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Research
Persistent Systems - More of the same - Prabhudas Lilladher
Posted On : 2013-03-26 22:53:35( TIMEZONE : IST )
We met the management of Persistent Systems (Persistent) to understand the demand environment and execution of current strategy. The company's strategy to drive growth using IP-led inorganic growth opportunity has been successful and helped them in attaining margin profile stronger than peers. We reiterate our "Accumulate" rating with a target price of Rs580.
Lumpiness in IP revenue could drive the positive surprise in Q4FY13 results: Persistent is likely to witness strong growth in IP-led revenue in Q4FY13 on account of inorganic revenue contribution from NovaQuest and HPCA, along with organic revenue contribution from IP portfolio of the company. The strong performance in IP-led revenue could give tailwind in margin as well.
FY14 - Eyeing for well rounded growth: Non-IP business has grown at CQGR of 1% (since Q1FY11) compared to IP-led business CQGR of 23.9% over the same period. The company is now eyeing for low-to-mid-teen growth (in-line with NASSCOM guidance) for OPD business. However, the growth from IP-led business would continue to dominate the incremental revenue and expects to reach ~25% of revenue in FY14. We expect growth from inorganic (taking over End of Life-cycle) to remain key for delivering growth above industry average.
Inorganic strategy - FCF to get suppressed: Free cash flow for the company has been impacted due to capex plan in FY11-12. We anticipated improving FCF/EBITDA in FY13, but, the inorganic pursuit of the company is likely to suppress the cash conversion in FY13-14. We expect FCF/EBITDA to be in mid-20s to mid 30s in FY13-14.
Valuation and Recommendation - 'Accumulate' with target price Rs580: Persistent's strategy has helped them deliver the strongest growth along with superior margin compared to peers in FY13. This is one of the best performing mid-cap companies in our coverage universe. We expect more of the same (inorganic) to drive top-line growth, but see margin profile of the company peeking out. We reiterate our 'Accumulate' rating with a target price of Rs580, 10x FY14E earnings estimate.
