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Persistent Systems - Outperformance Continues - BRICS
Posted On : 2012-10-20 22:45:25( TIMEZONE : IST )
Strong growth in IP-led business helped Persistent outperform in Q2FY13. The growth of 9.4% qoq in US$ revenue was driven by IP-led stream (up 49% qoq, vs. 16% qoq in Q1), aided further by a recovery in its core business of product engineering (up 3% qoq, vs. decline of 0.8% qoq in Q1). We raise our FY13/14 EPS estimates by 12% and 17% due to stronger than estimated traction in IP business, rCloud acquisition and currency movements. Raise target price to Rs560 (from Rs450) as we rollover to FY14 estimates. Re-iterate BUY.
IP-led business drives revenue & margin outperformance: Revenue of US$60.1mn was ahead of expectation, as IP-led business gained further traction. Despite a wage hike of10%, margins recovered by 41bps, due to a growth push from the (non-linear) IP-led business and normalization of the impact of product acquisition (which had pulled down margins in Q1).
Deal wins strong, management's outlook remains confident: Deal wins continued to be robust, with 48 new clients added in Q2FY13 (vs. 33 in Q1), including 6 large multi-billion dollar clients. Management is confident of easily beating NASSCOM's industry growth forecast and possibly recording a revenue growth in high-teens for FY13.
Strengthening IP-led portfolio may lead to re-rating of stock: Persistent is building its IP-led portfolio of services through internal efforts (4.5-6% of overall technical effort) and acquisitions. The IP-led business could be lumpy on a quarterly basis, though its upward trajectory continues, with its revenue share now standing at 19%, vs. 7.6% in Q1.
We believe that a stable growth in the IP-led business, on the back of a wider portfolio of offerings (built organically, as well as through acquisitions), could lead to a re-rating of the stock over FY13-14, due to the resulting growth push and margin improvement.
Outlook and valuation: The stock trades at a P/E of 9x FY13E and 7.6x FY14E earnings. We raise our target price to Rs560, while keeping P/E multiple unchanged at 10x FY14 earnings. In view of the possibility of a continued positive surprise from the IP-led (non-linear) business despite its lumpy nature, stable margins along with an improving trend and improvement in employee yield, we re-iterate BUY.
