Buy Persistent Systems - Prabhudas Lilladher

Ramp-down from clients are bottoming out: Persistent witnessed rampdown from top clients due to end of projects and M&A activity (of clients). Top clients, whose projects got shelved after acquisition, are already captured in quarterly run-rate. Moreover, due to project completion with other top-client, we may see no spill-over in Q3FY13. Nevertheless, the company is working with the same client on other projects to back-fill the gap. Hence, we expect it to recoup some of the negative impact.

Four strategic pillars to hold up growth: The strategic initiatives by the company have started yielding results. Key initiatives in recent time are 1) equipping S&M team with understanding of technology 2) Organic & inorganic route for IP accumulations (rCloud, location-based software) 3) Acquiring "End of Lifecycle" products (IBM-TNMP) and 4) Sell with Partners (IBM, Salesforce, Oracle, Cisco). We expect initiatives around IP to boost margin higher-than-peer.

Growth outlook strong, margin to see uptick in H2FY13: The management is confident of improving the growth rate and achieving better than NASSCOM guidance of 11-14% YoY gr., but didn't quantify the guidance. The strong margin performance for Q2FY13 has raised consensus outlook for H2FY13. Moreover, we remain confident of retaining the margin in H2FY13. We expect margin performance in H2FY13 to get boosted by revenue growth from IP, cost absorption of wage hike and replacing attrition employees with the fresher (Fresher addition: 1350).

New deal pipeline is strong: Persistent is chasing 2-4 large deals. The deals are not from "Sell with Partners". These deals' sales cycle is likely to be 4-5 months long and may involve rebadging of clients' employees. The scope of these deal ramp-ups is strong and can contribute US$10-20m/year.

Valuation and Recommendation – BUY with a revised target price of Rs540: We believe the option value of IP sales along with success of "Sell with Partner" could spin a positive surprise. Currently, Persistent is traded at 8.7x FY14E earnings estimate with 20% earnings CAGR (FY12-14E).

Source : Equity Bulls

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