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Persistent Systems 2QFY2013 performance highlights and results update

Contributed by Angel Broking

Persistent Systems (Persistent) reported its 2QFY2013 results which exceeded our as well as the street's expectations on the revenue as well as operating front. Intellectual property (IP) led revenue, the company's major focus area, posted a revenue growth of 49% qoq to US$1 1.3mn. The management sounded confident of surpassing Nasscom's industry growth forecast of 11-14% yoy (USD revenue) for FY2013 with incremental growth being led by growth from the key focus areas of cloud, analytics and collaboration which we believe is achievable keeping in view the current quarter's performance. We recommend an Accumulate rating on the stock.

Quarterly highlights: For 2QFY2013, Persistent reported a revenue of US$60.1mn, up 9.4% qoq. The company's EBITDA margin increased by 41 bp qoq to 27.2%, despite having a negative impact related to wage hike of ~330bp qoq, which was a positive surprise. The PAT came in at '45cr, impacted by a '16cr forex loss.

Outlook and valuation: Persistent's management sounded confident of the company's growth exceeding Nasscom's estimate of 11-14% yoy growth in FY2013, despite a challenging macro environment, citing that the deal pipeline has increased by 20-25% as compared to that in the previous quarter. Also, the company will get back to hiring after four consecutive quarters of net headcount reduction, and will add ~600 net employees in 2HFY2013. Persistent had earlier stated its intent to grow share from IP-led revenues to 20% of overall business. In 2QFY2013, the share of IP led revenue was 19%, fueled by growth in acquired IP assets, particularly in the telecom domain. Over FY2012-14E, the company is expected to record a USD and INR revenue CAGR of 13.0% and 16.2%, respectively. Over FY2012-14E, we expect the company to record an EBITDA and PAT CAGR of 19.7% and 23.4%, respectively. We value the stock at 9x FY2014E EPS, which gives us a target price of 7485, and recommend an Accumulate rating on the stock.