Stock Review: Persistent Systems

 

 

Considering Persistent Systems' revenue and margin growth, the stock looks attractive for investors

 

INCORPORATED in 1990, Persistent Systems is a new entrant in the BSE mid-cap index. It is one of the leading players in outsourced software product development (OPD) services industry. The company provides services across all phases of the software product development cycle providing end-to-end solution. Currently, the company is present in the telecom, wireless, life sciences, healthcare, infrastructure and systems space.

FINANCIALS :

In the quarter ended June 2010, the company's topline grew considerably by 37% to Rs 181 crore over the year ago period. This was due to an almost 100% revenue growth in the I T infrastructure segment. While the company's telecom segment registered a single digit growth during the quarter year on year, the revenue growth of its life science segment stagnated.

   During the June quarter, Persistent's operating margin dropped significantly by 540 basis points (bps) against the year-ago period due to a 40% rise in staff costs. Also, a rise in selling, general and administrative expenses (SG&A), which increased by nearly 13% to Rs 34 crore, contributed to the falling margin. However, the company expects to restore its depleted operating margin on account of realizations from the fresh recruits next quarter.

   The company plans to maintain SG&A expenses at the current level of 19% of the net revenue for the coming quarters. The company has added 830 new employees last year. This substantiates for a demand upsurge in the OPD market, predominantly in the cloud computing and mobile handsets space.

GROWTH DRIVERS:

Due to the global meltdown, product companies had cut short their investment and research and development (R&D) activities. This led to a slowdown in the demand for OPD services. However, the economic stabilisation has augmented clients' R&D spends resulting in a growth of the market for OPD. As per analysts' forecasts, the compound annual growth rate for product engineering services is expected to be around 14% for the next five years.

   Persistent is planning to foray into the emerging growth areas such as cloud computing, analytics, collaboration and mobility which will benefit the company with an enhanced operational base. Also, it has recently made investments in the intellectual property (IP) based model resulting in value-added products and services to its existing client base as well as new clients. The recent initiatives taken up by the company would further add to its faster growth.

VALUATION:

OPD market is a niche area of operation with limited competition, which makes the company a leader in the space. At the current market price of Rs 456, the company's scrip is trading at nearly 16 times its earnings for the trailing 12 months. The current quarterly numbers substantiate for the company's annual EPS guidance of Rs 35 which discounts the current price by nearly 13 times. Considering a better revenue and volume growth in future, Persistent Systems looks an attractive bet for investors.

CONCERN:

Even though the company has a wide client spectrum and benefits from a large operational base, the revenue structure is geographically concentrated with more than 80% of the revenue coming from the US. This makes the company more vulnerable to currency fluctuations and economic cycles.