Research

Persistent Systems - Ready for the next technology wave; maintain Buy - BRICS

Posted On : 2012-12-17 21:00:41( TIMEZONE : IST )

- PSYS is well positioned to benefit from the next technology wave that could be just around the corner, given its deep technology expertise, build-up of management bandwidth & acquisitions

- Share of IP portfolio in total revenue expected to be 20%, going forward; and product engineering services (PES) to also provide ample growth opportunities

- Maintain BUY & target price of Rs560 based on 10x FY14 earnings

We attended PSYS' analyst meet where management discussed key technology changes, and the company's future strategy & IP portfolio roadmap. Key takeaways:

Ready for the next technology wave: Mainstreaming of "cloud" is expected from H2CY13 onwards. PSYS is executing its 4x4x4 matrix strategy (4 verticals of banking & finance, Infra & Systems, Life Sciences, and Telecom, in 4 technology areas of mobility, collaboration, analytics and cloud, using 4 services around IP, consulting, PES, and sell-with partners) outlined earlier, and is now well positioned to benefit from the next wave of technology deployment.

Ample opportunities in PES: Despite PES being stagnant for some time, PSYS' client quality remains strong and it has maintained leadership position. PSYS sees ample opportunities in PES, driven by end-of-life products, product reselling & system integration.

IP strategy for growth already in play: PSYS is building its IP-led portfolio of services through internal efforts (4.5-6% of overall technical effort) & acquisitions. PSYS is targeting around 20% of total revenue from the IP-led segment, as against 18% in Q2FY13 and 14% in Q1FY13. The company's acquisition efforts could result in lower margins in the initial stages, though it is confident of margin expansion in future.

Valuation: The stock trades at P/E of 10.4x FY13E and 8.8x FY14E earnings. Maintain BUY and target price of Rs560 (based on 10x FY14 earnings) in view of PSYS' strength in the IP-led (non-linear) business, stable margins, and an improving trend in employee yield.