Stock Review: Persistent Systems

 

The stock of Pune-based software product developer Persistent Systems has remained more or less flat on the bourses over the past year. But a favourable pricing scenario, higher utilisation levels and increased volume momentum may bring back momentum to the stock. Persistent offers solutions to companies in the telecom & wireless, life sciences & healthcare, and infrastructure & systems sectors. It recently forayed into the niche areas of cloud computing, analytics, enterprise mobility and enterprise collaboration. Also, the company is in the business of acquiring intellectual property (IP) from customers and shares the revenue inflow from the same.

In the March 2011 quarter, the company's sales grew sequentially by 9.3% to . 211 crore. The new business segments of cloud computing, mobility, analytics and collaboration contributed 40% to the revenue. This is likely to increase to 45% in FY12 on the back of strong growth. During the quarter, operating profit margin dropped significantly by 400 basis points (bps) to 17.8% from the previous quarter due to higher wage bill and selling costs. The company's acquisition of Infospectrum resulted in a higher employee base, thereby increasing consolidated operating costs. This also impacted its net profit, which fell by 8.6% to . 33 crore.

Mid-term salary raise of 10% in January helped it reduce the attrition rate by 300 bps to 19% in the March quarter. The company is expected to offer another round of 7-9% salary increase in July. This should put pressure on margins in the coming quarters.

At the current market price of . 395, the stock trades at nearly 11 times its earnings for the trailing 12 months. This is on a higher side given that some of the smaller IT players attract a P/E between seven and 10. The company has given a revenue guidance of $220 million (approximately . 990 crore) for FY12. Given the traction in customer base and healthy growth in the market, the company is expected to perform better in the coming quarters.