Initiating Coverage: Persistent Systems Ltd - BUY - TP Rs.1025 - Kotak

- Persistent specializes in software product development and technology services. It helps enterprises to transform their business to software-driven business in North America, Europe, and Asia. The company has moved away from effort-based business (low growth prospects) to value-based business (high growth prospects and better margins). Our confidence on quality improvement of earnings and long-term margin sustainability, going forward is supported by company's strategy of aggressively focusing on digital business, increasing its efforts on IP and non-linear revenue through the IBM partnership along with allied deal wins and reducing its focus on linear revenue.

- Persistent expects to outperform industry-growth rate and report overall double-digit revenue growth for FY19E supported by healthy traction in digital business. We expect Persistent's revenue to grow by 19% yoy to Rs. 36 bn in FY19 and to grow by 13% yoy to Rs. 41 bn in FY20E as against Rs.30 bn in FY18 (5.4% yoy). Additionally, it is aggressively focusing on newer technologies such as machine learning, block chain, IoT, data and digital which should elevate its growth trajectory, we opine.

- We initiate coverage on Persistent with a BUY rating and a multiple based price target of Rs.1,025/share. Management has pointed to a stronger pipeline with significant deals wins particularly in the field of Neuro sciences. Margin improvement and strong revenue visibility makes us positive on its growth prospects. Additionally, cash rich balance sheet, strong free cash flow and healthy return ratios (ROE 16+% and ROCE 18+%) also provide high comfort. At CMP, the stock is valued at 8.1x EV/EBITDA and 13x P/E on FY20E basis. We have valued the stock at 15.7x PE multiple which is at a 30% discount to TCS.

Shares of PERSISTENT SYSTEMS LTD. was last trading in BSE at Rs.838.4 as compared to the previous close of Rs. 848. The total number of shares traded during the day was 9213 in over 748 trades.

The stock hit an intraday high of Rs. 854 and intraday low of 818.7. The net turnover during the day was Rs. 7649170.

Source : Equity Bulls

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