Stock Review: Persistent Systems

 

Higher utilization levels and increased volume momentum are likely to benefit Persistent Systems in the coming quarters

 

PERSISTENT Systems is benefiting from the momentum in its analytics segment. The share of this division in the total revenue of the company is gradually increasing. In the December 2010 quarter, the company reported a steady growth in volumes and revenue for the third straight quarter. Though its profitability was under pressure due to higher salary bill, it will be rationalised through higher topline in the coming quarters. Persistent is on a hiring spree, which reflects its revenue visibility in the near term. It stock is reasonably priced considering its expected growth in the next two years.

BUSINESS:

Pune-based Persistent Systems is a software product development services company. It provides solutions in telecom & wireless, life sciences & healthcare and infrastructure & systems segments. Since September 2010, the company has forayed into cloud computing, analytics, enterprise mobility and enterprise collaboration.

FINANCIALS:

During the December 2010 quarter, Persistent's sales grew sequentially by 4% to 195 crore helped by 3.5% volume growth. The new business segments of cloud computing, mobility, analytics and collaboration contributed 40% of its net revenue. The contribution is likely to increase to 45% in the coming quarters. It witnessed a healthy growth across all the verticals including telecom. Operating margin fell by 110 basis points (bps) to 21.9%, which can be attributed to three main reasons. First, the company witnessed a one off actuarial impact due to interest rate change in the gratuity payout to employees. Second, appreciating rupee against the dollar had an adverse impact on its profitability. 

   And third, a higher employee addition increased the wage bill. It added 179 employees during the quarter and aims to recruit over 200 more human resources in the fourth quarter of the fiscal. The company has given mid-term salary hikes of 10% to its employees in January 2011 so as to curb growing attrition. This is likely to further pull down the operating margin in the next quarter.

GROWTH OUTLOOK:

During the quarter, the company witnessed a significant traction in business demand. Although Europe remained more or less stagnant, business from North America improved. Moreover, the company expects to gain on account of better rates (re-negotiations) on certain account renewals. Also, improved onsite and offshore revenue mix comes as a positive for the company in the coming quarters. Given the increasing demand momentum, the company intends to hire over 900 employees during the next fiscal. Although, the company witnessed healthy growth across the sectors during the December 2010 quarter, IP driven business posted nearly flat performance. However, the segment is likely to witness a turnaround with a healthy deal
pipeline in the coming quarters. The company plans to invest 5% of its resources in this segment. Moreover, the segment is expected to close the current fiscal at a growth rate of 8.5%. 

   During the quarter, the company launched an SEZ unit in Pune with a total capacity of 1,000 seats, of which 600 are already operational. This substantiates for the improving demand pipeline witnessed by the company.

VALUATION:

Given the traction in the customer base and healthy growth in the market, the company has revised its revenue guidance for the FY11 from $155 million to $166 million. At the current market price of 394.9, the stock trades at a price-to-earnings ratio of 11 for the trailing 12 months. According to company's revised guidance and ETIG estimates, at the current stock price, the forward P/E ratio for the FY11 and FY12 will be 11.4 and 9.5, respectively. The stock looks attractively priced on a two-year horizon.