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Persistent Systems 3QFY2013 performance highlights and results update

Contributed by Angel Broking

Persistent Systems (Persistent) reported its 3QFY2013 results, which came in line with our expectations on the revenue front but disappointed on the operating margin front due to higher than expected S&M investments. The Management sounded confident of surpassing Nasscom’s industry growth forecast of 11% yoy (USD revenue) for FY2013 with incremental growth being led by the key focus areas of cloud, analytics and collaboration. Also, considering the company’s buoyant performance in 9MFY2013, we believe the Management’s growth outlook is achievable. We maintain our Accumulate rating on the stock.

Quarterly highlights: For 3QFY2013, Persistent reported a revenue of US$60.8mn, up 1.2% qoq. The company’s EBITDA margin declined by 248bp qoq to 24.8% due to higher SG&A costs (up 13.3% qoq). The PAT came in at Rs.50cr, up 10.9% qoq, aided by forex gain of Rs.1.8cr as against loss of Rs.4.1cr n 2QFY2013.

Outlook and valuation: Persistent’s Management sounded confident of the company’s growth exceeding Nasscom’s growth estimate for the industry of 11% yoy in FY2013, citing that the deal pipeline has increased by ~50% as compared to that in the same quarter last year. Also, the company got back into hiring mode after five consecutive quarters of net headcount reduction seen earlier, and indicated that it will add ~300 net employees in 4QFY2013. The Management also indicated that ~500 offers have already been extended to campus graduates for FY2014. Over FY2012-14, the company is expected to record a USD and INR revenue CAGR of 13.1% and 19.7%, respectively. Over FY2012-14, we expect the company to record an EBITDA and PAT CAGR of 21.8% and 23.4%, respectively. At the current market price of Rs.522, the stock is trading at 9.7x FY2014E EPS of Rs.54.0. We value the stock at 10x FY2014E EPS, which gives us a target price of Rs.550, and maintain an Accumulate rating on the stock.