Persistent Systems Ltd.

Transcription

1 RESULT UPDATE 26 th April2017

2 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 India Equity Institutional Research II Result Update - Q4FY17 II 26th April, Investment Mode Off, Return Mode On CMP INR 564 Target INR 828 Potential Upside 47% Market Cap (INR Mn) Recommendation Buy Sector IT Result highlights Persistent reported Q4 FY17 results which were marginally below our estimates on the revenue front but beat our estimates on the profitability front. In US$ terms, the company reported revenues of US$ 109 Mn, which was 4.3% below our estimate of US$ 114 Mn largely due to decline of IP led revenues (28% to topline) by -3.7% qoq and ISV business (41.9% to revenue) by -2.3% qoq. Q4 FY17 operating margins stood at 12.5% vs our estimate of 10.2% and Q3 FY17 margins of 10.7%. We believe that margins to have significant upside as company scales up the de-linear portion of business (56.1% of revenue) Digital (18.9% of revenue) continued it s phenomenal growth trend with a 10.8% qoq growth followed by accelerite (9.6% of revenue) which grew at 10.6% qoq. MARKET DATA Shares outs (Mn) 80 EquityCap (INR Mn) 800 Mkt Cap (INR Mn) Wk H/L (INR) 758/501 Volume Avg (3m K) Face Value (INR) 10 Bloomberg Code SHARE PRICE PERFORMANCE 110 PSYS IN KEY FINANCIALS Particulars (INR Mn) FY15 FY16 FY17 FY18E FY19E Net Sales 18,913 23,123 28,784 31,651 36,278 EBITDA 3,903 4,138 4,653 5,327 6,210 PAT 2,906 2,974 3,129 3,487 4,141 EPS OPM 15.7% 13.7% 11.0% 11.6% 12.1% NPM 15.4% 12.9% 10.9% 11.0% 11.4% Margins set to improve as de-linear business scales up in FY18e Persistent s operating margins stood at 12.5%, up 175 bps qoq and 94 bps yoy largely due to scaling up of non-linear businesses such as Digital (18.9% of revenues) and accelerite (9.6% of revenues). Digital grew 10.8% qoq whereas accelerite grew 10.6% qoq in Q4FY17. Management stated that Digital could have reported a higher rate of growth, however 2 deals that were supposed to close in Q4 spilled over and will book revenues in the next quarter Alliance business reported a decline of -10.6% in Q4 due to seasonally weak performance of IBM. However, expect Alliance business to outperform on account on account of robust deal pipeline and IoT industry dynamics. We estimate EBITDA margins to improve from 16.2% as of FY17 to 17.1% in FY19e largely due to completion of investment phase in Alliance business. Management is upbeat on its partnership initiative with Partners Healthcare for bringing digital transformation to clinical care and agreement with USAA for security in financial services Sensex Persistent Syst MARKET INFO SENSEX NIFTY 9307 Key Concall Highlights: (i) Expect Digital to record a higher growth run-rate in Q1 FY18 as 2 deals which were to be closed in Q4 FY17 spilled over (ii) Management expects accelerite to continue it s stellar performance (iii) Revenue was impacted mainly due to 0.1% growth in Billing rate which was offset by 0.8% decline in volumes. (iv) Company maintains it s focus on de-linear business which accounts for 56% of total revenues and expects FY18e margins to be much better if not same. Valuation and view On the back of immense traction in Digital, accelerite and IBM Alliance, we expect company to deliver Revenue CAGR of ~12% between FY17 and FY19E. We estimate higher than industry average growth in the above mentioned business segments which cumulatively contribute to >56% of total revenues. We estimate Digital and Accelerite to report growth >15% yoy for the next 3 fiscal years on account robust demand environment coupled with Persistent s competency and prowess in Digital and IoT solutions and products. We have a BUY rating on the stock, assigning a P/E multiple of 16x FY19E EPS to arrive at a price target of INR 828, giving an upside potential of 47% from CMP. SHARE HOLDING PATTERN (%) Particulars Mar 17 Dec 16 Sep16 Promoters FIIs DIIs % 15% PAT CAGR between FY 17 and Others Total Revenue CAGR between FY 17 and FY 19E FY 19E

3 3 Q4FY17 Result Snapshot Exhibit 1 Quarterly Income Statement INR Mn Q4 Q3 Q-o-Q Q4 Y-o-Y Q4 FY17 FY17 FY17 change % FY16 change % estimates Deviation % Net Sales (US$ Mn) (0.9%) % 114 (4.3%) Net Sales (INR Mn) 7,271 7,455 (2.5%) 6, % 7,629 (4.7%) Less: Employees Remuneration & Benefits 4,882 5,182 (5.8%) 4, % 5,339 (8.6%) Administrative & Other Expenses 1,088 1, % 1,090 (0.2%) 1,112 (2.2%) Total Operating Expenditure 5,969 6,269 (4.8%) 5, % 6,451 (7.5%) EBITDA 1,302 1, % 1, % 1, % EBIT % % % Less: Depreciation % % 397 Add: Other income (54.9%) 246 (41.8%) 325 (56.0%) Extraordinary Expense 114 Profit Before Tax 937 1,118 (16.2%) 1,028 (8.9%) 1,106 (15.3%) Adjusted Profits 1,051 1,118 (6.0%) 1, % 1,106 Less: Total Tax (30.2%) 220 (5.1%) 296 PAT (11.1%) 808 (9.9%) 810 (10.2%) Adjusted PAT % % % Reported Diluted EPS (Rs.) (11.1%) 10.1 (9.9%) 10.1 Adjusted Diluted EPS (Rs.) % % % No of Shared Diluted (mn) Margin Analysis % Change Change Deviation Operating margin 12.5% 10.7% % % 225 EBIDTA Margin 17.9% 15.9% % % 247 NPM 10.0% 11.0% (97) 11.9% (192) 10.6% (61) Adjusted NPM 11.6% 11.0% % (35) 10.6% 96 Effective Tax Rate % 22.3% 26.7% (447) 21.4% % (447) Cost Analysis % Change Change Deviation Employee Cost/Net Sales 67.1% 69.5% (237) 68.6% (145) 70.0% (285) SG&A/Net sales 15.0% 14.6% % (113) 14.6% 39 The Tax rate for the quarter stood 22.3% in Q4FY17 DSO stood at 65 days in Q4 FY17, an improvement of 5 days from previous quarter Client engagement in the $1 Mn to $3 Mn category grew from 50 to 55 in the current quarter Attrition stood at 15.7% and has maintained its declining trend Company has Cash & Cash equivalents in the range of INR 9000 Mn

4 ,642 4,946 4,975 5,004 5,427 5,921 6,771 7,018 7,040 7,455 4,350 7,271 India Equity Institutional Research II Result Update - Q4FY17 II 26th April, Exhibit 2 Revenues and Margin Movement (INR. Bn) 8,000 25% 7,000 6,000 5,000 20% 15% 4,000 10% 3,000 2,000 1,000 5% 0% 0-5% Total Revenue(Rs Mn) Revenue Growth % EBITDA % NPM % Revenue in Rupee terms was down by 2.5% qoq at INR 7,271 Mn, and below our estimates of INR 7,629 Mn. Top-line growth was subdued mainly due to weakness in Volumes growth and weakness in Alliance business due to seasonally low performance by IBM. Operating Margin outperformed and was reported at 12.5%, which was 225 bps above our expectation of 10.2%. Management stated that it expects EBIT margins to improve over FY18-19e as investment in Alliance business is complete and as de-linear lines of business scale up over the same period. Exhibit 3 US$ Revenue and Segment Revenue Growth Analysis ($. Mn) % 12% 10% % 6% 4% 2% 0% -2% -4% Total Revenue(USD Mn) Revenue Growth % Dollar revenues were recorded at $109 Mn in Q4 FY17, down 0.9% qoq and up 8.6% yoy. Growth was largely impacted by slowdown in IP-Led revenues and ISV business which declined 3.7% qoq and 2.3% qoq respectively. We believe that a vibrant Digital demand environment coupled with Persistent s scale of Digital business, Digital services spread, workforce and assets provides enormous competitive over competitors.

5 5 Exhibit 4 Onsite Offshore Volume Growth 12,000 10,000 8,000 6,000 4,000 2,000 0 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 20% 15% 10% 5% 0% -5% Onsite Personmonths (mn) Offshore Personmonths (mn) Onsite Vol Growth % Offshore Vol Growth % Volumes from Global Delivery Centers grew by 2% qoq, while Offshore volumes declined by 1% qoq. Utilization stood at 85.3% in Q4 vs 88.5% in Q3 FY17 with no fundamental rationale for the decline. Exhibit 5 Client Profile Client Profile Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2 FY17 Q3 FY17 Q4 FY17 $3 Million $1 Mn - $ 3 Mn Persistent added 5 new clients in the $1 3 Mn space thereby bringing the overall client engagements to 55. Client engagement in the $3 Mn+ category remained stagnant at 15.

6 6 Exhibit 6 Q4 FY17: Geography QoQ Growth (%) Geography All regions reported a flat to negative growth rate except India which grew at 0.9% qoq. North America declined by -1% qoq followed by Europe and ROW which declined by -0.9% respectively. Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY15 FY16 FY16 FY16 FY16 FY17 FY17 FY17 FY17 North America 1.5% -2.9% 7.8% 6.9% 13.1% 5.4% -1.4% 6.1% -1.0% Europe -3.6% -9.0% 13.9% 0.1% 19.1% -19.0% 17.8% -9.1% -0.9% India -6.1% -9.1% 4.1% 2.7% 0.9% Rest of the world -4.3% 17.1% -20.6% -84.6% 12.0% 150.3% 21.3% -6.2% -0.9% Exhibit 7 Q4 FY17: Services QoQ Growth (%) Verticals Q1 Q2 Q3 Q4 FY17 FY17 FY17 FY17 Services % -1.5% -0.9% Digital - 7.5% 16.3% 10.8% Alliance % 8.9% -10.6% Accelerite - 7.7% 2.2% 10.6% Digital and Accelerite outperformed with a qoq growth of 10.8% and 10.6% respectively. Alliance business disappointed in Q4 with a decline of -10.6% qoq mainly due to weak performance by IBM. Services business continues to report weak numbers due to structural weakness in the overall IT industry. However, we expect it to bounce-back in report middle single digit growth through FY18e. Exhibit 8 Q4 FY17: Industry QoQ Growth (%) Services Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY15 FY16 FY16 FY16 FY16 FY17 FY17 FY17 FY17 ISV 0.5% -3.1% 5.9% -3.1% 0.0% 3.4% -1.8% 0.1% -2.3% Enterprise 5.0% 0.3% 14.1% 16.2% 1.8% 5.9% 5.7% 9.5% 3.9% IP Led -4.1% -0.1% -7.1% 34.1% 57.2% 4.3% -1.0% 6.9% -3.7% ISV business declined by -2.3% qoq followed by decline in IP Led revenues by -3.7%. Enterprise revenues increased 3.9% qoq and offset the decline in other industries.

7 7 Exhibit 9 Q4 FY17: Profit & Loss Statement INR Mn FY15 FY16 FY17 FY18E FY19E Net Sales 18,913 23,123 28,784 31,651 36,278 SalesGrowth% 13.3% 22.3% 24.5% 10.0% 14.6% Total Revenue 18,913 23,123 28,784 31,651 36,278 Less: 12,203 15,415 19,827 21,576 24,720 EmployeesCost 2,806 3,571 4,304 4,748 5,348 SG&A 15,009 18,985 24,131 26,324 30,068 Total Operating Expenditure 3,903 4,138 4,653 5,327 6,210 EBITDA -5.8% 6.0% 12.5% 14.5% 16.6% EBITDAGrowth% ,490 1,646 1,814 Less:Depreciation 2,965 3,173 3,163 3,681 4,396 Operating Profit -4.9% 7.0% -0.3% 16.4% 19.4% OperatingProfitGrowth% Non-operatingIncome ,088 Profit Before Tax 3,900 3,956 4,121 4,631 5,484 Tax ,144 1,344 Net Profit 2,906 2,974 3,129 3,487 4,141 Adjusted Profit 2,906 2,974 3,129 3,487 4,141 Reported Diluted EPS INR Diluted EPS Growth% -41.7% 2.3% 5.2% 11.5% 18.7% Adjusted EPS Adjusted EPS Growth% -41.7% 2.3% 5.2% 11.5% 18.7% Exhibit 10 Q4 FY17: Balance Sheet INR Mn FY15 FY16 FY17 FY18E FY19E Liabilities Equity Capital Reserves & Surplus 13,255 15,593 17,714 20,078 22,886 Equity 14,055 16,393 18,514 20,878 23,686 Net Worth 14,055 16,393 18,514 20,878 23,686 Net Deferred tax liability/(asset) Total Loans Capital Employed 14,200 16,544 18,667 21,052 23,885 Assets Gross Block 6,166 6,857 7,457 8,357 9,857 Less: Depreciation 3,109 3,850 5,340 6,986 8,800 Net Block 3,057 3,007 2,117 1,371 1,058 Capital WIP Investments 2,129 2,218 2,480 3,043 3,644 Intangible Assets 1,019 1,597 2,015 2,216 2,539 Others Assets Current Assets Sundry Debtors 3,586 4,275 5,126 5,636 6,460 Current Investments 4,620 4,828 6,045 6,647 7,604 Cash and Bank Balance 1,416 1,432 1,949 3,620 4,438 Loans and Advances 531 1,663 2,071 1,918 1,959 Other Current Assets 1,035 1,788 1,786 2,048 2,468 Total Current Assets 11,188 13,987 16,976 19,869 22,928 Less:Current Liabilities & Provisions Sundry Creditors 529 1,651 1,983 2,164 2,471 Provisions 1,755 1,224 1,235 1,424 1,673 Other Current Liabilities 1,265 1,647 2,020 2,222 2,546

8 8 Exhibit 11 Q4 FY17: Ratio Analysis INR Mn FY15 FY16 FY17 FY18E FY19E EBITDA Margin(%) 20.6% 17.9% 16.2% 16.8% 17.1% Tax/PBT(%) 25.5% 24.8% 24.1% 24.7% 24.5% Net Profit Margin(%) 15.4% 12.9% 10.9% 11.0% 11.4% RoE(%) 22.1% 19.5% 17.9% 17.7% 18.6% RoCE(%) 21.7% 19.3% 17.8% 17.6% 18.4% Current Ratio(x) 3.2x 3.1x 3.2x 3.4x 3.4x Dividend Payout(%) 31.2% 28.6% 32.2% 32.2% 32.2% Book Value Per Share(Rs.) Financial Leverage Ratios Debt/Equity(x) 0.0x 0.0x 0.0x 0.0x 0.0x Growth Indicators% Growth in Gross Block(%) 11.8% 11.2% 8.8% 12.1% 17.9% Sales Growth(%) 13.3% 22.3% 24.5% 10.0% 14.6% EBITDA Growth(%) (5.8%) 6.0% 12.5% 14.5% 16.6% Net Profit Growth(%) 16.6% 2.3% 5.2% 11.5% 18.7% Diluted EPS Growth(%) (41.7%) 2.3% 5.2% 11.5% 18.7% Turnover Ratios Debtors (Days of net sales) Exhibit 12 Q4 FY17: Free Cash Flow Analysis INR Mn FY15 FY16 FY17 FY18E FY19E PAT 2, , , , ,140.6 (Less)/Add: Extraordinary Income/Expense Less: Non Operating Income (938.2) (784.5) (958.5) (949.5) (1,088.3) Add: Depreciation , , ,813.9 Add: Interest Paid Operating Profit before Working Capital Changes 2, , , , ,866.2 (Inc)/Dec in Current Assets (1,221.7) (2,782.8) (2,472.9) (1,222.0) (2,241.4) Inc/(Dec) in Current Liabilities Net Cash Generated From Operations 2, , , , ,506.1 Cash Flow from Investing Activities (Inc)/Dec in Fixed Assets (649.3) (690.7) (600.0) (900.0) (1,500.0) (Inc)/Dec in Capital Work In Progress (5.1) (14.9) 2.5 (Inc)/Dec in Investment (Strategic) (1,292.3) (500.0) (500.0) (500.0) (Inc)/Dec in Investment (Others) (856.7) (62.9) (101.6) Add: Non Operating Income Income ,088.3 (Inc)/Dec in Intangible Assets (495.0) (475.0) (229.5) (370.5) Net Cash Flow from/(used in) Investing Activities (72.5) (473.9) (383.5) (757.8) (1,381.2) Cash Flow from Financing Activities Inc/(Dec) in Total Loans (281.0) Dividend Paid (800.0) (640.0) (876.1) (976.4) (1,159.4) Tax Paid on Dividend (107.2) (211.7) (131.4) (146.5) (173.9) Less: Interest Paid (3.4) (0.9) (0.9) Net Cash Flow from Financing Activities (1,920.1) (854.9) (1,006.5) (1,102.9) (1,307.3) Net Inc/Dec in cash equivalents , Opening Balance , , , ,619.8 Closing Balance Cash and Cash Equivalents 1, , , , ,437.5

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