Buy Persistent Systems - 'Generation Next' of Indian IT - Elara Capital

• Rating : Buy
• Target Price : INR480
• Upside : 22%
• CMP : INR392 (as on 19 November 2010)

'Generation Next' of Indian IT

Niche OPD services to drive growth

Outsourced Product Development (OPD) is the bridging ground for Indian IT companies and software product companies. The forecast growth CAGR for R&D/product development off shoring spend (proxy for industry growth in OPD) stands at a CAGR of 19% (CY09 through CY13), higher than the anticipated growth for traditional IT services.

Counts big names in the top client category

Persistent has among its clients top global software product vendors, enterprises as well as leading edge technology startups funded by PEs. Within its client roster, more than 37 companies have a revenue base of more than USD1bn. Top four clients on a run-rate basis form around 20% of the revenue. Persistent has had long standing relationships with these clients as well as key players in the technology ecosystem (for eg- with salesforce.com or with owners of mobile operating systems like Android, Windows, Brew, Os-X etc) which allows it to win clients looking to work on these platforms.

Only listed Indian player in the pure-play OPD space

While most traditional Indian IT vendors have a small part of their business in OPD, there are few private OPD vendors like Symphony Systems, Globallogic etc. Persistent is the only listed pure play OPD vendor in India with long experience in new growth area like cloud platforms, device mobility and enterprise mobility.

Valuation and view

We compare Persistent with mid cap IT vendors and assign it a 25% PE premium over its peers on better return ratios, prospects of a valuation rerating on an increase in IP revenue and a rebound in top client's revenue. At a multiple of 12.7x our FY12 EPS numbers, our target price is at INR 480, representing a 22% upside from current levels. Our target price implies a FY12 EV/EBITDA of 6.4x, a 4% premium to peers.

Valuation

Persistent is the only listed pure-play OPD vendor in the Indian markets. With established relationships with leading Independent Software Vendors (ISVs) and enterprises, we believe that Persistent is well positioned to command a valuation premium over its mid-cap peers for longer term investors. While interim QoQ variability might be an issue for shorter term investors, we believe that Persistent will command a 25% premium on its mid-cap peers on 1) scarcity premium, 2) higher return ratios, 3) uptick in discretionary spend and 4) rebound in the forecasted revenue of top clients. We have a 'Buy' rating on the stock with a target price of INR480 and a 22% upside.

Source : Equity Bulls

Keywords