Persistent Systems Ltd. share price target

Sector: IT /Mid-Cap | Earnings Update 4QFY19 Background: Persistent Systems is one of the leading outsourced product development (OPD) companies in India. 4QFY19: Revenue from business offering mix: Services (78.4%) & IP led business (21.6%). The company has industry expertise in ISV (41.2%), Enterprise (37.2%) and IP Led (21.6%). Company has strong workforce of 9,962 employees. The company's business is spread across North America (80.9%), Europe (7.9%), and RoW (11.2%).Company earns revenue from global delivery centers (31.4%), India (47%) and IP Led (21.6%). Total active clients stood at 605 including services and IP led business. Company's top client accounts 20.2% in...

In FY19, PSYS faced challenges in its top client, which impacted its Services and IP revenue. Consequently, 1 May 2019 revenue growth was tepid at 2.2% YoY, while EBITDA/PAT increased 38%/12% YoY in the year. Amidst the earnings softness, the uptick in payout to 92% (including INR2.25b buyback) was to some extent comforting. IP revenue (22% of the top line) was down 15% QoQ owing to seasonality and a weak performance from IBMs CE/CLM segment (more than 40% contribution to IP). Revenue from Services increased 2.3% QoQ and 26.5% YoY), well above our estimate of INR726m mainly due to the margin beat. appears to have bottomed out, expanding 230bp YoY to 17.8% (adjusted) in FY19 after two years of downtrend. 4QFY19 EBITDA margin shrank 230bp QoQ to 17.4% (adjusted for IL&FS; provisioning) driven by a dip in IP revenue, but was ahead of our estimate of 15.7% due to better pricing in linear services and write-back of bonus incentives.

PSYS has lagged peers significantly on revenue and profit growth over FY17-19. High client concentration (top a/c at 24%), erratic revenues (high reliance on IBM sales to drive growth in Alliance biz) and weak client franchise are mostly to blame. The recent management rejig, including CEO (ex IBM) and Head Tech services (ex Harman and HCLT) may help change things, but need monitoring. Our USD rev/EPS CAGR at 8/4% over FY19-21 do not assume a change in trajectory. Valuations at 12.8x, strong FCF generation, high cash (25% of M-cap) provide relief in an otherwise uninspiring story. Key risks are decline in Alliance business and value destructive acquisitions. We maintain NEUTRAL on Persistent Systems (PSYS) after an expectedly weak 4QFY19. Recent management changes may revive trajectory. We await more clarity on the specifics. Our TP at Rs 645 is based on 13x FY21E EPS.

Expect company to lag industry growth in revenues Revenue growth was muted in FY19 due to specific issues in the top customer, concerns in meeting demand and weak performance in IP led business. Going forward, the management indicated better FY20E vs. FY19, driven by delivery capability enhancement, meeting demand by hiring at sales level and positive commentary from clients. Further, acceleration in digital business would support growth in coming years. However, a pick-up in IP business and services is required for the company to register double...

Persistent Systems (PSYS) closed the Mar'19 quarter with a 15% QoQ decline in IP revenues and 450bps QoQ contraction in reported EBITDA margins. The historically weak growth momentum entering into FY20 will render revenue growth a tall task. Management intends to maintain steady operating margins in FY20 and use the cash kitty for inorganic opportunities. We roll over to a revised Mar'20 TP of Rs 650 (vs. Rs 640) and reiterate REDUCE as we remain...

decline of 2.1% q-o-q at $118.3 million (versus our estimate of $116 million). Revenue decline during the quarter was due to 15.4% q-o-q fall in IP-led revenue, as Q4 is a seasonally soft quarter for IP-led revenue (because budgets are usually getting allocated in the U.S.), whereas IT services revenue grew by 2.3% q-o-q. Growth in IT services revenue was driven by 1.7% q-o-q...

Persistent Systems came out with weak set of numbers in Q4FY19. The company missed our estimates on all fronts as Revenue, EBITDA and PAT all came below our estimate. Revenue in rupee terms grew 10.5% YoY to Rs 8319 mn against our estimate of Rs 8590 mn. EBITDA stood at Rs 1266 mn against our estimate of Rs 1470 mn. PAT for the quarter stood at Rs 845 mn below our estimate of Rs 930 mn. Management in its concall acknowledged the fact that poor performance was owing to company specific issues rather than industry headwinds. We are cautious on the stock from near term perspective,...

Q3FY19 USD revenue grew by 2.2% QoQ (-1.4% YoY) led by rise in service revenue (+3.1% QoQ) whereas IP-led revenue was flat QoQ. EBITDA Margins improved by 250bps QoQ/230bps YoY led by higher utilisation, better realisation, and higher offshoring etc. Better business mix, improvement in utilisation, higher IP deals & higher onsite utilisation would drive PSYS' profit margins going forward....

Maintain BUY with TP of Rs 815, 14x Dec-20E EPS. Persistent (PSYS) posted in-line revenue and an operational beat in 3Q. While the revenue growth was muted (despite seasonality tailwind), operational improvement seems sustainable supported by (1) Higher offshoring (in large accounts), (2) Better mix (higher Salesforce, Appian channel contribution) and (3) Utilisation increase. Revenue came at USD 120.8mn, +2.2% QoQ led by Digital (+6.4% QoQ) and Accelerite (+7.8% QoQ), offset by Services (-0.4% QoQ) and Alliance (+1.9% QoQ).

It was a strong quarter from an EBITDA margin perspective as margins expanded 250 bps QoQ to 19.7% (way above our 17.7% estimate). Margin expansion was mainly on the back of lower travelling expenses (10.9% QoQ decline), higher offshoring, increase...