4QFY2012 Result Update | IT

April 23, 2012

Persistent Systems
Performance highlights
Y/E March (` cr) Net revenue EBITDA EBITDA margin (%) PAT
Source: Company, Angel Research

ACCUMULATE
CMP Target Price
% chg (qoq) 1.1 11.1 257bp 1.6 4QFY11 213 38 17.9 33 % chg (yoy) 27.2 103.0 1,068bp 24.4

`335 `361
12 Months

4QFY12 271 77 28.6 41

3QFY12 268 70 26.0 41

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 1,341 0.4 407/281 12,956 10 17,097 5,201 PERS.BO PSYS@IN

For 4QFY2012, Persistent Systems (Persistent) reported better-than-expected numbers on the operational as well as bottom-line front. Management sounded confident of surpassing Nasscoms industry growth forecast of 11-14% yoy (USD revenue) for FY2013 with majority of incremental work expected to come from the U.S. Persistent is into pure-play offshore product development (OPD), which is highly discretionary in nature and, thus, poses a risk for the company if any slowdown kicks in the economy. We maintain our Accumulate rating on the stock. Quarterly highlights: For 4QFY2012, Persistent reported revenue of US$54.2mn, up 4.9% qoq. The companys revenue from IP-led services grew by 38% qoq to US$6.6mn. In INR terms, revenue came in at `271cr, up merely 1.1% qoq. The companys EBITDA and EBIT margins increased by 257bp and 164bp qoq to 28.6% and 21.7%, respectively, majorly driven by operational efficiencies and robust growth in IP-led revenue, which commands higher margin. Outlook and valuation: Persistent, due to its niche focus on OPD, is exposed to higher risks if any slowdown kicks in developed economies. However, management indicated that it expects the company to grow higher than Nasscoms estimate of 11-14% yoy in FY2013. Over FY2012-14E, the company is expected to record USD and INR revenue CAGR of 9.8% and 10.6%, respectively. The company expects EBITDA margin to remain stable yoy for FY2013. We expect margin to inch up to 23.3% for FY2013 from 23.2% in FY2012 and then drop to 22.4% in FY2014. Over FY2012-14E, we expect the company to record EBITDA and PAT CAGR of 8.6% and 6.3%, respectively. At the CMP of `335, the stock is trading at 8.4x FY2014E EPS of `40.1. We value the stock at 9x FY2014E EPS, which gives us a target price of `361, and maintain our Accumulate rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 39.0 30.3 2.7 28.1

Abs. (%) Sensex Persistent

3m 2.1 4.5

1yr (12.8) (15.3)

3yr 53.5 -*

Note: * Listed on April 6,2010

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) FY2010 601 1.2 115 74.0 24.3 32.1 10.5 1.9 18.0 17.5 1.7 6.8 FY2011 776 29.1 140 21.5 20.4 34.9 9.6 1.8 18.7 15.5 1.3 6.3 FY2012E 1,000 28.9 142 1.5 23.2 35.4 9.5 1.6 16.9 20.4 1.0 4.3 FY2013E 1,109 10.8 149 4.9 23.3 37.2 9.0 1.4 15.4 18.6 0.9 3.7 FY2014E 1,224 10.4 160 7.8 22.4 40.1 8.4 1.2 14.5 17.0 0.7 3.2

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

Source: Company, Angel Research

Please refer to important disclosures at the end of this report

Persistent | 4QFY2012 Result Update

Exhibit 1: 4QFY2012 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

4QFY12 271 150 121 18 26 77 19 59 (3) 55 14 41 10.3 44.7 28.6 21.7 15.4

3QFY12 268 153 115 17 28 70 16 54 7 (4) 56 16 41 10.2 42.9 26.0 20.1 15.0

% chg (qoq) 1.1 (2.1) 5.4 4.8 (8.3) 11.1 17.0 9.3

4QFY11 213 133 80 16 25 38 12 26 6 3

% chg (yoy) 27.2 12.2 52.3 7.2 4.6 103.0 55.9 124.6

FY2012 1,000 592 408 69 107 232 61 171 17 9

FY2011 776 472 304 62 83 158 42 116 17 17 150 11 140 34.9 39.1 20.4 14.9 17.2

% chg (yoy) 28.9 25.4 34.4 11.5 27.9 46.8 44.1 47.8

(2.2) (11.7) 1.6 1.5 182bp 257bp 164bp 42bp

35 2 33 8.3 37.4 17.9 12.3 15.0

58.6 719.7 24.4 24.4 738bp 1068bp 941bp 47bp

197 55 142 35.4 40.8 23.2 17.1 13.8

30.9 419.0 1.5 1.6 167bp 283bp 219bp (342)bp

Exhibit 2: Actual vs. Angel estimates

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

Actual 271 28.6 41

Estimate 267 26.0 31

% Var. 1.3 256bp 33.4

Healthy performance
For 4QFY2012, Persistent reported revenue of US$54.2mn, up 4.9% qoq. The companys revenue from IP-led services grew by 38% qoq to US$6.6mn. The companys onsite as well as offshore billing rates saw some improvement of 1.7% and 3.1% qoq to US$12,603ppm and US$3,895ppm, respectively, due to increased IP-led revenue. As such, management indicated that pricing will be stable going ahead. In INR terms, revenue came in at `271cr, up merely 1.1% qoq lower growth as against USD revenue due to qoq INR appreciation against USD in 4QFY2012.

April 23, 2012

Persistent | 4QFY2012 Result Update

Exhibit 3: Trend in revenue growth (qoq)

58 54 50
(US$ mn)

8.8 54.2 6.3 50.0 47.0 3.1 51.5 51.7 4.9

10 8 6 4 2 0.3 0
(%)

46 42 38 34

4QFY11

1QFY12

2QFY12

3QFY12 qoq growth (%)

4QFY12

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

Exhibit 4: Trend in billing rates (qoq)

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

12,746

13,033

12,665

12,387

12,603

10,000 8,000 6,000 4,000 2,000 4QFY11 1QFY12 Onsite 2QFY12 Offshore 3QFY12 4QFY12 3,723 3,770 3,771 3,778 3,895

Source: Company, Angel Research

Industry wise, the companys growth was led by the telecom and wireless segment (contributing 21.0% to revenue), revenue of which grew by 8.2% qoq. The companys anchor industry segment infrastructure and systems (contributed 67.6% to revenue) also posted healthy 5.6% qoq growth in revenue. Revenue from the lifesciences and healthcare segment (contributing 11.4% to revenue) declined by 4.3% qoq.

Exhibit 5: Growth trend in industry segments

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

% chg (qoq) 5.6 8.2 (4.3)

% chg (yoy) 14.0 18.3 17.3

67.6 21.0 11.4

Geography wise, the companys growth was led by Aisa-Pacific region, revenue from which grew by 14.5% qoq. Revenue momentum from the U.S. geography was decent and registered growth of 4.3% qoq. Majority of the companys incremental growth is also expected to come from the U.S.
April 23, 2012

Persistent | 4QFY2012 Result Update

Exhibit 6: Growth trend in geographies

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

% chg (qoq) 4.3 (0.9) 14.5

% chg (yoy) 10.1 35.1 57.6

82.4 6.8 10.8

Revenue contribution from IP-led services increased in 4QFY2012 to 12.1% from 9.2% in 3QFY2012. Management indicated that it foresees IP-led revenue to be higher in FY2013, but it will remain volatile on a qoq basis.

Hiring and utilization

Persistent, unlike its peers, again reported reduction in its employee base, by 78 people, to 6,628. The companys technical employee base reduced by 65 people to 6,223. Sales and support employee base also saw employee rationalization. Attrition rate (LTM basis) increased to 18.3% in 4QFY2012 from 17.4% in 3QFY2012. Management indicated that it intends to hire 350 freshers in FY2013 and lateral hiring in FY2013 is expected to be higher than that of freshers.

Exhibit 7: Employee metrics

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

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

4QFY12 6,223 95 310 6,628 (78) 18.3

Net utilization (excluding resources in IP-led work) declined by 240bp qoq to 71.7% because of the increase in the denominator used for calculating utilization. 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 71.7 71.0 73 72 72 71 71 70 4QFY11 1QFY12 2QFY12 Utilization (%)
Source: Company, Angel Research

73.8

74.1

(%)

3QFY12

4QFY12

April 23, 2012

Persistent | 4QFY2012 Result Update

The companys client metrics saw qualitative improvement with the number of clients in the US$3mn plus bracket increasing by one. Also, revenue bracket of less than US$1mn saw addition of 15 clients. The companys total active client base increased to 288 in 4QFY2012 from 273 in 3QFY2012.

Exhibit 9: Client metrics

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

4QFY11 229 194 26 9

1QFY12 239 198 32 9

2QFY12 253 211 32 10

3QFY12 273 236 27 10

4QFY12 288 251 26 11

Margin profile
In 4QFY2012, the companys EBITDA and EBIT margins increased by 257bp and 164bp qoq to 28.6% and 21.7%, respectively, majorly driven by operational efficiencies and robust growth in IP-led revenue, which commands higher margin.

Exhibit 10: Margin profile

50 45 40 35 30 25 20 15 10 5 12.3 4QFY11 12.3 1QFY12 13.2 2QFY12 EBITDA margin 3QFY12 4QFY12 37.4 37.3 37.2 19.0 20.1 21.7 42.9 26.0 44.7 28.6

(%)

17.9

17.9

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. However, management indicated that it expects the company to grow higher than Nasscoms estimate of 11-14% yoy in FY2013. Over FY2012-14E, the company is expected to record USD and INR revenue CAGR of 9.8% and 10.6%, respectively. The company expects its EBITDA margin to remain stable yoy for FY2013. We expect margin to inch up to 23.3% for FY2013 from 23.2% in FY2012 and then drop to 22.4% in FY2014. Over FY2012-14E, we expect the company to record EBITDA and PAT CAGR of 8.6% and 6.3%, respectively. At the CMP of `335, the stock is trading at 8.4x FY2014E EPS of `40.1. We value the stock at 9x FY2014E EPS, which gives us a target price of `361, and maintain our Accumulate rating on the stock.
April 23, 2012

Persistent | 4QFY2012 Result Update

Exhibit 11: Key assumptions

FY2013 Revenue growth USD terms (%) USD-INR rate Revenue growth INR terms (%) EBITDA margin (%) Tax rate (%) EPS growth (%)
Source: Company, Angel Research

FY2014 10.4 49.0 13.2 22.4 30.0 7.8

9.1 49.0 11.7 23.3 30.0 4.9

Exhibit 12: Change in estimates

FY2013 Parameter (` cr) Net revenue EBITDA PBT Tax PAT Earlier estimates 1,098 245 213 68 145 Revised estimates 1,109 258 212 64 149 Variation (%) 1.0 5.2 (0.4) (6.6) 2.6 Earlier estimates 1,227 255 228 72 156 FY2014 Revised estimates 1,224 274 229 69 160 Variation (%) (0.2) 7.7 0.3 (4.4) 2.5

Source: Company, Angel Research

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

700 600 500

(`)
400 300 200

Dec-10

Dec-11

Apr-10

Apr-11

Aug-10

Aug-11

Oct-10

Feb-11

Oct-11

Price
Source: Company, Angel Research

16x

14x

12x

10x

8x

April 23, 2012

Feb-12

Apr-12

Jun-10

Jun-11

Persistent | 4QFY2012 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 Accumulate Neutral Buy Accumulate Buy Buy Accumulate Buy Buy Accumulate Buy Accumulate Accumulate CMP (`) 495 125 2,312 160 82 76 545 372 46 335 1,059 696 424 Tgt. price (`) 560 2,792 177 98 89 585 433 61 361 1,360 750 463 Upside (%) 13.1 20.8 10.9 18.9 16.7 7.4 16.3 34.1 7.6 28.4 7.7 9.3 FY2014E EBITDA (%) 17.4 18.3 30.6 16.6 14.9 15.0 15.5 17.9 16.9 22.4 28.9 15.7 19.3 FY2014E P/E (x) 11.5 12.1 13.2 8.6 7.6 9.2 9.3 9.0 5.0 8.4 15.2 8.0 14.0 FY2011-14E EPS CAGR (%) 17.0 53.4 13.4 13.9 (1.4) 25.3 32.9 1.7 18.0 4.7 16.1 20.8 11.8 FY2014E RoCE (%) 20.4 24.1 22.8 16.9 20.0 11.4 19.8 14.1 11.5 17.0 30.6 12.9 14.1 FY2014E RoE (%) 21.3 21.6 20.8 13.2 18.0 13.0 17.0 13.7 19.0 14.5 29.9 18.0 19.3

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 FY2012 1,000 592 59.2 408 40.8 69 6.9 107 10.7 232 23.2 61 171 17 9 197 55 28.0 142 142 35.4 FY2013E 1,109 648 58.4 461 41.6 83 7.5 120 10.8 258 23.3 78 180 25 7 212 64 30.0 149 149 37.2 FY2014E 1,224 733 59.9 491 40.1 88 7.2 129 10.5 274 22.4 86 189 33 8 229 69 30.0 160 160 40.1

April 23, 2012

Persistent | 4QFY2012 Result Update

Balance sheet (Indian GAAP, Consolidated)

Y/E March (` cr) Liabilities Share capital ESOP outstanding Reserves and surplus Hedge reserves Total shareholders' funds Borrowings Deferred payment liability 40 3 580 16 639 5 40 3 696 8 747 3 40 801 841 1 40 928 968 40 1,067 1,107 FY2010 FY2011 FY2012E FY2013E FY2014E

Total liabilities
Assets

644 371 188 183 48 232 156 1

750 454 228 226 60 287 250 6

841 609 289 320 53 372 204 11

8

968 759 367 392 63 456 250 25

8 213 134 22 61 114 86 230 968

1,107 909 453 456 65 522 300 16

8 235 159 24 67 129 95 262 1,107

Gross block - fixed assets Accumulated depreciation Net block Capital work-in-progress Total fixed assets Investments Deferred tax assets, net
Other non-current assets 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

136 192 34 72 148 32 255 644

158 100 23 87 121 40 207 750

203 137 18 54 88 78 246 841

April 23, 2012

Persistent | 4QFY2012 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. (Inc)/dec in other assets Cashflow from investing activities Inc/(dec) in debt Inc/(dec) in equity/premium Dividends Cashflow from financing activities Cash generated/(utilized) 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 (7) 6 (1) 201 (147) 46 (5) (3) (8) (116) 1 (27) (21) (48) 38 100 137 (21) 34 13 240 (161) (46) (14) (0) (221) (1) (21) (22) (3) 137 134 (31) 24 (7) 239 (152) (50) 9 (193) (21) (21) 25 134 159 FY2010 113 34 146 11 158 9 149 FY2011 116 42 158 34 193 11 182 FY2012E 171 61 232 26 258 55 203 FY2013E 180 78 258 32 290 64 226 FY2014E 189 86 274 41 315 69 246

April 23, 2012

Persistent | 4QFY2012 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 3.0 66 64 2.7 70 64 2.5 70 64 17.5 45.7 18.0 15.5 34.1 18.7 20.4 38.3 16.9 18.6 34.7 15.4 17.0 32.3 14.5 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 16.9 0.7 1.2 0.2 1.1 1.0 15.4 0.7 1.2 0.2 1.1 1.0 14.5 32.1 41.4 0.6 178.1 34.9 45.5 5.5 186.8 35.4 50.7 4.5 210.1 37.2 56.6 4.5 242.0 40.1 61.5 4.5 276.9 10.5 8.1 1.9 0.2 1.7 6.8 1.5 9.6 7.4 1.8 1.6 1.3 6.3 1.3 9.5 6.6 1.6 1.3 1.0 4.3 1.2 9.0 5.9 1.4 1.3 0.9 3.7 1.0 8.4 5.5 1.2 1.3 0.7 3.2 0.8 FY2010 FY2011 FY2012E FY2013E FY2014E

April 23, 2012

10

Persistent | 4QFY2012 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
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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%)

April 23, 2012

11