Accumulate Persistent Systems - Motilal Oswal

Persistent Systems Limited (PSYS IN; Mkt Cap USD 391m, CMP Rs 440, Accumulate)

Total income grew by 24%/5% on yoy/qoq basis and net profit growth by 17%/1% on yoy/qoq basis, which was aided by price hike of around 3% yoy/qoq. Operating margins decreased by 127 bps yoy and 60bps qoq due to higher share of staff costs as a result of increased salary cost resulting due to attrition pressure.

The company also announced mid term salary hike effective from Jan 1, 2011 to counter attrition pressure. Increased salary to have negative margin impact of 200 bps during Q4FY11. During FY12 company expects to come back to existing margin of around 24.5% at the operating level.

Tax rates are expected to remain in the range of 8.5% to 9.5% for FY11E. The tax rate to rise in FY12E due to sunset clause on STPI provisions setting in.

The managament is optimistic about future growth wherein it mentions that initial discussions with clients indicate that budget for them will be greater in CY2011 as compared to CY2010.

Rapid appreciation in forex rates along with high attrition for mid cap companies remains the biggest concern in the stock.

Source : Equity Bulls

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