Persistent Systems
Performance highlights
Y/E March (` cr) Net revenue EBITDA EBITDA margin (%) PAT 3QFY12 268 70 26.0 41 2QFY12 238 45 19.0 32 % chg (qoq) 12.4 53.5 696bp 25.2 3QFY11 195 43 21.9 36 % chg (yoy) 37.3 62.7 406bp 12.0
NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code IT 1,331 0.5 453/281 12,956 10 16,996 5,118 PERS.BO PSYS@IN
`333 -
For 3QFY2012, Persistent Systems (Persistent) reported lower-than-expected numbers on the top-line front but outperformed expectations on the bottom-line front. Management has revised FY2012 sales guidance downwards to 20.5-23.5% yoy from 29% yoy and PAT guidance to `125cr-135cr from `140cr. Persistent is into pure-play offshore product development (OPD), which is highly discretionary in nature and, thus, poses a huge risk for the company if any slowdown kicks in the economy. We maintain our Neutral view on the stock. Quarterly highlights: For 3QFY2012, Persistent reported revenue of US$51.7mn, up merely 0.3% qoq. Again in this quarter, the company witnessed a decline in onsite billing rates to US$12,387 people per minute (ppm) from US$12,665 ppm due to higher fixed price contracts. In INR terms, revenue growth was robust at 12.4% qoq to `268cr due to steep INR depreciation against USD. The companys EBITDA and EBIT margins increased by 696bp and 688bp qoq to 26.0% and 20.1%, respectively, aided by ~600bp qoq due to INR depreciation. Outlook and valuation: Persistent, due to its niche focus on OPD, is exposed to higher risks if any slowdown kicks in developed economies. This, along with the cautious outlook on the economy, has led to management revising its FY2012 revenue growth guidance downwards. Over, FY2011-13E, the company is expected to record USD and INR revenue CAGR of 14.8% and 20.3%, respectively. On the EBITDA margin front, we expect margin to increase to 22.7% and 23.0% for FY2012 and FY2013 from 20.4% in FY2011, majorly due to INR depreciation and higher utilization level, from 74% in 3QFY2012 to 74.7% in FY2013. On the bottom-line front, the company has revised its guidance to `125cr-135cr from `140cr previously. Thus, over FY2011-13E, we expect the company to record EBITDA and PAT CAGR of 27.8% and 0.1%, respectively. At the CMP of `333, the stock is trading at 9.5x FY2013E EPS of `35.0. We value the stock at 9.5x FY2013 EPS i.e., 50% discount to Infosys, which gives us a fair price of `332, and maintain our Neutral rating on the stock.
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 39.0 27.0 5.8 28.2
3m 0.3 4.8
3yr 95.9 -
FY2010 601 1.2 115 74.0 24.3 32.1 10.4 1.9 18.0 17.5 1.6 6.7
FY2011 776 29.1 140 21.5 20.4 34.9 9.5 1.8 18.7 15.5 1.3 6.2
FY2012E 1,003 29.3 130 (6.9) 22.7 32.5 10.2 1.6 15.2 19.7 1.0 4.6
FY2013E 1,122 11.9 140 7.5 23.0 35.0 9.5 1.4 14.3 19.4 0.9 3.9
Ankita Somani
+91 22 39357800 Ext: 6819 ankita.somani@angelbroking.com
3QFY12 268 153 115 17 28 70 16 54 7 (4) 56 16 41 10.1 42.9 26.0 20.1 15.0
% chg (qoq) 12.4 2.2 29.6 0.8 7.0 53.5 14.0 71.0
% chg (yoy) 37.3 28.8 50.6 20.3 45.8 62.7 49.6 67.1
9MFY11 563 339 224 45 59 120 30 90 11 14 116 9 107 26.6 39.8 21.4 15.9 18.1
% chg (yoy) 29.6 30.6 28.1 13.1 37.8 29.0 39.5 25.4
10 8 6 4 2 0.3 0
(%)
42 38 34 30
3QFY11
4QFY11
1QFY12
3QFY12
Revenue (US$mn)
Source: Company, Angel Research
12,896
12,746
13,033
12,665
12,387
10,000 8,000 6,000 4,000 2,000 3QFY11 4QFY11 Onsite 1QFY12 Offshore 2QFY12 3QFY12 3,661 3,723 3,770 3,771 3,778
Industry wise, the companys growth was led by the lifesciences and healthcare segment (contributing 12.5% to revenue), revenue of which grew by 18.2% qoq. Revenue from the telecom and wireless segment (contributing 20.4% to revenue) declined by 7.0% qoq, majorly led by European clients. The anchor industry segment infrastructure and systems (contributed 67.1% to revenue) also did not show traction in its business as revenue from this industry declined by 0.2%.
Geography wise, the companys growth was again led by the U.S., though revenue from this geography grew by merely 1.3%. Revenue from all other geographies registered a decline sequentially.
Revenue contribution from IP-led services increased in 3QFY2012 to 9.2% from 7.6% in 2QFY2012. Management indicated that it foresees IP-led revenue to be substantially higher in 2HFY2012 as compared to 1HFY2012 and expects IP-led revenue to touch US$20mn by the end of FY2012 i.e., whopping 34% yoy growth. This requires an ask rate of 74% qoq growth in IP-led revenue in 4QFY2012, which we believe is highly unlikely. We expect IP-led revenue to grow by 6% qoq and overall FY2012 IP-led revenue to be at US$16.7mn.
Net utilization (excluding resources in IP-led work) increased by 30bp qoq to 74.1%. For computing utilization, the company does not account for freshers added till they complete three months in the company. Management expects utilization to inch up and reach 75-77% over the next 3-4 quarters.
(%)
The client metrics of the company witnessed reduction in the number of clients in the US$1mn bracket and addition in the lower revenue bracket of <US$1mn. The companys total active client base increased to 273 in 3QFY2012 from 253 in 2QFY2012.
Margin profile
In 3QFY2012, the companys EBITDA and EBIT margins increased by 696bp and 688bp qoq to 26.0% and 20.1%, respectively, aided by ~600bp qoq due to INR depreciation.
42.9 39.1 37.4 37.3 37.2 26.0 21.9 17.9 16.5 12.3 3QFY11 4QFY11 12.3 1QFY12 EBITDA margin 13.2 2QFY12 3QFY12 17.9 19.0 20.1
25 20 15 10 5
Gross margin
Source: Company, Angel Research
EBIT margin
At the CMP of `333, the stock is trading at 9.5x FY2013E EPS of `35.0. We value the stock at 9.5x FY2013 EPS i.e., 50% discount to Infosys, which gives us a target price of `332, and maintain Neutral rating on the stock.
(`)
Dec-10
Aug-10
Aug-11
Price
Source: Company, Angel Research
16x
14x
12x
10x
8x
Dec-11
Apr-10
Oct-10
Apr-11
Feb-11
Oct-11
Jun-10
Jun-11
Key ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BVPS Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS Cash EPS Dividend Book value Dupont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover ratio (Sales/Assets) Leverage ratio (Assets/Equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (fixed assets) Receivables days Payable days 2.7 73 120 3.0 69 104 2.8 73 103 2.4 72 103 17.5 45.7 18.0 15.5 34.1 18.7 19.7 33.0 15.2 19.4 31.8 14.3 0.9 1.1 0.2 0.9 1.0 18.0 0.9 1.3 0.1 1.0 1.0 18.7 0.7 1.1 0.2 1.2 1.0 15.2 0.7 1.1 0.2 1.1 1.0 14.3 32.1 41.4 0.6 178.1 34.9 45.5 5.5 186.8 32.5 47.2 3.5 213.8 35.0 51.8 3.5 245.1 10.4 8.0 1.9 0.2 1.6 6.7 1.5 9.5 7.3 1.8 1.7 1.3 6.2 1.3 10.2 7.1 1.6 1.1 1.0 4.6 1.2 9.5 6.4 1.4 1.1 0.9 3.9 1.0 FY2010 FY2011 FY2012E FY2013E
10
E-mail: research@angelbroking.com
Website: www.angelbroking.com
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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered
Persistent No No No No
Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors
Ratings (Returns):
11