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3QFY2012 Result Update | IT

January 24, 2012

Persistent Systems
Performance highlights
Y/E March (` cr) Net revenue EBITDA EBITDA margin (%) PAT 3QFY12 268 70 26.0 41 2QFY12 238 45 19.0 32 % chg (qoq) 12.4 53.5 696bp 25.2 3QFY11 195 43 21.9 36 % chg (yoy) 37.3 62.7 406bp 12.0

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code IT 1,331 0.5 453/281 12,956 10 16,996 5,118 PERS.BO PSYS@IN

`333 -

Source: Company, Angel Research

For 3QFY2012, Persistent Systems (Persistent) reported lower-than-expected numbers on the top-line front but outperformed expectations on the bottom-line front. Management has revised FY2012 sales guidance downwards to 20.5-23.5% yoy from 29% yoy and PAT guidance to `125cr-135cr from `140cr. Persistent is into pure-play offshore product development (OPD), which is highly discretionary in nature and, thus, poses a huge risk for the company if any slowdown kicks in the economy. We maintain our Neutral view on the stock. Quarterly highlights: For 3QFY2012, Persistent reported revenue of US$51.7mn, up merely 0.3% qoq. Again in this quarter, the company witnessed a decline in onsite billing rates to US$12,387 people per minute (ppm) from US$12,665 ppm due to higher fixed price contracts. In INR terms, revenue growth was robust at 12.4% qoq to `268cr due to steep INR depreciation against USD. The companys EBITDA and EBIT margins increased by 696bp and 688bp qoq to 26.0% and 20.1%, respectively, aided by ~600bp qoq due to INR depreciation. Outlook and valuation: Persistent, due to its niche focus on OPD, is exposed to higher risks if any slowdown kicks in developed economies. This, along with the cautious outlook on the economy, has led to management revising its FY2012 revenue growth guidance downwards. Over, FY2011-13E, the company is expected to record USD and INR revenue CAGR of 14.8% and 20.3%, respectively. On the EBITDA margin front, we expect margin to increase to 22.7% and 23.0% for FY2012 and FY2013 from 20.4% in FY2011, majorly due to INR depreciation and higher utilization level, from 74% in 3QFY2012 to 74.7% in FY2013. On the bottom-line front, the company has revised its guidance to `125cr-135cr from `140cr previously. Thus, over FY2011-13E, we expect the company to record EBITDA and PAT CAGR of 27.8% and 0.1%, respectively. At the CMP of `333, the stock is trading at 9.5x FY2013E EPS of `35.0. We value the stock at 9.5x FY2013 EPS i.e., 50% discount to Infosys, which gives us a fair price of `332, and maintain our Neutral rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 39.0 27.0 5.8 28.2

Abs. (%) Sensex Persistent

3m 0.3 4.8

1yr (11.3) (18.7)

3yr 95.9 -

Key financials (Indian GAAP, Consolidated)


Y/E March (` cr) Net sales % chg Net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2010 601 1.2 115 74.0 24.3 32.1 10.4 1.9 18.0 17.5 1.6 6.7

FY2011 776 29.1 140 21.5 20.4 34.9 9.5 1.8 18.7 15.5 1.3 6.2

FY2012E 1,003 29.3 130 (6.9) 22.7 32.5 10.2 1.6 15.2 19.7 1.0 4.6

FY2013E 1,122 11.9 140 7.5 23.0 35.0 9.5 1.4 14.3 19.4 0.9 3.9

Ankita Somani
+91 22 39357800 Ext: 6819 ankita.somani@angelbroking.com

Please refer to important disclosures at the end of this report

Persistent | 3QFY2012 Result Update

Exhibit 1: 3QFY2012 performance (Indian GAAP, Consolidated)


Y/E March (` cr) Net revenue Cost of revenue Gross profit S&M expenses G&A expenses EBITDA Depreciation EBIT Other income Forex gain/(loss) PBT Income tax PAT EPS (`) Gross margin (%) EBITDA margin (%) EBIT margin (%) PAT margin (%)
Source: Company, Angel Research

3QFY12 268 153 115 17 28 70 16 54 7 (4) 56 16 41 10.1 42.9 26.0 20.1 15.0

2QFY12 238 150 89 17 27 45 14 31 7 6 45 13 32 8.1 37.2 19.0 13.2 12.9

% chg (qoq) 12.4 2.2 29.6 0.8 7.0 53.5 14.0 71.0

3QFY11 195 119 76 14 20 43 11 32 4 4

% chg (yoy) 37.3 28.8 50.6 20.3 45.8 62.7 49.6 67.1

9MFY12 730 443 287 51 81 155 42 113 20 9

9MFY11 563 339 224 45 59 120 30 90 11 14 116 9 107 26.6 39.8 21.4 15.9 18.1

% chg (yoy) 29.6 30.6 28.1 13.1 37.8 29.0 39.5 25.4

25.1 25.0 25.2 25.2 570bp 696bp 688bp 214bp

39 3 36 9.1 39.1 21.9 16.5 17.9

43.0 389.2 12.0 11.9 378bp 406bp 357bp (291)bp

142 41 101 25.1 39.3 21.3 15.4 13.3

22.6 361.1 (5.7) (5.6) (46)bp (10)bp (51)bp (485)bp

Exhibit 2: Actual vs. Angel estimates


(` cr) Net revenue EBITDA margin (%) PAT
Source: Company, Angel Research

Actual 268 26.0 41

Estimate 269 21.9 25

% Var. (0.6) 409bp 62.0

INR depreciation The only reason to cheer


For 3QFY2012, Persistent reported revenue of US$51.7mn, up merely 0.3% qoq. The companys offshore billing rate was almost flat qoq at US$3,778 ppm; however, again in this quarter, the company witnessed a decline in onsite billing rates to US$12,387 ppm from US$12,665 ppm due to higher fixed price contracts. As such, management indicated that pricing will be stable going ahead. In INR terms, revenue growth was robust at 12.4% qoq to `268cr higher growth as against USD revenue due to qoq steep INR depreciation against USD in 3QFY2012.

January 24, 2012

Persistent | 3QFY2012 Result Update

Exhibit 3: Trend in revenue growth (qoq)


54 50 46
(US$ mn)

8.8 6.7 47.0 43.2 3.1 50.0 6.3 51.5 51.7

10 8 6 4 2 0.3 0
(%)

42 38 34 30

3QFY11

4QFY11

1QFY12

2QFY12 qoq growth (%)

3QFY12

Revenue (US$mn)
Source: Company, Angel Research

Exhibit 4: Trend in billing rates (qoq)


14,000 12,000
(US$/ppm)

12,896

12,746

13,033

12,665

12,387

10,000 8,000 6,000 4,000 2,000 3QFY11 4QFY11 Onsite 1QFY12 Offshore 2QFY12 3QFY12 3,661 3,723 3,770 3,771 3,778

Source: Company, Angel Research

Industry wise, the companys growth was led by the lifesciences and healthcare segment (contributing 12.5% to revenue), revenue of which grew by 18.2% qoq. Revenue from the telecom and wireless segment (contributing 20.4% to revenue) declined by 7.0% qoq, majorly led by European clients. The anchor industry segment infrastructure and systems (contributed 67.1% to revenue) also did not show traction in its business as revenue from this industry declined by 0.2%.

Exhibit 5: Growth trend in industry segments


% to revenue Infrastructure and systems Telecom and wireless Lifesciences and healthcare
Source: Company, Angel Research

% chg (qoq) (0.2) (7.0) 18.2

% chg (yoy) 22.7 6.0 28.8

67.1 20.4 12.5

Geography wise, the companys growth was again led by the U.S., though revenue from this geography grew by merely 1.3%. Revenue from all other geographies registered a decline sequentially.

January 24, 2012

Persistent | 3QFY2012 Result Update

Exhibit 6: Growth trend in geographies


% to revenue North America Europe Asia-Pacific
Source: Company, Angel Research

% chg (qoq) 1.3 (7.7) (2.3)

% chg (yoy) 16.1 62.4 27.3

82.9 7.2 9.9

Revenue contribution from IP-led services increased in 3QFY2012 to 9.2% from 7.6% in 2QFY2012. Management indicated that it foresees IP-led revenue to be substantially higher in 2HFY2012 as compared to 1HFY2012 and expects IP-led revenue to touch US$20mn by the end of FY2012 i.e., whopping 34% yoy growth. This requires an ask rate of 74% qoq growth in IP-led revenue in 4QFY2012, which we believe is highly unlikely. We expect IP-led revenue to grow by 6% qoq and overall FY2012 IP-led revenue to be at US$16.7mn.

Hiring and utilization


Persistent, unlike its peers, reported reduction in its employee base, by 194 people, to 6,706. The companys technical employee base reduced by 181 people to 6,288. Sales and support employee base also saw employee rationalization. Attrition rate (LTM basis) declined to 17.4% in 3QFY2012 from 17.7% in 2QFY2012.

Exhibit 7: Employee metrics


Particulars Technical Sales Rest Total Net addition Attrition LTM (%)
Source: Company, Angel Research

3QFY11 5,070 94 296 5,460 179 21.5

4QFY11 5,950 108 302 6,360 900 19.6

1QFY12 6,178 119 323 6,620 260 18.4

2QFY12 6,469 113 318 6,900 280 17.7

3QFY12 6,288 103 315 6,706 (194) 17.4

Net utilization (excluding resources in IP-led work) increased by 30bp qoq to 74.1%. For computing utilization, the company does not account for freshers added till they complete three months in the company. Management expects utilization to inch up and reach 75-77% over the next 3-4 quarters.

Exhibit 8: Utilization trend


75 74 74 73 72.7 73 72 72 71 71 70 3QFY11 4QFY11 1QFY12 Utilisation (%) 2QFY12 3QFY12 71.0 74.2 73.8 74.1

Source: Company, Angel Research

January 24, 2012

(%)

Persistent | 3QFY2012 Result Update

The client metrics of the company witnessed reduction in the number of clients in the US$1mn bracket and addition in the lower revenue bracket of <US$1mn. The companys total active client base increased to 273 in 3QFY2012 from 253 in 2QFY2012.

Exhibit 9: Client metrics


Particulars Customers billed <US$1mn US$1mn-3mn >US$3mn
Source: Company, Angel Research

3QFY11 207 169 29 9

4QFY11 229 194 26 9

1QFY12 239 198 32 9

2QFY12 253 211 32 10

3QFY12 273 236 27 10

Margin profile
In 3QFY2012, the companys EBITDA and EBIT margins increased by 696bp and 688bp qoq to 26.0% and 20.1%, respectively, aided by ~600bp qoq due to INR depreciation.

Exhibit 10: Margin profile


45 40 35 30
(%)

42.9 39.1 37.4 37.3 37.2 26.0 21.9 17.9 16.5 12.3 3QFY11 4QFY11 12.3 1QFY12 EBITDA margin 13.2 2QFY12 3QFY12 17.9 19.0 20.1

25 20 15 10 5

Gross margin
Source: Company, Angel Research

EBIT margin

Outlook and valuation


Persistent, due to its niche focus on OPD, is exposed to higher risks if any slowdown kicks in developed economies. This, along with the cautious outlook on the economy, has led to management revising its FY2012 revenue growth guidance downwards. Over, FY2011-13E, the company is expected to record USD and INR revenue CAGR of 14.8% and 20.3%, respectively. On the EBITDA margin front, we expect margin to increase to 22.7% and 23.0% for FY2012 and FY2013 from 20.4% in FY2011, majorly due to INR depreciation and higher utilization level, from 74% in 3QFY2012 to 74.7% in FY2013. On the bottom-line front, the company has revised its guidance to `125cr-135cr from `140cr previously. Thus, over FY2011-13E, we expect the company to record EBITDA and PAT CAGR of 27.8% and 0.1%, respectively.

January 24, 2012

Persistent | 3QFY2012 Result Update

At the CMP of `333, the stock is trading at 9.5x FY2013E EPS of `35.0. We value the stock at 9.5x FY2013 EPS i.e., 50% discount to Infosys, which gives us a target price of `332, and maintain Neutral rating on the stock.

Exhibit 11: Key assumptions


FY2012 Revenue growth USD terms (%) USD-INR rate Revenue growth INR terms (%) EBITDA margin (%) Tax rate (%) EPS growth (%)
Source: Company, Angel Research

FY2013 8.6 50.0 9.3 23.0 32.0 7.5

21.4 48.5 8.1 22.7 29.5 (6.8)

Exhibit 12: Change in estimates


FY2012 Parameter (` cr) Net revenue EBITDA PBT Tax PAT Earlier estimates 1,014 213 170 52 119 Revised estimates 1,003 228 185 54 130 Variation (%) (1.1) 6.6 8.5 5.5 9.8 Earlier estimates 1,174 263 198 61 137 FY2013 Revised estimates 1,122 258 206 66 140 Variation (%) (4.4) (1.9) 4.0 7.3 2.5

Source: Company, Angel Research

Exhibit 13: One-year forward PE(x) chart


600 500

(`)

400 300 200

Dec-10

Aug-10

Aug-11

Price
Source: Company, Angel Research

16x

14x

12x

10x

8x

January 24, 2012

Dec-11

Apr-10

Oct-10

Apr-11

Feb-11

Oct-11

Jun-10

Jun-11

Persistent | 3QFY2012 Result Update

Exhibit 14: Recommendation summary


Company HCL Tech Hexaware Infosys Infotech Enterprises KPIT Cummins Mahindra Satyam Mindtree Mphasis NIIT Persistent TCS Tech Mahindra Wipro Reco Buy Buy Buy Neutral Accumulate Accumulate Accumulate Accumulate Buy Neutral Buy Accumulate Neutral CMP (`) 428 78 2,620 139 150 73 437 347 42 333 1,088 608 419 Tgt. price (`) 520 96 3,047 163 82 502 387 55 1,262 666 Upside (%) 21.6 22.7 16.3 9.0 13.0 14.8 11.5 31.1 16.0 9.6 Target P/E (x) 13.0 11.0 18.0 8.5 10.0 11.0 10.0 11.5 6.9 9.0 19.5 9.0 15.3 FY2013E EBITDA (%) 17.5 18.7 32.0 16.0 15.4 14.8 14.7 16.6 16.3 23.0 29.9 16.8 19.7 FY2013E P/E (x) 10.7 9.0 15.5 8.8 9.1 9.8 8.7 9.4 5.3 9.5 16.8 7.3 15.1 FY2011-13E EPS CAGR (%) 22.1 74.1 18.9 11.9 19.9 33.0 42.1 (3.1) 19.3 0.1 20.6 29.9 13.1 FY2013E RoCE (%) 20.9 21.4 25.8 16.1 19.5 11.7 20.3 14.0 11.0 19.4 32.1 14.6 15.3 FY2013E RoE (%) 23.1 19.8 23.8 13.0 16.9 13.8 17.4 14.2 15.6 14.3 33.3 20.0 20.5

Source: Company, Angel Research

Profit and loss statement (Indian GAAP, Consolidated)


Y/E March (` cr) Net sales Direct costs % of net sales Gross profit % of net sales S&M expenses % of net sales G&A expenses % of net sales EBITDA % of net sales Depreciation EBIT Other income Forex gain/(loss) Profit before tax Provision for tax % of PBT PAT Extraordinary expenses Final PAT EPS (`) FY2010 601 337 56.1 264 43.9 46 7.7 71 11.9 146 24.3 34 113 8 3 124 9 7.3 115 115 32.1 FY2011 776 472 60.9 304 39.1 62 8.0 83 10.8 158 20.4 42 116 17 17 150 11 7.1 140 140 34.9 FY2012E 1,003 595 59.4 407 40.6 69 6.9 111 11.0 228 22.7 59 169 17 (1) 185 54 29.5 130 130 32.5 FY2013E 1,122 671 59.8 451 40.2 81 7.2 112 10.0 258 23.0 67 191 21 (6) 206 66 32.0 140 140 35.0

January 24, 2012

Persistent | 3QFY2012 Result Update

Balance sheet (Indian GAAP, Consolidated)


Y/E March (` cr) Liabilities Share capital ESOP outstanding Reserves and surplus Hedge reserves Total shareholders' funds Deferred payment liability Total liabilities Assets Gross block - fixed assets Accumulated depreciation Net block Capital work-in-progress Total fixed assets Investments Deferred tax assets, net Current assets Sundry debtors Cash and bank balance Other current assets Loans and advances Less: - Current liab. and provisions Current liabilities Provisions Net current assets Total assets 148 32 255 644 121 40 207 750 167 48 160 858 189 57 208 983 136 192 34 72 158 100 23 87 201 31 29 115 221 72 33 129 371 188 183 48 232 156 1 454 228 226 60 287 250 6 654 287 368 65 433 250 15 804 354 450 60 510 250 15 40 3 580 16 639 5 644 40 3 696 8 747 3 750 40 4 810 2 855 3 858 40 4 933 4 980 3 983 FY2010 FY2011 FY2012E FY2013E

January 24, 2012

Persistent | 3QFY2012 Result Update

Cash flow statement (Indian GAAP, Consolidated)


Y/E March (` cr) Pre tax profit from operations Depreciation Pre tax cash from operations Other income/prior period ad Net cash from operations Tax Cash profits (Inc)/dec in Current assets Current liabilities Net trade working capital Cashflow from operating activities (Inc)/dec in fixed assets (Inc)/dec in investments (Inc)/dec in deferred tax assets Inc/(dec) in deferred payment liab. Cashflow from investing activities Inc/(dec) in debt Inc/(dec) in equity/premium Dividends Cashflow from financing activities Cash generated/(utilised) Cash at start of the year Cash at end of the year (81) 88 7 156 (48) (68) 1 5 (110) 132 (2) 129 175 17 192 (25) (19) (44) 138 (97) (94) (5) (2) (198) (6) (26) (32) (92) 192 100 (77) 55 (22) 167 (205) 0 (9) (0) (214) (6) (16) (22) (69) 100 31 (38) 31 (7) 200 (145) (145) 2 (16) (15) 41 31 72 FY2010 113 34 146 11 158 9 149 FY2011 116 42 158 34 193 11 182 FY2012E 169 59 228 15 243 54 189 FY2013E 191 67 258 15 273 66 207

January 24, 2012

Persistent | 3QFY2012 Result Update

Key ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BVPS Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS Cash EPS Dividend Book value Dupont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover ratio (Sales/Assets) Leverage ratio (Assets/Equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (fixed assets) Receivables days Payable days 2.7 73 120 3.0 69 104 2.8 73 103 2.4 72 103 17.5 45.7 18.0 15.5 34.1 18.7 19.7 33.0 15.2 19.4 31.8 14.3 0.9 1.1 0.2 0.9 1.0 18.0 0.9 1.3 0.1 1.0 1.0 18.7 0.7 1.1 0.2 1.2 1.0 15.2 0.7 1.1 0.2 1.1 1.0 14.3 32.1 41.4 0.6 178.1 34.9 45.5 5.5 186.8 32.5 47.2 3.5 213.8 35.0 51.8 3.5 245.1 10.4 8.0 1.9 0.2 1.6 6.7 1.5 9.5 7.3 1.8 1.7 1.3 6.2 1.3 10.2 7.1 1.6 1.1 1.0 4.6 1.2 9.5 6.4 1.4 1.1 0.9 3.9 1.0 FY2010 FY2011 FY2012E FY2013E

January 24, 2012

10

Persistent | 3QFY2012 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Persistent No No No No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

January 24, 2012

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