by intellectual property-led revenue that showed strong growth. The same was up 30 percent sequentially (thanks to a low base) and 10 percent YoY. Bulk of the traction came from the reselling business in Europe that raked in $6 million in revenue.
On account of the realignment of businesses across verticals, sequential differences is not directly comparable. IBM Alliance business posted robust growth (39.6 percent sequentially), while services, digital and Accelerite businesses declined sequentially by 3.6 percent, 5.8 percent and 14.8 percent, respectively.
Digital revenue declined due to completion of certain projects and inability to ramp-up new projects. However, the management has highlighted a robust deal pipeline, which should accelerate growth in digital. Spends of companies towards next-gen technology is also rising and the management is aggressively investing in sales and marketing to capture this opportunity.
In the quarter under review, the company saw 203 basis points sequential margin improvement to 16.8 percent, driven by higher IP sales that earned a better margin.
Going forward, margin expansion will be supported by better utilisation rates, improvement in onsite mix, new product launches in Accelerite/IP businesses and improvement in operational efficiency.
The company will hike wages this quarter, which could cut erode margin by around 250 bps, but better revenue and cost optimatisation would offset some of the impact. For FY19, around 100 bps YoY margin expansion can be seen on a constant currency basis (and another 50-100 bps due to favourable currency movements).
The management will be investing more in sales and marketing in FY19. It has already added a dozen resources in Europe and will be adding around 3-5 each in North America and the Rest of the World. While investments in sales will be high, that in product development will cool off, providing some respite.
The management’s strategy is to focus on collaborative innovation/co-creation model to build new business models and revenue streams. It has successfully created a new digital solution in collaboration with its existing clients. Going forward, the co-creation model should start showing meaningful results.
We remain optimistic on the Persistent’s growth potential and margin improvement as it has strengthened its digital capabilities and migrated from pure effort-based business to a value-based one (IP driven). It is focusing on key service areas - data, digital and IoT (Internet of Things) - for its targeted verticals: financial services, healthcare and industrials (IoT only) which has a huge growth potential.
While the stock has outperformed the Nifty year to date, it has significantly underperformed the IT index due to its tepid showing so far. The commentary appears to be strong enough to reverse the same. The stock is reasonably valued at 14.7 times FY20e earnings. The consolidation provides a strong opportunity to buy the stock for the medium- to long-term.
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