Persistent Systems - Uniqueness attracting attention; initiate Hold - Tata Securities

Unlike its peers, Persistent Systems is a product focused company, providing services as well as solutions to its clients. It has evolved from being an outsourced product development vendor to becoming a strategic partner to its clients. Early investment in newer technologies such as cloud, analytics and enterprise mobility has helped it take advantage of the demand shifts towards these technologies. The company's deep understanding of domain and investment in these technologies are helping it target business heads, which are increasingly becoming decision makers in the enterprises.

The IP strategy has helped the company to report strong revenue and profitability growth in the last few quarters. While its consolidated revenues have grown at a CQGR of 4.4% in the last eight quarters, its margins have improved 690bps. The share of IP-led revenues, in overall revenues, has increased from 6.1% in 1QFY12 to 18.2% in 3QFY13. Its IP strategy also involves acquiring products that are either non-strategic to the sellers or are at the end of their lifecycle, but help it fill white spaces towards its strategic direction. Persistent has also been strengthening its senior management team in order to grow to the next level.

However, the increased contribution of IP-led revenues makes its earnings volatile. Though we remain bullish about the strategic direction that the company has taken, difficult to estimate IP-led revenues makes us wary. Moreover, we highlight that some of the incremental growth of the company has been driven by acquisition of products/solutions. Therefore, we believe that the earnings are likely to remain volatile going forward. Hence, we initiate our coverage on the stock with a Hold rating and a target price of Rs549/share,9.5x FY15 EPS.

Source : Equity Bulls

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