Persistent Systems: Deserves Rerating! - BUY - IIFL

CMP Rs590, Target Rs680, Upside 15.3%

Platforms and IP to boost revenues; PE services sees stable growth

The core product engineering (PE) services and platforms segment of Persistent Systems has shown steady improvement in revenue traction over past couple of quarters driven by higher spending of Independent Software vendors (ISVs) and enterprises. Our recent conversation with the management suggests this traction should continue especially considering robust growth from Platform solutions. The IP business (Intellectual Property) too should show strong growth owing to the pushed out HP Client automation (HPCA) product revenues and traditional back-ended growth in rest of the IP portfolio.

Operating margin to improve seq. on higher IP and cost leverage

Integration related expenses, strong hiring, sales function re-organisation, wage hikes and delay in the revenue accretion from the HPCA product (despite costs being booked) resulted in correction in margin over past 3-4 quarters. We believe, the improving traction in Products and platform business, robust growth expectation in IP revenues should result in strong cost leverage implying a steady improvement in margin. Overall, the key headwinds of wage inflation, fresher hiring and sustained S&M should be offset to a large extent by the improving business momentum in H2 FY14 resulting in margin improving 300bps over next three quarters.

Valuation is cheap at 8.7x FY15E; Maintain BUY

Persistent has continued to leverage on its niche expertise in the offshore product development space and its marquee clientele. This is seen in the sustained traction for its sell-with business, PE services as well as strong growth in IP portfolio. Improving spending momentum in its key US market, rejigged sales organization and broadened services/client portfolio due to acquisitions should continue to support revenue traction. On the back of this stronger momentum, we increase our estimates and expect dollar revenue/INR earnings to witness 15.8%/19.6% CAGR over FY13-15E (versus 13.6%/16.3% earlier). Maintain BUY.

Source : Equity Bulls

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