BUY Persistent Systems - Anand Rathi Research

Enterprise segment holds the key; Buy

While profit warning has disappointed us, we think stock price reactions to quarterly earnings are exponential (not linear) and Persistent is no exception to this. We retain Buy on our thesis of return of moderate growth in traditional OPD and high growth in Enterprise business.

Revenue and Profit warning for 1QFY16. Persistent has guided for a marginal decline (we est 0 to -1% qoq) in US$ revenues in 1Q on spillover of client specific challenges (one of the top 5 clients) from 4Q and continued weakness in the traditional OPD business. Following revenue shortfall, margins will be lower as costs continue to inch up on hiring and visa related expenses (+120bps). We think that the company should be able to absorb most of margin fall as it accrues benefits from rupee depreciation (+2.2%).

Can Persistent deliver 13% yoy growth in FY16? Persistent does not expect any spill over of 1Q to other quarters but is experiencing drag in growth rates on account of its high exposure to the traditional OPD business (57% of revenues). Enterprise business (24% of revenues) is growing fast but is currently not large enough to offset deterioration in the OPD business. If we assume that there is no further decline in the traditional OPD business, the services business should be able to deliver the kind of growth rates we are talking about. On the IP side (19% of revenues), given strong pipeline of the company and by virtue of many clients being in restructuring mode, we think Persistent should be able to grab couple of deals to accelerate growth.

One-offs becoming too frequent? Persistent has reported no growth in three out of last five quarters for various reasons. There are some positive signals as well which shouldn't be overlooked. In Services business, Persistent has delivered 12-13% growth (9-Qtr avg 12.0% and 1QFY16 exp to be 11.7%) - in line with the industry. Billing rates (est. US$80/hour, +5.6%yoy in 4Q15) are inching up reflecting value chain shift. Volatility in IP-led, on the other hand, is by very nature of the products business.

Valuation. Given softness in 1Q, we are revising our revenue estimates lower by 4.5-5.0% for FY6 and FY17. This, with operating leverage, will result into downwards earnings revision of 8%/9% for FY16 and FY17.

Risks. Shocks from Traditional OPD clients.

Shares of PERSISTENT SYSTEMS LTD. was last trading in BSE at Rs.613.9 as compared to the previous close of Rs. 610.85. The total number of shares traded during the day was 86417 in over 4647 trades.

The stock hit an intraday high of Rs. 629 and intraday low of 610. The net turnover during the day was Rs. 53309483.

Source : Equity Bulls

Keywords