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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.

Business Growth Outlook.

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).

Performance highlights:.

Investment Rationale:

Revenue beats estimate, but margins fall short of expectations:

During Q3FY2017, Persistent Systems’ (PSL) revenue grew at better-than-anticipated pace of 4.6% QoQ to $110.0 million, driven by a 6.9% QoQ growth in IP-led revenue and a 3.7% QoQ growth in IT Services (3.9% QoQ growth in volume and 0.2% QoQ drop in realisations). However, the company delivered lower-than-expected EBITDA margin at 15.9% (up 18BPS QoQ and down 284BPS YoY), owing to reduced billing days and higher provision for doubtful debt (relating to two customer accounts), partially offset by improvement in utlisation and benefit of currency depreciation. Forex gain increased by 327.3% QoQ, led by rupee depreciation, partially offset by lower other income (down 29.2% QoQ) and higher tax provision (up 140BPS QoQ), resulting in a 11.4% QoQ growth in the net profit at Rs81.9 crore (vs our estimate of Rs81.7 crore).

FY 17 Outlook:

All the investments for the IBM LoT deal have already been taken into account in the Q1 P&L; Therefore, revenue growth from now should lead to higher margins. Management feels that the impact on margins would be within the guided to range (<200bps) while quarterly fluctuations cannot be ruled out. A sales team will be hired but, as a percent of revenue, may hold at a similer level. The effective tax rate (ETE) for FY17 is expected at ~24-25%.

Financials :

Highlights the fact:

1) SL is not perturbed about any hostile regulatory developments in relation to the current US visa regime, as the company has around 47% in terms of local US hires. In a major development with regard to potential change in the minimum wage hike, the management stated that the company will take a hit of $1.5-2 million per annum.

2) The management foresees traction in its Sentient and Concert products, and plans to launch these products during Q4FY2017.

3)Digital, Alliance and Accelerite will continue to deliver sustainable growth in the coming years.

4)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

Technically View:

The stock is currently trading around 50 days and 100 days, moving average that is all about good bullishmoov& uptrend signal on daily base. RSI &MFI is present at 58 and 69respectivally, which is showing the consolidationformation for the short term period. The stock is currently in the sideways formation and when it hold above 630 then someupside is expecting with major support is found 590 level. MACD line is greaterthen signal line 10 day Avg Volume is very high.

VALUATION & OUTLOOK:

The  Companyhave marginally tweaked our revenue estimates for FY2017/FY2018, led by higher-than-expected revenue growth in Q3FY2017, sharpening focus on IP and Digital businesses, and some green shoots in the Services business. However, we have broadly maintained the earnings estimates for FY2017/ FY2018 in anticipation of higher investments (on account of ongoing shift in the business model and intensifying competition).

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. The stock is currently trading at a reasonable valuation of 14.0x FY2018 earnings estimates.

We retain our Buy recommend in this script with a price target of Rs 765-775 in the very short term outlook. So Entry would be around 610-620as recomanded in this counter.