Stock review: Persistent Systems

Growth Momentum in Deal Pipeline To Boost Future Numbers

 

THE stock of mid-tier software products outsourcing company Persistent Systems has underperformed the broader market over the past three months. The scrip has fallen 14.3% during the period against 9.2% gains of the benchmark Sensex.

   The underperformance of the scrip can be attributed to the lower-than expected results of the company over the past two quarters due to project delays. To address the issue, the company has identified focus areas to grow its business in the coming quarters.

   Persistent Systems is an IT company, which offers services in the telecom, wireless, life sciences, healthcare, infrastructure and systems space. Recently, it made a foray into newer technologies such as cloud computing, analytics, enterprise mobility and enterprise collaboration.

   Persistent's growth during the September 2010 quarter was somewhat subdued on a sequential basis. This can be attributed to the project delays witnessed during the quarter. The company had a revenue loss of $1.5 million due to delay in the signing of a project. This is, however, likely to reflect in its December quarter numbers since the company has completed the necessary procedure in October. To that extent, its third quarter performance may improve when compared sequentially.

   The company has been witnessing lumpiness in the IP (intellectual property) driven business over the past two quarters. A piece of the IP project, which contributed a considerable chunk to the company's net income in the June 2010 quarter, did not sustain in the September 2010 quarter. This further brought down the quarterly revenue by $1 million.

   Going ahead, Persistent intends to focus on the niche areas of analytics, cloud computing, collaboration and mobility wherein each forms roughly 10% of the company's net revenue. Moreover, the company has witnessed a significant traction in the client addition in these technologies.

   At the current market price, the stock trades at nearly 12 times its earnings for the trailing twelve months. Given the growth momentum witnessed in the deal pipeline for newer technologies and company's in-depth expertise in providing end-to-end services to customers in the space, the company is expected to fare better in the coming quarters.

Strong Service

The company's expertise in providing end-to-end services in the space will see it performing better in the coming quarters

At the CMP, the stock trades at 12 times its earnings for the trailing 12 months