Persistent Systems - IP in drivers seat - SPA Securities

The company came back strongly in the 4Q with a revenue growth of 4.9% QoQ and a solid margin expansion of 260bps QoQ, after a forgettable 3QFY12. This was mainly on the back of 38% sequential growth in the IP business. For FY12 PSYS crossed INR 10bn revenue for the first time, growing at 28.9%. We remain confident that the increased sales focus approach will help it maintain a sustained growth performance and thus expect a re-rating (8.0x FY13E and 6.8x FY14E EPS) to follow soon. We have increased the multiple (9x vs 8x previously) to our FY14E EPS of 48.4 and raise our TP to INR 435.

IP and Sales focus paving the way

The company improved its Sales and Marketing focus, resulting in 35 new client additions to 288 and clients with more than $1mn revenue contribution jumping to 251 from 211 in the past 6 months. This was achieved with an incremental S&M spend of just 6%, thus not impacting its EBITDA margins which rose to 28.6% (highest in the company's history). The EBITDA Margin for FY12 was 23.2% up 280bps YoY. Margin expansion was primarily led by non-linear IP business which remains a strong margin lever for the company.

FY12 expected vs actual

PSYS FY12 revenue of $207.4mn was in-line with our estimates of $208.3mn and bang in the middle of the company's guidance of $205-$210mn registering a growth of 22.1%. The revenue of INR 10bn grew faster at 28.9% helped by dip in INR during the 2HFY12. Net Income of INR 1,417mn, however, beat our estimates of INR 1,306mn handsomely due to higher than expected margin improvement.

FY13E / FY14E estimates

Due to an improved growth visibility and margin improvement, we have revised our EPS targets upwards for FY13E and FY14E by 3% and 8% respectively. Though the sluggishness in the IT services business (up 1.5% in 4QFY12 QoQ) will continue in the 1HFY13, we expect PSYS to achieve our conservative revenue CAGR of 15.2% for FY12-FY14E. We have also factored in (i) lower utilization; (ii) IP led business and (iii) incremental IP business to flow from lower-tax units to offset any effect of INR appreciation in FY14E Margin assumption of 25.5% which compares well within the 28.6% PSYS did in 4QFY12, building in substantial conservatism.

Valuation and Outlook

Steady growth especially from cloud and collaboration market of size $250bn and an improving margin profile, in our view, commands a revision of PSYS beaten-down PE multiple of 8.0x FY13E and 6.8x FY14E EPS. We value the stock at 9x our FY14E EPS of INR 48.4, thus continuing to recommend BUY with a TP of INR 435.

Source : Equity Bulls

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