Persistent, 1Q FY 2014

7/27/2019 Persistent, 1Q FY 2014

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Please refer to important disclosures at the end of this report 1

Y/E March (` cr) 1QFY14 4QFY13 % chg (qoq) 1QFY13 % chg (yoy)Net revenue 357 334 7.0 301 18.8EBITDA 78 83 (6.5) 81 (3.7)

EBITDA margin (%) 21.7 24.9 (313)bp 26.8 (508)bp

PAT 57 52 10.0 42 37.3Source:Company, Angel Research

Persistent Systems (Persistent) reported its 1QFY2014 results, which were below

our expectations on the revenue and operating margin fronts but were better than

our expectation on the bottom-line front because of robust forex gain. Revenues

were impacted due to a 13% qoq decline in IP-led revenues. The Management

remains confident of FY2014 with the deal pipeline being strong and remains focused

on increasing the share of IP-led revenues in its portfolio with incremental growth

being led by the key focus areas of cloud, analytics and collaboration. We maintainour Accumulate rating on the stock.Quarterly highlights: For 1QFY2014, Persistent reported a revenue ofUS$63.0mn, up 1.5% qoq. In INR terms, the revenue came in at `357cr, up 7.0%

qoq. The companys EBITDA margin declined by 313bp qoq to 21.7%, well below

our expectation of 24.1%. This was because of negative impacts suffered due to

3.5% onsite wage hikes, visa costs incurred during the quarter and increased

investments in senior S&M resources. The PAT stood at `57cr, up 10% qoq, aided

by a forex gain of `18cr as against `4cr in 4QFY2013.

Outlook and valuation: The Management indicated that the deal pipeline hasimproved by ~50% compared to last quarter and the company continues to

observe increasing client budgets. The company is witnessing good momentum in

the product engineering business (linear IT services), and IP-led revenues will add

to it going forward, thus making the outlook for 2HFY2014 look definitely better

than 1H. Revenues from HP client automation (HPCA) should flow in largely from

the 2QFY2014 and that along with healthy traction in product engineering segment

keeps growth outlook sanguine. Over FY2013-15, the company is expected to

record a USD and INR revenue CAGR of 11.5% and 15.1%, respectively. OverFY2013-15, we expect the company to record an EBITDA and PAT CAGR of 7.4%

and 10.0%, respectively. We value the stock at 10x FY2015E EPS, which gives us atarget price of `568, and maintain an Accumulate rating on the stock.Key financials (Indian GAAP, Consolidated)Y/E March (` cr) FY2011 FY2012 FY2013 FY2014E FY2015ENet sales 776 1,000 1,295 1,533 1,715% chg 29.1 28.9 29.4 18.4 11.9

Net profit 140 142 188 197 227% chg 21.5 1.5 32.3 5.0 15.3

EBITDA margin (%) 20.4 23.2 25.9 22.2 22.5

EPS (`) 34.9 35.4 46.9 49.2 56.8P/E (x) 15.1 14.8 11.2 10.7 9.2

P/BV (x) 2.8 2.5 2.1 1.7 1.5

RoE (%) 18.7 16.9 18.4 16.4 16.1

RoCE (%) 15.2 20.2 23.7 19.2 19.2

EV/Sales (x) 2.3 1.8 1.2 1.0 0.8

EV/EBITDA (x) 11.1 7.6 4.8 4.4 3.4

Source: Company, Angel Research; CMP as of July 29, 2013

ACCUMULATECMP `525

Target Price `568

Investment Period 12 Months

Stock Info

Sector

Net debt (`cr) (457)

Bloomberg Code

Shareholding Pattern (%)

Promoters 39.0

MF / Banks / Indian Fls 19.3

FII / NRIs / OCBs 14.8Indian Public / Others 26.9

Abs. (%) 3m 1yr 3yr

Sensex 1.1 16.4 8.9

Persistent 1.0 43.6 14.3

22,586

BSE Sensex

Nifty

Reuters Code PERS.BO

5,832

19,593

PSYS@IN

Face Value (`)

IT

Avg. Daily Volume

Market Cap (`cr)

Beta

52 Week High / Low

2,101

0.3

10

590/364

Ankita Somani+91 22 39357800 Ext: 6819

[email protected]

Persistent SystemsPerformance highlights

1QFY2014 Result Update | IT

July 30, 2013


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Persistent | 1QFY2014Result Update

July 30, 2013 2

Exhibit 1:1QFY2014 performance (Indian GAAP, Consolidated)

Y/E March (` cr) 1QFY14 4QFY13 % chg (qoq) 1QFY13 % chg (yoy) FY2013 FY2012 % chg (yoy)Net revenue 357 334 7.0 301 18.8 1,295 1,000 29.4Cost of revenue 210 192 9.8 169 24.9 731 592 23.4Gross profit 147 142 3.1 132 11.1 563 408 38.1

S&M expenses 32 26 22.3 22 46.7 96 69 39.9

G&A expenses 37 33 12.2 30 25.1 132 107 23.5

EBITDA 78 83 (6.5) 81 (3.7) 335 232 44.2Depreciation 24 21 12.0 18 28.3 78 61 28.1

EBIT 54 62 (12.8) 62 (13.2) 257 171 50.0

Other income 26 10 (5) 6 17

PBT 80 72 11.3 58 39.6 263 197 33.6

Income tax 23 20 14.5 16 45.4 75 55 36.8

PAT 57 52 10.0 42 37.3 188 142 32.3EPS (`) 14.3 13.0 10.0 10.4 37.3 46.9 35.4 32.3

Gross margin (%) 41.1 42.6 (153)bp 44.0 (286)bp 43.5 40.8 273bp

EBITDA margin (%) 21.7 24.9 (313)bp 26.8 (508)bp 25.9 23.2 266bp

EBIT margin (%) 15.1 18.5 (342)bp 20.7 (557)bp 19.8 17.1 272bp

PAT margin (%) 14.9 15.1 (19)bp 14.0 84bp 14.4 13.8 61bp

Source: Company, Angel Research

Exhibit 2:Actual vs Angel estimates

(` cr) Actual Estimate % Var.Net revenue 357 364 (1.9)

EBITDA margin (%) 21.7 24.1 (238)bp

PAT 57 51 12.4


Subdued performance

For 1QFY2014, Persistent reported a revenue of US$63.0mn, up 1.5% qoq. This

was on the back of a 4.5% qoq revenue growth (3.0% qoq volume growth and

1.5% qoq rise in price realization) in linear IT services (product engineering) to

US$53.5mn. Onsite revenues grew by 14.6% qoq on the back of a 10.7% qoq

volume growth and 3.9% qoq rise in price realization. Offshore revenues grew by

1.5% qoq on the back of a 2.3% qoq rise in volumes and 0.8% qoq decline in

price realization. IP-led revenues declined by 13% qoq to US$9.5mn. IP-led

revenues declined for the third consecutive quarter as Radia HPCA revenues were

delayed and its contribution during this quarter was miniscule. The company is not

concerned about the drop during the quarter. The Management indicated that the

deals in this business are annual maintenance contracts from HPCA which would

see significant ramp up in the second half and provide stability to IP led revenues.

In INR terms, the revenue came in at `357cr, up 7.0% qoq.


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July 30, 2013 3

Exhibit 3:Trend in revenue growth (qoq)


Exhibit 4:Trend in billing rates (qoq)


Industry wise, the companys growth was driven by its anchor industry segment

Infrastructure and Systems (contributed 69.1% to revenue) the revenue from

which grew by 5.5% qoq. Revenue from the Telecom and Wireless segment

(contributed 20.7% to revenue) declined on a sequential basis for the thirdconsecutive quarter. The Life Sciences and Healthcare segment (contributed 10.2%

to revenue) reported a 3.4% qoq decline in revenues.

Exhibit 5:Growth trend in industry segments

% to revenue % chg (qoq) % chg (yoy)Infrastructure and systems 69.1 5.5 23.5

Telecom and wireless 20.7 (8.0) (1.9)

Lifesciences and healthcare 10.2 (3.4) 1.7


Geography wise, North America was the only region to show growth this quarter,and the company expects this to continue with increased traction in SMAC (social

networks, mobile computing, analytics, and cloud computing) related product

engineering services in the region. Persistents presence in Europe is small and

54.9

60.1 60.862.1 63.0

1.3

9.4

1.2

2.2

1.5

0

2

4

6

8

10

34

38

42

46

50

54

58

62

66

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

(%)

(US$mn)

Revenue (US$mn) qoq growth (%)

12,789 12,863 12,772

14,01414,567

3,898 3,978 4,032 4,143 4,111

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000


(US$/ppm)

Onsite Offshore


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July 30, 2013 4

dominated by a few customers. During the quarter, the conclusion of a project and

a client facing stress, resulted in a weak performance in the geography.

Exhibit 6:Growth trend in geographies% to revenue % chg (qoq) % chg (yoy)North America 87.6 4.5 19.2

Europe 4.8 (14.5) (20.1)

Asia-Pacific 7.6 (16.2) 0.3


Hiring and utilization

Persistent reported a net addition of 174 employees into the system, taking its total

employee base to 7,144. The companys technical employee base increased by

149 people to 6,689. Attrition rate dropped marginally to 14.2% in 1QFY2014from 14.4% in 4QFY2013.

Exhibit 7:Employee metrics

Particulars 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14Technical 6,132 5,956 6,287 6,540 6,689

Sales 94 99 101 99 119

Rest 310 315 331 331 336

Total 6,536 6,370 6,719 6,970 7,144Net addition (92) (166) 349 251 174


Exhibit 8:Utilization trend


Operating margin declined considerably

In 1QFY2014, the companys EBITDA margin declined by 313bp qoq to 21.7%,

well below our expectations of 24.1%. This was on account of the following factors:

a) 3.5% onsite wage hikes, b) visa costs incurred during the quarter, c) 250bp qoq

decline in utilization (100bp impact), d) investments in senior S&M resources

(110bp impact), e) HPCA related knowledge transfer costs (~40bp impact) and f)

provisions for doubtful debts in 1QFY2014 as against a reversal in the prior

quarter (~120bp qoq impact). Of these, investment in sales is the sole factor that

71.7

75.2

77.3

72.5

70.0

69

70

71

72

73

74

75

76

77

78


(%)

Utili zation (%)


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July 30, 2013 5

will persist going forward, offsetting the gains from currency. The only tailwind

available to Persistent in 1QFY2014 was the 5.4% qoq depreciation in INR against

USD, which gave an ~180bp qoq benefit to margins.

Exhibit 9:Margin profile


Outlook and valuation

The Management sounded confident of the companys growth matching or

exceeding Nasscoms growth estimate of 12-14% yoy in FY2014, based on the

healthy pipeline and plans to continue investments in new technologies and sales

efforts, to take advantage of improved demand. The company sees itself well

positioned with respect to its SMAC offering. Hence, Persistent has taken the

advantage of favorable currency to invest heavily in S&M, adding 20 senior sales

executives this quarter and will add further in the coming quarter too. It is also

adding capacity with 500 freshers joining in in the coming two quarters.

The Management indicated that the deal pipeline has improved by ~50%

compared to last quarter and the company is continuing to observe increase in

budgets of clients and excitement related to its SMAC stack of services. The

Management indicated that the product engineering business (linear IT services) is

seeing good momentum and IP-led revenues will add to it going forward, making

the outlook for 2HFY2014 look definitely better than 1H. Revenues from HP client

automation should flow in largely from the next quarter, and that along with

healthy traction in product engineering segment keeps growth outlook sanguine.

Over FY2013-15, the company is expected to record a USD and INR revenue

CAGR of 11.5% and 15.1%, respectively.

Persistent would be extending wage hikes to its offshore employees in 2QFY2014

(8-9%), which will be a significant drag on the margins. However, the substantial

currency depreciation (INR vs USD), absence of visa and knowledge transfer costs

(related to HPCA) should assist in protecting margins to an extent in 2QFY2014.

Beyond 2QFY2014, we expect a significant improvement in margins driven by

a) increased revenue contribution from HPCA (US$8-9mn in H2FY2014) for which

the costs have already been incurred, b) utilization improvements and c) employee

pyramid rationalization as Persistent intends to bring ~500 freshers onboard in the

44.0 44.1 43.5 42.641.1

26.8 27.224.8 24.9

21.7

20.7 21.518.8 18.5

15.110

15

20

25

30

35

40

45

50


(%)

Gross margin EBITDA margin EBIT margin


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July 30, 2013 6

next couple of quarters. Over FY2013-15, we expect the company to record an

EBITDA and PAT CAGR of 7.4% and 10.0%, respectively.

At the current market price of `525, the stock is trading at 10.7x FY2014E and

9.2x FY2015E EPS. We value the stock at 10x FY2015E EPS, which gives us atarget price of `568, and maintain our Accumulate rating on the stock.Exhibit 10:Key assumptions

FY2014 FY2015Revenue growth USD terms (%) 11.0 12.0

USD-INR rate 58.0 58.0

Revenue growth INR terms (%) 15.2 17.5

EBITDA margin (%) 22.2 22.5

Tax rate (%) 28.3 28.0

EPS growth (%) 5.0 15.3


Exhibit 11:One-year forward PE(x) chart


100

200

300

400

500

600

700

800

Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13

(`)

Price 13x 11x 9x 7x 5x


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July 30, 2013 7

Exhibit 12:Recommendation summary

Company Reco CMP Tgt. price Upside FY2015E FY2015E FY2012-15E FY2015E FY2015E(`) (`) (%) EBITDA (%) P/E (x) EPS CAGR (%) EV/Sales (%) RoE (%)

HCL Tech Neutral 897 - - 22.0 14.2 20.7 1.7 21.7

Hexaware Accumulate 116 123 6.3 20.5 9.0 13.1 1.2 23.5

Infosys Neutral 2,921 - - 26.4 15.4 9.2 2.5 19.3

Infotech Enterprises Accumulate 179 190 6.1 17.6 8.0 15.7 0.5 14.0

KPIT Cummins Accumulate 131 144 10.2 16.7 9.1 21.6 0.7 16.7

Mindtree Accumulate 961 1050 9.2 19.9 9.1 25.1 0.9 20.3

Mphasis Neutral 388 - - 18.2 8.9 4.9 0.6 14.2

NIIT Neutral 16 - - 9.1 3.0 (7.1) (0.0) 11.9

Persistent Accumulate 525 568 8.1 22.5 9.2 17.0 0.8 16.1TCS Buy 1,780 2,060 15.7 30.0 17.3 23.8 3.5 29.2

Tech Mahindra Accumulate 1,248 1,390 11.4 19.1 10.7 11.4 1.8 18.9

Wipro Accumulate 409 435 6.5 21.6 13.1 11.2 1.6 19.4


Company background

Persistent is a leading player in the global outsourced software product

development (OPD) market and has service offerings across various stages of

product lifecycle. The company primarily focuses on the infrastructure, telecom and

lifesciences industry segments. It has over 18 years of experience working with

software product companies and has developed and released more than 3,000

products till now. The company has invested and plans to continuously invest in

new technologies and frameworks in the areas of cloud computing, analytics,enterprise collaboration and enterprise mobility.


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Profit and loss statement (Indian GAAP, Consolidated)

Y/E March (` cr) FY2011 FY2012 FY2013 FY2014E FY2015ENet sales 776 1,000 1,295 1,533 1,715Direct costs 472 592 731 899 1,011% of net sales 60.9 59.2 56.5 58.6 59.0

Gross profit 304 408 563 634 704

% of net sales 39.1 40.8 43.5 41.4 41.0

S&M expenses 62 69 96 134 146

% of net sales 8.0 6.9 7.4 8.7 8.5

G&A expenses 83 107 132 161 171

% of net sales 10.8 10.7 10.2 10.5 10.0

EBITDA 158 232 335 340 386% of net sales 20.4 23.2 25.9 22.2 22.5

Depreciation 42 61 78 97 103

EBIT 116 171 257 243 283

Other income 17 17 6 43 40

Forex gain/(loss) 17 9 - (12) (8)

Profit before tax 150 197 263 275 316

Provision for tax 11 55 75 78 88

% of PBT 7.1 28.0 28.7 28.3 28.0

PAT 140 142 188 197 227Extraordinary expenses - - - - -

Final PAT 140 142 188 197 227EPS (`) 34.9 35.4 46.9 49.2 56.8


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July 30, 2013 9

Balance sheet (Indian GAAP, Consolidated)

Y/E March (` cr) FY2011 FY2012 FY2013 FY2014E FY2015ELiabilitiesShare capital 40 40 40 40 40

ESOP outstanding - - - - 1

Reserves and surplus 707 801 978 1,162 1,369

Hedge reserves - - - - -

Total shareholders' funds 747 841 1,018 1,202 1,410Borrowings - 1 - - 1

Deferred payment liability 15 7 65 65 65

Total liabilities 762 848 1,084 1,268 1,476AssetsGross block - fixed assets 457 611 731 871 991

Accumulated depreciation 228 289 368 464 567

Net block 229 321 363 407 424

Capital work-in-progress 52 51 51 51 51

Total fixed assets 281 372 414 458 475Investments - 12 12 12 12

Deferred tax assets, net 6 11 19 19 19

Other non-current assets 26 15 20 17 18

Current assetsSundry debtors 158 203 238 281 315

Cash and bank balance 89 137 241 320 459

Other current assets 100 72 93 110 123

Loans and advances 250 192 247 293 328Less:- Current liab. & prov.Current liabilities 75 88 100 123 139

Provisions 74 78 101 120 134

Net current assets 448 438 618 762 952Total assets 762 848 1,084 1,268 1,476


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July 30, 2013 10

Cash flow statement (Indian GAAP, Consolidated)

Y/E March (` cr) FY2011 FY2012 FY2013 FY2014E FY2015EPre tax profit from operations 116 171 257 243 283

Depreciation 42 61 78 97 103Pre tax cash from operations 158 232 335 340 386

Other income/prior period ad 34 26 6 31 32

Net cash from operations 193 258 341 371 418

Tax 11 55 75 78 88

Cash profits 182 203 266 294 330(Inc)/dec in

Current assets (265) 41 (112) (106) (81)

Current liabilities (31) 17 35 42 30

Net trade working capital (296) 59 (77) (65) (52)

Cashflow from operating (114) 262 189 229 278(Inc)/dec in fixed assets (92) (152) (120) (140) (120)

(Inc)/dec in investments 156 (12) - - -

(Inc)/dec in deferred tax assets (5) (5) (8) - -

Inc/(dec) in deferred liab. 10 (8) 58 - -

(Inc)/dec in other assets (26) 11 (5) 3 (1)

Cashflow from investing 43 (165) (75) (137) (121)Inc/(dec) in debt - 1 (1) - 1

Inc/(dec) in equity/premium (6) (27) 9 - 1

Dividends (26) (21) (19) (13) (21)

Cashflow from financing (32) (48) (11) (13) (19)Cash generated/(utilized) (103) 49 104 79 138

Cash at start of the year 192 89 138 241 320

Cash at end of the year 89 138 241 320 459


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July 30, 2013 11

Key ratios

Y/E March FY2011 FY2012 FY2013 FY2014E FY2015EValuation ratio (x)P/E (on FDEPS) 15.1 14.8 11.2 10.7 9.2P/CEPS 11.5 10.4 7.9 7.2 6.4

P/BVPS 2.8 2.5 2.1 1.7 1.5

Dividend yield (%) 1.0 0.9 0.8 0.5 0.9

EV/Sales 2.3 1.8 1.2 1.0 0.8

EV/EBITDA 11.1 7.6 4.8 4.4 3.4

EV/Total assets 2.3 2.1 1.5 1.2 0.9

Per share data (`)EPS 34.9 35.4 46.9 49.2 56.8

Cash EPS 45.5 50.7 66.5 73.4 82.5

Dividend 5.5 4.5 4.0 2.8 4.5

Book value 186.8 210.1 254.6 300.6 352.4

Dupont analysisTax retention ratio (PAT/PBT) 0.9 0.7 0.7 0.7 0.7

Cost of debt (PBT/EBIT) 1.3 1.1 1.0 1.1 1.1

EBIT margin (EBIT/Sales) 0.1 0.2 0.2 0.2 0.2

Asset turnover (Sales/Assets) 1.0 1.2 1.2 1.2 1.2

Leverage ratio (Assets/Equity) 1.0 1.0 1.1 1.1 1.0

Operating ROE 18.7 16.9 18.4 16.4 16.1

Return ratios (%)RoCE (pre-tax) 15.2 20.2 23.7 19.2 19.2

Angel RoIC 18.7 26.5 33.0 27.5 29.7

RoE 18.7 16.9 18.4 16.4 16.1

Turnover ratios (x)Asset turnover (fixed assets) 3.0 3.1 3.3 3.5 3.7

Receivables days 69 66 67 67 67

Payable days 86 50 50 50 50


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July 30 2013 12

Research Team Tel: 022 - 3935 7800 E-mail: [email protected] Website: www.angelbroking.com

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Disclosure of Interest Statement Persistent

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

Documents

Persistent, 1Q FY 2014