Result Update: Persistent Systems Ltd - BUY - TP Rs.1025 - Kotak

Persistent Systems expects its robust pipeline to drive growth, going forward. The Company alluded that it is aggressively investing in sales and marketing which will boost its topline. Wage hike in Q2FY19 will impact its margins (250 bps impact) but company is confident of margin improvement in FY19. With strong balance sheet, it is looking for acquisitions of smaller businesses in healthcare, data and machine learning, and which can support geographical expansion. Persistent's consolidated revenue increased by 6% qoq in US$ terms to US$ 124 mn (+9% yoy) led by 30% qoq (base effect) and 10% yoy jump in high-margin IP revenue (US$ 34mn).

Key Highlights

- Consolidated revenues increased by 11% qoq and 15% yoy to Rs.8.3 bn supported by 46% qoq (partly base effect) and 26% yoy jump in Alliance (IBM) revenue. Notably, Digital revenue declined marginally on qoq basis to Rs.1.79 bn (-1% qoq) due to some projects completed but there was some delay in commissioning of new projects. However, the company's management highlighted that it is confident of achieving its full year digital revenue target in 9MFY19.

- Recently, it has invested in and entered into a strategic partnership with US based big data as a service firm, Cazena. The partnership combines Cazena's Big data as a service platform with Persistent's ShareInsights analytic solution and machine learning and artificial intelligence data solutions to create a self-service data lake.

- Notably, European region contributed 12% (highest ever) of the total revenue while the North American business went below 80% (first time) reflecting Persistent's focus and investments made in Europe. In Europe, it has already added 15 people and expects to add 3 more people in sales and marketing team.

- The company has realigned its business segments. PLM has moved to alliance segment and NEURO has been sifted to Accelerite business.

- The board has recommended a final dividend of Rs.3/share resulting in a total dividend of Rs.10/share for FY18.

Valuation & outlook

- We expect Persistent to report an EPS of Rs.52.2/share in FY19E and an EPS of Rs. 65.1/share in FY20E. Management pointed to a strong pipeline with significant wins particularly in the field of Neuro sciences. Margin improvement and strong revenue visibility makes us positive on its growth prospects.

- We maintain BUY rating on Persistent and a multiple based price target of Rs.1,025/share. 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 7.9x EV/EBITDA and 12.7x P/E on FY20 basis. We have valued the stock at 15.6x PE multiple at a discount to its peers.

Shares of PERSISTENT SYSTEMS LTD. was last trading in BSE at Rs.837.9 as compared to the previous close of Rs. 830.45. The total number of shares traded during the day was 7271 in over 509 trades.

The stock hit an intraday high of Rs. 840.4 and intraday low of 826. The net turnover during the day was Rs. 6091779.

Source : Equity Bulls

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