Persistent Systems - Analyst Day takeaways - Elara Capial

Major trends to work for Persistent's strategy

We attended the Persistent analyst day. The Major trends that were called out by the management are 1)line managers handling more of the spends as it moves from the capex model to the opex model 2) major cloud deployments in 2HCY13 as per announcements made by global majors in CY12, 3)BYOD (bring your own device credo in enterprises) trends bringing forth major challenges in seamless integration 4) in the tech ecosystem, decision makers will be the ones with data, going forward and 4) pervasiveness of apps across enterprise, consumer and tech domain with data access being the key.

IP revenue composition skewed towards acquired products

IP revenues of Persistent are essentially either solutions or products. While solutions are components of products with services wrapped around them (usually organic), pure products are largely based on a license sale model. The acquired products (particularly end of life ones) sometimes are sold in "sell with" partnerships with the tech majors where Persistent owns the IP as well as maintains a budget for development and upgrades. The skew towards acquired products has had a positive margin impact on Persistent so far, as in the 'organic build' model, development costs are written off upfront and not capitalized. However, for the buy model, projections are made regarding cashflow and revenue matched thereof.

Possible kinks in the Persistent strategy

In our view, the major deficiencies of the Persistent model lies in the fact that they have been targeting only the tech majors as their clients with almost no footprint on the enterprise side. While they are trying to get into the game with its 'sell with' model and technology consulting, the gains so far have been rather poor. On the acquisitions front, most of them are opportunistic and there have been no major updates on the organic efforts at building bigger ticket IP. We note that though the portfolio approach of acquisitions is positive, there is no consistent approach with regard to targeting an industry segment.

Persistent - a good long term play to avoid IT commoditization

Persistent has managed to carve out a niche with its focus on tech Companies as clients for product engineering, low enterprise exposure and a growing stream of IP revenue which gives investors an option value from possible hockey stick scaleup from any one of its products/solutions line. While a significant part of the margins from IP revenue are already in the numbers, from a shorter term perspective; we believe that investors are better off looking at the longer term picture. Moreover, our conversations with the management did not indicate any slowdown in deal wins and hiring, both on laterals as well as freshers, is on track. We now take INR560 as the target price based on around 10x our FY14 numbers. Though the stock has entered Accumulate territory, we keep this as one of our preferred picks as visibility is much better and consistent compared to its larger peers.

Source : Equity Bulls

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