Persistent Systems - Soft performance; Reiterate ACCUMULATE - Prabhudas Lilladher

Persistent Systems' (Persistent's) Q3FY13 results were touch softer than consensus/PLe estimates. Revenue performance missed estimates by a whisker; whereas, margin was softer due to higher investment in S&M and softness in IP-led revenue. We retain "Accumulate" rating and revise our TP to Rs 580 (Old: Rs540) as we tweak our model for higher revenue growth and margin for FY14.

Revenue in line, margin softer: Persistent's Q3FY13 results have missed PLe/Consensus expectation on all counts. Revenue grew 1.9% QoQ to Rs3,329.9m (PLe: Rs3,316m Cons: Rs3,317m) and 1.2% QoQ in USD terms to $60.8m (PLe: US$61m). EBITDA margins eroded by 249bps to 24.7% (PLe: 26.5%, Cons: 26%) despite higher utilization (180bps) & currency depreciation (0.7%) due to higher investment in S&M and G&A. EPS grew by 10.9% QoQ to Rs13.13 (PLe: Rs14.5, Cons: Rs13.8).

Investment in S&M effort holds the key for future growth: In line with our hypothesis, the investment in S&M has been ramped up in the quarter. The company has accelerated the investment to 7.9% QoQ. Moreover, the increase in G&A by 15.5% QoQ was largely due to higher provision of doubtful debts, rent for SEZ and Seattle facility for Doyenz business. As the utilization reaches an all-time high to 79.5% (180bp increase QoQ), the company needs to push-up the hiring to address the future growth need.

Inorganic growth - Acquired NovaQuest: Persistent acquired Novaquest, a Product Lifecycle Management (PLM) and Search-Based technology solutions company, thereby, entering into a strategic partnership with Dassault Systemes to sell and offer support, maintenance and deployment services as an authorized VAR for Dassault Systemes' in the US.

Valuation & Recommendation: Persistent has successfully pushed the margin and revenue performance in H1FY13. But, as the company enters investment phase to address the need of growth, we expect margin expansion to halt. We reiterate ?Accumulate? rating, as we see limited upside from the current level.

Source : Equity Bulls

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