Persistent Systems - Strong quarter... deal pipeline healthy - MSFL Research

Persistent delivered a strong set of number for Q2FY13 beating expectations. Revenue increased by 9.4% to USD 60.05mln, way above expectation. EBITDA margin gave further surprise improving by 40bps q-o-q despite offshore wage hike of 9.9% during the quarter. Strong revenue growth, utilization and efficiency aided in margin improvement absorbing wage hike impact. Net profit grew by 7.4% q-o-q to Rs.446mln. Company added 48 new logos during the quarter with 6 being multi-billion dollar logos. Pipeline is very healthy in OPD space as guided by management with almost 20-25% growth which gives good revenue visibility. Persistent added another product to its portfolio acquiring Doyenz during October which is first product in cloud space and will start contributing from October itself with annual run rate of USD 4mln. Persistent's focus on new technology of cloud, mobility, collaboration and analytics continues to reap fruits along with healthy flow in traditional OPD space. IP business though lumpy is also growing. We remain positive on Persistent given its presence in niche OPD space and healthy margin and come out with TP of Rs.528.

Better than expected revenue: While this quarter was expected to be good, but it was still better than that as revenue jumped by 9.4% q-o-q to USD 60.05mln. This was contributed by 6.4% from IP led revenue and 3% from product engineering (OPD) space. Growth in OPD was led by 3.6% offshore while onsite declined by 0.4% q-o-q. IP led revenue increased by 48.5% q-o-q with increase in revenue contribution to 18.9% from 13.9%. Growth was also driven by IBM based products as top client grew at 27.2% q-o-q.

Margin expansion surprised positively: EBITDA margin expansion of 40bps q-o-q came as a surprise against expectation for a decline on account of wage hike. Margin improved by 40bps q-o-q to 27.2% as wage hike impact of 360bps and currency impact of negative 60bps was absorbed by higher revenue growth, utilization and some efficiency led gains. Investment in S&M expenses continues for increasing the front end force and is expected to continue. There was net reduction of 166 employees during the quarter.

Commentary positive: Management sounded confident on the deal pipeline in product engineering space with almost 20-25% growth with change in structural demand. IP is also doing well though lumpiness would persist owing to product nature. Company plans to hire 600 net recruits in next six months. Acquisition of Doyenz in October will add to cloud product capability named rcloud, platform for business continuity solution serving 3500 customers with annual run rate of USD 4mln.

Valuation: Presence in niche OPD space, good revenue visibility, strong margin in mid-cap space position Persistent strongly in mid-cap space. We raise our earnings estimates to Rs.46.7/Rs.52.8 from Rs.44/Rs.49.5 and TP to Rs.528 valuing at 10xFY14P.

Source : Equity Bulls

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