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Established
in 1990, Persistent Systems (BSE & NSE: PERSISTENT) is a global company
specializing in software product development services. For more than two
decades, Persistent has been an innovation partner for the world's largest
technology brands, leading enterprises and pioneering start-ups. With a global
team of 6,600+ employees, Persistent has 350+ customers spread across North
America, Europe, and Asia. Today, Persistent focuses on developing
best-in-class solutions in four key next-generation technology areas: Cloud
Computing, Mobility, BI & Analytics, Collaboration across technology,
telecommunications, life sciences, consumer packaged goods, banking &
financial services and healthcare verticals.
The PSL management expects Q4FY2017
to be strong, as it has acquired new logos for its digital business. Further,
the recent partnership with Dell Boomi will drive its digital business going
ahead. The company has successfully
completed the transition of the IBM IOT business and could be able to take the
entire team into its Board. The management foresees traction in this IBM CE/CLM
product and expects a strong growth in FY2018; for the nine months ended
December 31, 2016, the partnership has fallen short of its revenue target of
$50 million (contributed $48 million; the management expects some contribution
to come by the end of FY2017). Digital,
Alliance and Accelerite will continue to deliver sustainable growth in the
coming years. The management stated that the Services segment (43.9% of total
revenue in Q3FY2017) has bottomed out and believes this business may do well in
the coming quarters (for Q4FY2017, the management has indicated it could trim
some tail-end clients).
Persistent Systems (PSL) delivered better-than-expected revenue growth
of 3.6% QoQ at $113 million during Q1FY2018, led by a 2.4% QoQ growth in IP-led
revenue and a 3.6% QoQ growth (1.8% QoQ growth in volume and 2.2% QoQ increase
in realisations) in IT Services. However, the company delivered
lower-than-expected EBITDA margin at 14.3% (down 357BPS QoQ), due to the
appreciation of the rupee (120BPS), higher onsite revenue mix, investments in
partnerships (90BPS), lower offshore utilisations (40BPS), visa and acquisition
expenses (70BPS), investments in sales team (30BPS) and provision of debts (40BPS),
partially offset by higher revenue from IP-Led business. Forex gains increased
to Rs 18.5 crore (vs negative Rs 2.8 crore in Q4FY2017), resulting in a 3.2%
QoQ growth in the adjusted net profit at Rs75.1 crore.
Revenue drivers are intact,
but margins to improve gradually:
The management remains optimistic on the prospects of acceleration of
its revenue growth going ahead. This is on the back of strong traction in the
IOT business, a healthy pipeline of deals in the digital space, deal closures
of the reseller contract for IBM IOT solutions, good response for its IP
products and strengthening of partnerships with USAA and Partners Healthcare
for digital offerings. Further, the company has closed three deals (one deal in
India for the legislative assembly of the State of Madhya Pradesh and two deals
in USA) in the Service vertical, which is expected to sustain the growth
momentum. The management believes that the traction in growth in the service
segment will be mainly on account of its strong focus on
large and strategic accounts as well as higher adoption of digital technologies
in the Enterprise. On margin front, It expects improvement from Q2FY18 onwards
despite high investments in sales team, higher onsite mix and developing global
delivery centres. The management highlighted the key levers for the margins
improvement are (1) higher revenue from IP-Led business, (2) improvement in
profitability in IBM Watson, (3) cost control measures.
Acquisition of PARX to strengthen
its presence in Europe:
PSL has agreed to acquire ParxWerk AG to strengthen its presence in the
European region (5.9% of total revenue as of June 30, 2017) as part of its
global expansion strategies. PSL will initially pay CHF 8.5 million (~Rs 58 crore)
and will pay an additional CHF 7.5 million (Rs 51 crore) over three years
depending on performance. PARX reported revenue of CHF 8 million (~Rs 54 crore)
for CY2016. As Parx is a certified partner of Salesforce, we believe this
acquisition would provide opportunities to PSL to cross-sell its products.
Outlook and valuation:
We have tweaked estimates for FY2018/FY2019 due to below-than-expected
Q1FY18 margin performance and higher onsite mix. We believe there could be
pressure to profitability in near-term owing to currency headwinds, shifting
from effort-based business model and macro uncertainties. In long term,
however, we continue to remain positive on PSL, as the company has been
continuously focusing on strengthening its digital capabilities to remain
relevant to customers in the ongoing IT industry transition. PSL’s stock price has already gained close
to 16% in last three months, we do not see major upside from current levels
owing to weak margin performance. Hence, we downgrade our rating on PSL from
‘Buy’ and ‘Hold’ with a target of Rs700.