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Recommendations India

Persistent Systems 3QFY2014 performance highlights and results update

January 28, 2014, Tuesday, 10:56 GMT | 05:56 EST | 15:26 IST | 17:56 SGT
Contributed by Angel Broking

Persistent Systems (Persistent)’ 3QFY2014 results have come better than our expectations, broadly on all fronts. The company’s revenue performance was led by a healthy 3.8% qoq growth in IT services revenues with the segment’s volume growth coming in at 3.4% qoq. The Management remains confident of FY2015 with the deal pipeline being strong and remains focused on increasing the share of IP-led revenues in its portfolio with incremental growth being led by the key focus areas of cloud, analytics and collaboration. We recommend an Accumulate rating on the stock.
Quarterly highlights: For 3QFY2014, Persistent reported a revenue of US$69.9mn, up 2.2% qoq. In INR terms, the revenue came in at Rs.433cr, flat qoq. The company’s EBITDA margin grew by 171bp to 27.7%, driven by lower CSR spends, lower provision for doubtful debts and lower S&M spends qoq in addition to an increases in billing rates. The PAT stood at Rs.64cr, up 5.6% qoq, negatively impacted by a forex loss of Rs.15cr as against a loss of Rs.10cr in 2QFY2014.
Outlook and valuation: The Management sounded confident of the company’s growth exceeding average industry growth in FY2015, based on the healthy pipeline, slight increase in billing rates in some of the new contracts and plans to continue investments in new technologies and sales efforts, to take advantage of improved demand. The company sees itself well positioned with respect to its SMAC offering. The Management indicated that the product engineering business (linear IT services) is seeing good momentum and healthy traction in the segment keeps growth outlook sanguine. IP-led revenues will add to it going forward, making the outlook for FY2015 look definitely better. Over FY2013-15E, the company is expected to record a USD and INR revenue CAGR of 15.6% and 23.4%, respectively. Over FY2013-15, we expect the company to record an EBITDA and PAT CAGR of 24.2% and 30.4%, respectively. We value the stock at 13x FY2015E EPS, which gives us a target price of Rs.1,060, and recommend an Accumulate rating on the stock.