BUY Persistent Systems - AnandRathi Institutional Research

Persistent Systems - Weak IP-led business masks services-business growth; Buy with a target price of Rs 860

We believe that Persistent is one of the companies best poised to benefit from the digital wave, validated by its enterprise business, which now contributes 27% to revenue, growing 31% yoy. It has its share of challenges (stagnating to falling IP revenue, slower growth in its ISV business); growth in its enterprise business, though, should offset this drag. 18% PBT margins with wage hikes behind and revenue recovering lead us to believe that Q2 is a bottom out quarter for margins. Hence, we retain our Buy recommendation.

Revenue at $83m (up 5.5% qoq, 8.7% yoy). Revenue at its effort-led business was $69.5m, up 8.4% qoq, 13.2% yoy, including RGEN revenue of $2m (or 3% of qoq growth). 5.4% qoq organic growth was impressive after a weak Q1, driven by 14% qoq growth in the enterprise business. The IP business slid 7.2% qoq, 9.9% yoy, on weak sales of the TNPM product. The company is revamping this product and expects growth to return in Q4.

18.7% EBITDA margin, down 67bps qoq, 186bps yoy. Persistent is transforming from an offshore-heavy OPD operator to an onsite-plus-IT-services one with onsite bringing 30% to revenue now vs. 25% in Q2FY15. Consequently, wages have gone up 12% yoy (vs. 7% for TCS and 5% for Infosys). The drop in IP-led revenue from 18.4% in Q1 to 16.2% in Q2 FY16 is also weighing on margins as the entire shortfall flows through EBITDA. The effect of these two factors, coupled with acquisition-related costs (RGEN is a lower-margin business) and wage hikes completely offset the benefit of currency movements in Q2.

FY16/17 business outlook, upbeat. Persistent continues to be positive on the business environment for the enterprise segment. It expects the ISV segment to deliver growth and guided to a better H2 FY16 in growth and margins. We are incorporating Aepona into our estimates.

Valuation. The stock trades at 14x our FY17 EPSe. We believe it should trade at 17.5x FY17e, a 5% discount to Mindtree due to lack of consistency. Risk. Shocks in its ISV or IP-led businesses.

Shares of PERSISTENT SYSTEMS LTD. was last trading in BSE at Rs.648.25 as compared to the previous close of Rs. 664.65. The total number of shares traded during the day was 13979 in over 1240 trades.

The stock hit an intraday high of Rs. 664 and intraday low of 642.5. The net turnover during the day was Rs. 9097722.

Source : Equity Bulls

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