Persistent Systems up 5% post Q4 earnings; brokerages see up to 32% upside in 1 yr

Shares of midcap IT company Persistent Systems rallied nearly five percent on Wednesday despite a weak Q4 FY18 earnings performance, which was already intimated by the management at the start of April. The stock rally is largely on the hope of positive outlook for FY19 by the brokerage houses.

The stock price was quoting at Rs 760.95, up Rs 35.10, or 4.84 percent on the BSE, at 13:30 hours IST.

Net profit during the quarter fell by 19.7 percent sequentially to Rs 73.7 crore and revenue declined 5 percent to Rs 752.5 crore on lower IP revenue.

Revenue in dollar terms also dropped 4.6 percent to USD 116.9 million for the quarter ended March 2018, from USD 122.5 million in previous quarter.

Operating profit was down 21.2 percent quarter-on-quarter to Rs 108.3 crore and margin contracted 300 basis points to 14.4 percent in Q4FY18.

During the March quarter, the company had intimated that it was expecting a decline in IP revenues during Q4 FY18, which would impact revenue and EBIDTA margin for the quarter.

All brokerage houses retained their rating on the stock and expect the stock to rally up to 32 percent over one year period on hopes of good earnings in FY19:-

Brokerage: Credit Suisse | Rating - Outperform | Target - Rs 960 | Return - 32%

Credit Suisse has maintained its Outperform rating on the IT company with a target price of Rs 960 per share as it has positive outlook on FY19 despite a weak exit in FY18.

Despite a weak exit, double-digit growth looks possible in FY19, it feels.

Q4 result slightly better than its estimates, it said and believes there is scope for margins to expand.

Brokerage: CLSA | Rating - Buy | Target - Rs 900 | Return - 24%

While reiterating Buy call on the stock with an unchanged target of Rs 900 per share, CLSA said Persistent's Q4 revenue was below expectations, but in-line with lowered expectations by the company during the quarter.

"Company remains attractive on inexpensive valuations and we are likely to see growth recovery from improving demand environment," it said.

The research house expects IP revenue to recover to a slower pace of growth, but cut FY19-20 revenue by 5 percent & earnings by 5-8 percent.

Brokerage: Morgan Stanley | Rating - Overweight | Target - cut to Rs 950 | Return - 31%

Morgan Stanley has maintained its Overweight rating on the stock with reduced target price at Rs 950 (from Rs 1,025 per share earlier) after lowering EPS estimate by 3.1 percent for FY19 & 3.5 percent for FY20.

The research house believes operating leverage should drive better margins as growth comes back and expects financial performance to improve in FY19.

Brokerage: HDFC Securities | Rating - Buy | Target - Rs 840 | Return - 16%

Margin contraction was mitigated by improvement in efficiencies (utilisation increase of 134bps QoQ to 81.2 percent with lower headcount), higher gross margin in services/ digital.

We re-iterate positive outlook on Persistent based on (1) Strong growth in digital (43 percent YoY with around 30 percent organic in FY18), (2) Market expansion in Europe supported by Parx Werk and increased sales focus, (3) Near-shore shift to improve profitability (alliance business), (4) Structural non-linear benefits from IP-led business, despite quarterly volatility (Q3-Q4 seasonality), and (5) Improving cash generation (FCF/APAT improved from around 50 to 100 percent over FY17-18).

Factored revenue/EPS growth of 10/14 percent CAGR over FY18-20E, based on revenue growth at 8.4/12.4 percent and EBITDA at 16.2/17.0 percent for FY19/20E, respectively. Maintain Buy with target price of Rs 840, at 16x FY20E EPS.

Brokerage: Prabhudas Lilladher | Rating - Buy | Target - Rs 820 | Return - 13%

We expect Persistent Systems' USD revenues to grow at 9.5/12.5 percent for FY19/FY20E (versus 9.2/12 percent modelled earlier). We estimate EBIDTA margins at 16.3/16.8 percent for FY19/FY20E (versus 15.5 percent delivered in FY18). Margin trajectory remains challenging as company is already operating at peak utilisation rates. While we recently downgraded earnings post Q4 warning, we further marginally trim EPS estimates by 3.5/2.3 percent to Rs 43.5/53 per share for FY19E/FY20E.

While most midcap IT companies are showing organic revenue growth acceleration, Persistent Systems USD revenue growth is below midcap peers. In our view, Persistent needs to strengthen its footprint in the Enterprise segment by expanding service offerings into traditional services as well. This can enable company increase client mining and address a larger part of Enterprise IT spend (Similar strategy adopted to EPAM). Trim target price by 2 percent to Rs 820 per share (15.5x FY20E EPS) led by earning cut. Net cash on balance sheet at Rs 1,220 crore (Rs 153/sh) which is around 21 percent of market cap and provides downside protection. Retain Buy.

Brokerage: Motilal Oswal | Rating - Buy | Target - Rs 860 | Return - 18%

Persistent reiterated its expectation of above industry growth, as it expects revenues to remain unaltered despite Q4 miss. On margins, too, the company cited that it can continue holding on to the 15-16 percent band. While investment in sales will be elevated, those in product development will cool off, providing an offset. That said, Persistent cited that the project nature of Digital and dependency on partner's sales in IP limit visibility to predict growth.

Earnings moderation by 5-6 percent is a function of: (i) spreading recoupment of IP-revenues over the next three quarters rather than immediately and (ii) factoring in lower visibility in some of the partner-led IP deals.

However, a pickup in sales of its own new IPs and partnerships could provide a boost to non-linear revenues. Our price target of Rs 860 (18 percent upside) discounts forward earnings by 15x.

Increasing the base of revenues from IPs, apart from continued execution in linear services, will be a key trigger to further re-rating. Maintain Buy.