Stock Market Update on Persistent Systems for 1QFY2012

Stock Market Update on Persistent Systems for 1QFY2012 with an Accumulate recommendation and a Target Price of `424 (12 months)

For 1QFY2012, Persistent Systems (Persistent) reported numbers that were almost in-line with the expectations on the revenue front, though its performance was marginally disappointing on the operating front. Management has maintained its revenue guidance of US$220mn, i.e. 29% yoy growth for FY2012, and is confident of maintaining PAT at least flat yoy, despite the surge in tax rates to 31% from 7% in FY2011. The company is into pure-play offshore product development (OPD) and has been recording a 6% CQGR since 1QFY2011 on the back of comeback in R&D spending by product companies. We recommend Accumulate on the stock.

Quarterly highlights: For 1QFY2012, Persistent reported revenue of US$50.0mn, up 6.3% qoq, led by volume growth coupled with increased billing rates. In rupee terms, revenue came in at `223.8cr, up 5.2% qoq. Despite strong volume growth, EBITDA margin remained stable qoq at 17.9% because of a decline in IP-led revenue as well as promotions given during the quarter. PAT came in at `27.6cr, aided by higher forex gain of `6.4cr as against `2.9cr in 4QFY2011 on the back of ITM hedges of US$86.25mn with average contract rate of 47.39INR/USD.

Outlook and valuation: Persistent, due to its niche focus on OPD, is expected to witness a scorching revenue CAGR of 26.3% (in USD) over FY2011–13E, outperforming tier-I IT companies’ growth. Also, on the back of adequate margin levers, the tailwinds mentioned above are expected to overplay the headwinds such as 1) rupee appreciation and 2) competitive wage hikes in the medium term, thereby helping the margins to rebound to 18.4% and 19.5% in FY2012 and FY2013, respectively. At the CMP of `373, the stock is trading at 9.7x FY2013E EPS of `38.5. We value the stock at 11x FY2013 EPS, i.e. 45% discount to Infosys, and recommend an Accumulate rating on the stock with a target price of `424.