BUY Persistent Systems - In-line Q1; revenue growth should help to better margins: AnandRathi Institutional Research

Persistent Systems - In-line Q1; revenue growth should help to better margins; Buy with a target price of Rs 900

With 4.3%qoq revenue growth, Persistent saw a good Q1. IBM IoT revenue and costs are now fully built into the P&L, and traditional levers such as utilisation and offshore mix suggest scope for margin expansion. In FY18, Persistent is likely to touch $500m in revenue, qualifying it to be a reasonably large midcap, unlocking fresh growth and margin-expansion levers. In this context, the multiple, at 17x FY18e, appears reasonable to us. Hence, we retain a Buy, with estimates adjusted for a new currency rate and greater amortization.

Revenue at $105m, up 4.3% qoq, 33.3% yoy.The quarter was impressive for Persistent, with both services (up 4.4% qoq) and IP (up 4.1% qoq) contributing equally. Services grew organically while elements of inorganic growth were found in IP—15 days consolidation of IBM IoT (additional ~$1.5m) and Citrix (another $1.5m). The company also curtailed business of $1m to sharpen its focus and expand its margins.

A 15.1% EBITDA margin, down 79bps qoq, 430bps yoy. Margins were lower due to visa expenses (~100bps), wages adjusted for the IBM employees taken over, and rupee appreciation. Q2 is Persistent's wage-hike quarter, but we expect the impact to be fully absorbed using the levers mentioned above. Net profit came at Rs.733m, down 9% qoq, up 9% yoy, supported by forex gains and a lower tax rate (24%).

Business outlook. For the quarter, IBM IoT revenue was estimated to be $11m (estimated not disclosed), up 10%qoq, with growth fructifying in Q1. Management expects this deal to bring in $45m-50m in revenue in FY17 (~15-20% of revenue) and guided to 200-250bp margin erosion in FY17. Margins should now improve as all costs have been included and the favourable operating leverage would play out.

Valuation. We adjust our estimate for FY17, primarily taking into account the new exchange rate and higher amortization, maintaining our Buy call with a revised price target of Rs.900 (17x FY18e). Risks: Execution and high client-concentration (top client).

Shares of PERSISTENT SYSTEMS LTD. was last trading in BSE at Rs.684.45 as compared to the previous close of Rs. 692.1. The total number of shares traded during the day was 4047 in over 372 trades.

The stock hit an intraday high of Rs. 695.65 and intraday low of 681.6. The net turnover during the day was Rs. 2787511.

Source : Equity Bulls

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