Result Update: Persistent Systems Ltd - BUY - TP Rs.870 - Kotak

IP revenue volatility continues: Persistent Systems indicated better revenue growth and margin improvement in H2FY19 which will partly mitigate the impact of one-offs in Q2FY19. Revenue growth will be supported by good deal wins, project starts in Q2FY19, higher contribution from healthcare business (strong demand on the digital side and higher deal sizes), meaningful jump in IP business and the reseller segment due to seasonally strong Q3FY19. In Q2FY19, it has added net 400 people reflecting strong project pipeline. Margin improvement will be supported by better sales mix (higher offshore mix), better utilization, and efficiency improvement. With strong balance sheet, it is looking for acquisitions of smaller businesses in healthcare, data and machine learning, which can support in geographical expansion.

Key Highlights

- In Q2FY19, the biggest disappointment is the poor growth in Digital segment.

- Persistent's Q2FY19 consolidated revenue decreased by 4.3% qoq in US$ terms to US$ 118 mn led by 10% qoq decline in IP revenue (US$ 30mn).

- Consolidated revenues increased merely by 0.2% qoq to Rs.8.36 bn (+9.8% yoy) supported by 3.7% qoq increase in technology services revenue but revenue from Alliance-IBM declined by 8.3% qoq.

- Operating profit increased to Rs.1.44 bn (3% qoq and 24% yoy) due to rupee depreciation, lower sales and marketing expenses/ project related travel expenses and lower purchase/royalty expenses. EBITDA margin rose by 40 bps qoq, with rupee depreciation (110 bps benefit) and higher utilization offsetting the wage hike impact.

- In Aug'18, the company has completed acquisition of Herald Health. It's a Boston based start-up that transforms healthcare data overload into clear and actionable insights for care providers and patients.

- Persistent had deposits of Rs.430 mn with Infrastructure Leasing & Financial Services Ltd. (IL&FS) and IL&FS Financial Services Ltd. and the same are due for maturity from Jan'19 to Jun'19. As of Sept'18 end, there have been no defaults in payment of interest. Accordingly, the management believes that there is no immediate need to recognize any impairment.

Valuation & outlook

We have lowered our EPS estimates to reflect H1FY19 performance, higher tax rate guided by company and minor other changes. Accordingly, we now expect Persistent to report an EPS of Rs.47.7/share (earlier Rs.52.2) in FY19E and an EPS of Rs. 61.3/share (earlier Rs.65.1) in FY20E. Margin improvement and decent revenue visibility makes us positive on its growth prospects. We maintain BUY rating on Persistent and a multiple based price target of Rs.870/share (earlier Rs.1025/share). We have valued the stock at 14x PE multiple at a 30% discount to its peers. Additionally, attractive valuations, 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 5.7x EV/EBITDA and 9.1x P/E on FY20 basis.

Shares of PERSISTENT SYSTEMS LTD. was last trading in BSE at Rs.556.5 as compared to the previous close of Rs. 564.95. The total number of shares traded during the day was 38436 in over 2530 trades.

The stock hit an intraday high of Rs. 580 and intraday low of 540.1. The net turnover during the day was Rs. 21292750.

Source : Equity Bulls

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