Finance Club Assignment

GROUP-9
PERSISTENT SYSTEMS-RATIO ANALYSIS

Presented ByMahesh Alapati(M009-14)

Patil Pranav Ranjan
Piyush Jain
Guneet Kaur
Anup Ranjan

(Note- There aren`t any listed Pure OutSourced Product Development

Companies ,So most relevant comparisions would be with mid sized
IT firms )
Liquidity Analysis
IT companies typically have high current ratios(Drived by Cash & Cash
Equivalents , Current Investments) as their CAPEX requirements are relatively
very low.
Same is the case with Persistent Systems , It has been maintaining Current ratio
of 3+ from past 3 years primarily due to high Cash & Cash equivalents
component , Current Investments ( in mutual funds)
Industry trend has also been in the similar lines , Biggies like TCS , Infy
has current ratio of around 3, oracle has 6 where as midsized IT firms
like Mindtree, Hexaware ,Cyient etc has around 2 .
However YOY , Persistent`s increasing cash & investments component is
denting the return on equity ,currently its portion is equal to 12% of the
market cap .
The company should look for lucrative inorganic growth opportunities / expansion
opportunities and try to reduce its revenue risk ( 80%+ revenues are from north
America which means any anti outsourcing policy or abnormal currency
movements can have deleterious affects on the company`s earnings).Now that
developed economies& relatively less turbulence in emerging economies are
coming into growth path it should consider expanding into Asia Pacific and
Europe regions to leverage its strong balance sheet position .
Cash Ratio & Quick Ratio are also in the same lines
Quick ratio across the industry
TCS ;3+ , INFY ; 4+ , Wipro -;2+,Tech M-;1.7 HCL-;1.5, Persistent -;2.89
Prone to business cycles and currency risks , firms can maintain cash and
investments as a buffer but to an extent .Persistent is a midsized it firm with
huge industry potential worldwide so this high quick ratio is not justifiable for it,
it is a different scenario with biggies they have already grown a lot and its
difficult to further grow on their already huge base so high liquidity ratios for
them can be justified to an extent.
Leverage Ratios
Company has very negligible debt portion on the books i.e 3.187 cr and most of
the IT Players are virtually debt free like Polaris, Mindtree , Hexaware , Mphasis ,
TCS , Infy , Oracle etc due to the nature of their industy.

One Advantage besides guarding against currency risks and Geographic

Concentration Risks is that big ticket acquisitions , if found worth , can be
seamless.
Disadvantage is that during economic boom leveraged companies grow pretty
fast and perform substantially on profitability and roe fronts where as non
leveraged firms cant beat them in terms of growth / profitability.
Cash Coverage ratio , interest coverage ratio etc tells the same story

Asset Utilization Ratios

Ratios in this space i.e Asset Turnover , Receivables turnover ( For IT Firms
Inventory ratios are not applicable) would portray efficiency in the operations.

Asset Turnover Ratios As On March 14

1.42
1.08
0.92

0.3

Polaris

Mphasis

Mindtree

Persistent

Receivables Turnover Ratios As On March 14

5.2

5.02

5.51

2.64

Polaris

Mphasis

Mindtree

Persistent

Evidently Persistent Systems has second highest Asset turnover ratio

and first in terms of receivables turnover ratios , which clearly indicates
that the operations are highly efficient.
On comparing past 2 years data of Persistent ,It is clearly on improving
path
Receivables Turnover Ratios in 2012 4.92 in 2013 5.18 , in 2014-

5.51
Asset turnover ratio in 2012 0.979 , 2013 1.02 , 2014-

1.08

Profitability Ratios
Profit Margins and ROA has been an improving path from past 3 years ,
Profit Margin
Return On assets

14.93%
16.15%

14.49%
14.81%

13.71%
13.88%

Profit Margins For FY 13-14

14.90%

17.26%

14.93%

10.40%

Polaris

Mphasis

Mindtree

Persistent

As the business models are different one can`t comment fairly , however
Persistent`s profit margins are higher than many mid sized IT Firms and
importantly they are in growth path YOY which is quite positive , With potential
increase in share of IP Led products division the company reap significant
benefits in terms of margins.

ROA - March 2014

21.10%
16.15%
11.52%
4.75%
Polaris

Mphasis

Mindtree

Persistent

ROA has been increasing YOY for the company and it has second highest ROA
among reputed midsized IT peers,.

Return On Equity -March 14

26.12%
20.39%
12.87%
5.95%
Polaris

Return on equity

Mphasis

Mindtree

2014 -20.39

2013
-22.32%

Persistent

2012 - 18.90%

ROE has fallen almost by 200 basis points from last year due to high cash and
investments component i.e almost 1/3rd of the total assets . Company must
find avenues that has higher returns or else distribute good portion as
dividends.
However it has decent ROE numbers and infact second highest among the peers.

Market Price Ratios

Before further dwelling into these ratios , We would like to quote few insights
about the company
There arent many Pure Outsourced product development companies like
"Persistent " in India and Persistent,most probably, is the biggest in this space in
India.

As per latest annual report 2014

1) The company is constantly increasing its place in IP Led products

business which has margins in the range of 50%+ ( In Q4 20% of
revenues came from IP Led products)
2) Campany has 83% repeat business which signifies the client
relationship & satisfaction levels
3) Being an IT Player it need not incur regular CAPex and return on
retained earnings will be wayforward for growth
4)Management indirectly indicated 15% sustained growth rate in
topline , which is quite a conservative estimate
5)With huge chunk of Investments and cash balance in the balance
sheet(Around 420 cr) , if it wants it can embark on aggresive Inorganic
growth path
6)Independent software vendors are increasingly focusing on reducing
"Time to market" factor ,Frequent upgradations , Low cost value
addition . which gives tremendous market potential for persistent.

Sustainable growth rate i.e as per theory,

ROE*Retention Rate = 20.19(10.22)=20.19*0.78= 15.74%
Theoretically PEG Ratio for
persistent=17.65/15.74= 1.12
Industry P/E ratio is around 21.93

P/E Ratios

11.62

12.18

15.8

12.6

14.13

17.65

Price To Book Values

4.25
1.5

1.76

3.67

2.76

3.51

Company is profitable since inception and it is run by Dr. Anand Deshpande who
is a highly respected personality in Industry circles and also a member of CII
Its corporate governance practices are quite impressive and CSR Activities are
IMPECCABLE , It has won-

Here are some extracts from recent annual report-

This speaks volumes about their ethical standards

Business Unique business model and largest company in Pure OPD
play in the country , Has huge potential worldwide.
Management Quality and Ethical Management
Valuation Trading at EV/EBIDTA of 9.64 and below Industry Avg P/E ,
Strong Balance Sheet , One of the highest ROE , Mammoth 22.71%
CAGR in Topline over past 5 years , 16.73% CAGR in bottom line over
past 5 years.
By all means it is an attractive long term buy