Persistent Systems Ltd.

NSE: PERSISTENT | BSE: 533179 | ISIN: INE262H01013 |Industry: IT Consulting & Software
|Expensive Rocket
1629.10 -43.65 (-2.61%)
NSE Jan 15, 2021 15:31 PM
Volume: 226.8K

Persistent Systems Ltd.    
14 Jan 2021, 03:28PM
Persistent Systems: Back on Investors’ Radar

By Suhani Adilabadkar

Persistent Systems has transformed itself over the years from an outsourced product development (OPD) company to a global solutions provider. The company’s revenue mix is segmented into two business verticals, Technical Services Unit (TSU) and Alliance catering to BFSI, healthcare & life sciences, and tech and emerging businesses.

The company’s stock has been an underperformer over the past five years, but is now back on the investor’s radar. Persistent has more than tripled investor wealth since it touched its 52-week low on 23rd March 2020.

Quick Takes:

  • Acquisition of CAPIOT strengthens Persistent’s data integration capabilities with strategic partners MuelSoft, TIBCO and Red Hat

  • Recent global alliance with Actifio (multi-cloud copy data management player) will help in acceleration of digital transformation projects

  • Persistent Systems aims to achieve $1 billion revenues in the next four years

  • The company reached two major milestones, revenue and PAT crossing Rs 1,000 crores and Rs 100 crores, respectively in Q2 FY21      

Persistent Systems – The Underperformer

Persistent Systems enjoyed early success developing software for database companies and after the dotcom bubble burst transformed into an outsourced product developer(OPD). With Indian IT companies intensely vying for the IT outsourcing pie, Persistent differentiated itself by building software products for ISV clients, contributing across their entire product lifecycle.

But profitability took a hit in 2014 as higher automation and advanced tools changed OPD’s business model, reducing ISV’s (independent software vendor) costs and human effort. And while the rest of its peers moved in line with changing business dynamics into digital and enterprise services, Persistent was a late entrant. Thus, even though the company was an early identifier of SAMC (social, mobile, analytics and cloud), higher focus on core OPD business was its undoing. 

Persistent’s stock has been underperforming over the past five years with its net profit (PAT) CAGR at just 3%, far lower than, TCS, Infosys, HCL Tech, Tech Mahindra (6-10%.) But ahead of Wipro at 2% and much lower than LTI (15%)

Industry Revenue Mix

The 2020 Turnaround  

There were few strategic decisions which backfired for Persistent - the IBM IoT deal (2016) and the rebranding of the IP business (Accelerite). Persistent also faced limitations in the form of a higher dependence on US markets (80%), revenue concentration in a single client (IBM), lower growth in Europe, talent crunch and high attrition. The company transitioned from being an outsourced product development company to delivering digital business acceleration and modernization for enterprises. At the end of FY20, its revenues exceeded half a billion dollars for the first time and the company entered FY21 with analyst upgrades.

In fact, Persistent was one of the very few IT companies that reported strong growth in dollar revenues in Q1 FY21. The company came out with 3% sequential and 9.5% YoY revenue growth in dollars, higher than TCS, Infosys, HCL Tech, Wipro and Tech Mahindra. The stock price soared 18% after the June quarter results came out. The September quarter was even better with Persistent reaching two major milestones, revenue and PAT crossing Rs 1,000 crores and Rs 100 crores, respectively.

Dollar Revenue Mix

Back on Investors’ Radar

After years of underperformance, Persistent has caught investors’ eyes. It is not just the June and September quarters, the street is impressed with gradual improvements in the TSU vertical which includes IoT, digital transformations services, business analytics, cloud, ADM and Accelerite business.

With a change in top management in May 2019, the TSU vertical has been growing above 10% YoY growth rate for the past five quarters. The TSU CQGR (compounded quarterly growth rate) stands at roughly 4%. In Q2 FY21, the TSU vertical reported 16.6% YoY growth with sequential jump of 4.2%. Persistent has won multi-year multi million-dollar deals in this segment and has a robust deal pipeline. It also expects healthy annuity type revenues in the coming years. The vertical is a mix of annuity and project-based businesses.

The annuity business is in the form of multi-year contracts varying between 5-25 years. Annuity encompasses 65-70% of TSU business while project-based contracts extending between 6-18 months make up the rest. The management is following a stated strategy of layering up qualitative revenue by focussing on large long-term deals leading to consistent growth for TSU vertical which contributes more than 74% of total revenue mix.

While the TSU vertical seems to be on track, the Alliance business’ (26% of revenues) revival plan is also on the drawing board. Alliance business provides platform-based solutions, product engineering and other specialised services. These have been a drag on the overall growth for many quarters. The management is focussing on turning around the Alliance business.

Sandeep Kalra, CEO and Executive Director, Persistent Systems said, “We had set a certain strategy for TSU. We have seen some results in the last four or five quarters. For Alliance, one of the charters for us as a management team is to make sure that it turns in the same direction as the services business, and we bring growth into that”. The management’s key effort is to cross sell across TSU and Alliance verticals along with simplified and harmonised service offerings.

Further indicating strong Alliance performance in the next few quarters Kalra said, “In addition to our largest customer, Alliance is seeing a strong traction in services with other end customers, further yielding better prospects for revenue and profitability going ahead”.

IBM is the largest customer of the Alliance business, contributing 19% of total revenues. The management is confident of turning around the Alliance business in the next few quarters. Continuing with its positive commentary, the management also indicated that its EBIT margin at 12.1% levels, expanding 170 bps QoQ and 310 bps YoY, is sustainable. Kalra said that lower discounts and ramp downs, optimizing delivery headcount in the IP portfolio, higher offshore mix and turnaround of Alliance business will aid in sustainability of margins beyond FY21.

Along with a strong management stance, positive news flow during the quarter also enthused investors. Persistent is raising its partnership level with Red Hat (hybrid multi-cloud player) expanding go-to-market opportunities in Europe and Asia. IBM splitting its business into cloud computing & artificial intelligence (AI) and legacy IT infrastructure is favourable for Persistent over medium-to-long term.

Majority of current revenues accrue from the core IBM side (cloud and AI) and a smaller proportion from IBM legacy business. Global alliance with Actifio (multi-cloud copy data management player) will help in acceleration of digital transformation projects for Persistent. Acquisition of CAPIOT will strengthen Persistent’s data integration capabilities with strategic partners MuelSoft (provides integration software), TIBCO (specializes in big data and analytics) and Red Hat.

The management expects revenues from the CAPIOT acquisition to flow in from Q3 FY21 after the acquisition is completed.  It is also looking for meaningful acquisitions in Europe. And lastly, management’s target is to achieve $ 1 billion revenues in the next four years. For a company seen as a potential acquisition target three years ago, this seems like a dream run.

Persistent Systems Ltd. has gained 129.97% in the last 1 Year
More from Persistent Systems Ltd.