Persistent Systems. 2Q/F14 result review. IP business drives revenue growth. Financial Summary. Institutional Equity Research.

Transcription

1 IT India Persistent Systems Ltd PSYS IN; PERS.BO Institutional Equity Research October 21, Q/F14 result review HOLD IP business drives revenue growth Current price Rs 742 Target price Rs 730 Upside/(downside) % (2) Earning estimate Revised Market data Mkt capitalisation Rs bn 29.7 Average daily vol ' week H/L Rs 755 / 450 Shares O/S mn 40.0 Free float mn 24.4 Promotor holding % 39.0 Foreign holding % 14.4 Face value Rs 10.0 Price performance (%) 1m 3m 6m 1yr Nifty (abs) Stock (abs) Relative to Index Performance (Rs) Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Persistent Systems Source: Bloomberg, SSL (%) (10) (30) Rel. to CNXIT Persistent Systems 2QF14 revenue grew 8.6% QoQ to US$68.5mn, led by a 37.4% QoQ growth in IP-led business and 3.5% QoQ rise in Product Engineering & Platforms (PEP) business. In Rupee terms, revenue grew 21% QoQ to Rs4,324mn. Linear business volumes grew 3.1% QoQ. Offshore linear revenue grew 2.6% QoQ with a volume growth of 2.6% and stable realisation QoQ. Onsite linear revenue grew 5.5% QoQ with a volume growth of 7.6% and realisation decline of 1.9%. Despite offshore wage hike (9% for India-based employees w.e.f. July) impacting margins by 310bps, EBITDA margins improved by 421bps QoQ, on back of weaker rupee (270bps), operational efficiencies and higher IP-led revenue. Net profits growth was restricted to 6.5% QoQ at Rs608mn due to forex loss of Rs99.6mn vs. gain of Rs183mn QoQ. Strong performance in IP-led revenue: IP-led revenue surged 37.4% QoQ contributing 19.1% of revenue in 2QF14 vs.15.1% QoQ. The strong performance was mainly due to on-boarding of HPCA clients, traction in TNPM business and revenue from location business deal in South Africa. Management expects a stronger performance in H2 in the IP-led business, however expects quarterly volatility in revenue to continue. Management focused on revenue growth: For F14, the management remains confident about growth in both the linear as well as IP-led business. The company added 36 new clients in the quarter of which 5 are multi-billion dollar enterprises. As the demand environment improves, the company expects to see further growth in focus areas of social media, mobility, analytics and collaboration (SMAC) technologies. The management suggests healthy deal pipeline and expects H2 growth to be stronger backed by healthier IP-led business. Going ahead, the management is targeting EBITDA margin of 24-25% considering continued investment into newer technologies and IPs. Valuation: The management s commentary remains fairly upbeat, backed by a healthy pipeline, improving traction in SMAC offerings, steady growth in linear business and a growing IP-led business. We have tweaked our earnings estimates by 1.2%/0.6% for F14/F15 respectively factoring H1 performance. We maintain our HOLD recommendation on the stock with a revised target price of Rs730 at 10x F15e earnings. Dipesh Mehta dipesh.mehta@sbicapsec.com Neerav Dalal Financial Summary Y/E Mar (Rs mn) F 12 F 13 F 14e F 15e Sales 10,003 12,945 16,784 19,006 Growth YoY (%) EBITDA margin (%) Net profit (mn) 1,418 1,876 2,384 2,929 EPS (Rs) Growth YoY (%) P/E (x) EV/EBITDA (x) Dividend yield (%) RoE (%) e SBICAP Research on Bloomberg SBICAP <GO>, Please refer to our disclaimer given at the last page.

2 Results highlights and earnings call takeaways The management remains confident of IP-led business maintaining its growth momentum on a full year basis. The management expects gradual uptick in HPCA revenue with on-boarding of clients. The company is seeing good traction in the focus areas of cloud, analytics, mobility and collaboration. The company is seeing increase in spending by ISVs and enterprises which would drive linear revenue growth. Its sell-with partnerships with Salesforce.com, Oracle, Microsoft and IBM are progressing well. The company through its IP acquisition strategy is also expected to yield good results. EBITDA margin improved 421bps in the quarter to 26%. Going ahead, the management targets to maintain margins within 24-25% range considering continued investment into newer technologies and IPs. Management intends to invest benefits accruing from weaker rupee and traditional margin levers such as utilization back into business to drive medium to long term sustainable growth. For 2QF14, growth was driven across client buckets. Top client grew 15.3% QoQ, top 2-5 clients grew 8.6% QoQ and non-top 10 clients grew 8.8% QoQ. There was an increase of 1 client in the US$3mn + bucket by 1 to 16 and of 2 clients in US$ 1-3mn bucket taking the total to 32 vs. 30 QoQ. The company added 313 employees in the quarter taking the total headcount to 7,457. The company added 293 people in technical and 9 people in sales & business development. The company plans to add 626 employees in H2F14 including 366 fresher recruits. DSO improved to 62 days from 65 days QoQ. The company has hedge position of US$93mn at an average rate of Rs59.57/US$ vs. US$106mn at an average rate of Rs58.17/US$ QoQ. Forward P/E chart (Rs) Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Price 6x 8x 10x 12x 14x Source: Bloomberg, Company, SSLe dipesh.mehta@sbicapsec.com I neerav.dalal@sbicapsec.com October 21,

3 Quarterly Financials Particulars (Rs mn) 2Q/F14 1Q/F14 QoQ (%) 2Q/F13 YoY (%) 2Q/F14e Var. (%) Revenues (US$ mn) Revenues 4,324 3, , , Personnel expenses 2,575 2, , , Operating and other exp (1.8) EBITDA 1, EBITDAM (%) Dep. & amortisation EBIT EBITM (%) Other income (net) (24) 263 (79) 49 PBT Provision for tax (2.2) Net profit EPS (Rs) e Segment Results (Rs mn) 2Q/F14 1Q/F14 QoQ (%) 2Q/F13 YoY (%) Revenues Telecom and Wireless (16.7) Life Sciences and Healthcare Infrastructure and Systems 2,991 2, , ,324 3, , Operating income Telecom and Wireless (31.4) margin (%) Life Sciences and Healthcare margin (%) Infrastructure and Systems 1, margin (%) Total 2,044 1, , Unallocable expenses, net 1, , Other income (net) (42.2) PBT dipesh.mehta@sbicapsec.com I neerav.dalal@sbicapsec.com October 21,

4 Segment Mix Particulars As a % of revenue QoQ (%) YoY (%) 2Q/F14 1Q/F14 2Q/F13 Telecom (7.7) (28.4) Infrastructure and Systems Life Sciences and Healthcare Geography As a % of revenue Particulars QoQ (%) YoY (%) 2Q/F14 1Q/F14 2Q/F13 North America Europe (0.5) (32.2) Asia-Pacific Revenue concentration Particulars As a % of revenue QoQ (%) YoY (%) 2Q/F14 1Q/F14 2Q/F13 Top client Top-5 clients Top-10 clients IP-led revenues (as a percentage of revenues) 20% 16% 12% 8% 4% 2Q/F11 3Q/F11 4Q/F11 1Q/F12 2Q/F12 3Q/F12 4Q/F12 1Q/F13 2Q/F13 3Q/F13 4Q/F13 1Q/F14 2Q/F14 dipesh.mehta@sbicapsec.com I neerav.dalal@sbicapsec.com October 21,

5 Financials Income statement Balance sheet Y/E Mar (Rs mn) F 12 F 13 F 14e F 15e Y/E Mar (Rs mn) F 12 F 13 F 14e F 15e Revenue 10,003 12,945 16,784 19,006 Net fixed assets 2,986 3,975 3,245 3,355 YoY (%) Goodwill and intangible assets , EBITDA 2,336 3,352 4,273 4,825 Investments 2,038 3,289 3,673 4,173 YoY (%) Cash & bank balance 1, ,653 3,170 Depri. & Amorti ,052 1,166 Debtors and unbilled revenues 2,173 2,810 3,684 4,171 EBIT 1,725 2,569 3,221 3,659 Other current assets YoY (%) Other non-current assets Other income Total assets 10,212 12,730 14,766 16,989 PBT 1,969 2,630 3,352 4,126 Provision for Taxation ,197 Equity 8,405 10,183 12,051 14,326 Effective tax rate (%) Borrowings Recurring Net Profit 1,418 1,877 2,384 2,929 Unearned and deferred revenues YoY (%) Other current liabilities 1,641 1,718 2,101 2,292 Exceptional items Non-current liabilities Net Profit 1,418 1,877 2,384 2,929 Total liabilities 10,212 12,730 14,766 16,989 Financial ratios Cash flow statement Y/E Mar F 12 F 13 F 14e F 15e Y/E Mar (Rs mn) F 12 F 13 F 14e F 15e Profitability & return ratio (%) Net profit 1,418 1,876 2,384 2,929 EBITDAM Depreciation & amortisation ,052 1,166 EBITM Others (305) (496) (850) (976) NPM Operating CF 1,724 2,163 2,586 3,119 RoE Per share data (Rs) Purchase of fixed assets (1,740) (1,131) (845) (859) EPS Purchase of investments 242 (836) (384) (500) CEPS Other investing activities BV Investing CF (1,279) (1,711) (979) (947) DPS Valuation ratios Issue of equity shares PE (x) Proceeds from borrowings P/BV (x) Dividend (incl. dividend tax) (233) (395) (515) (655) P/S (x) Others (15) EV/EBITDA (x) Financing CF (241) (387) (515) (655) EV/Sales (x) Turnover ratios Inc/(dec) in cash & bank bal ,092 1,517 DSO incl. unbilled (days) Closing cash & bank bal. 1, ,653 3,170 e dipesh.mehta@sbicapsec.com I neerav.dalal@sbicapsec.com October 21,

6 Recommendation History 800 BUY HOLD SELL Stock Price Target Price Date Stock Price TP Rec. 23-Apr ADD 20-Jul ADD 19-Oct ADD 18-Dec ADD 28-Jan ADD Rating based on Current Rating System (Feb'13) Date Stock Price TP Rec. 20-Mar HOLD 5-Apr HOLD 23-Apr HOLD 29-Jul HOLD 23-Sep HOLD 21-Oct HOLD 700 (Rs) Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 SBICAP Securities Limited Corporate Office: Mafatlal Chambers, A-Wing, 2nd Floor, N. M. Joshi Marg, Lower Parel, Mumbai Tel.: /01 Fax: KEY TO INVESTMENT RATINGS (w.e.f. February 2013) Guide to the expected return over the next 12 months. 1=BUY (expected to give absolute returns of 15 or more percentage points); 2=HOLD (expected to give absolute returns between -10 to 15 percentage points); 3=SELL (expected to give absolute returns less then - 10 percentage points) DISCLAIMER We, Dipesh Mehta, B.E. (IT), MMS (Finance) - Analyst and Neerav Dalal, ACA Analyst, authors of this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. This report has been prepared based upon information available to the public and sources, believed to be reliable. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. SBICAP Securities Limited (SSL),a full service Stock Broking Company and a member of National Stock Exchange of India Ltd. (NSE) and Bombay Stock Exchange Ltd. (BSE). SSL is a wholly owned subsidiary of SBI Capital Markets Limited (SBICAP), which is engaged into the investment banking activities and is registered with the Securities and Exchange Board of India as a Category I Merchant Banker. SBICAP (Singapore) Limited, a fellow subsidiary of SSL, incorporated in Singapore is regulated by the Monetary Authority of Singapore as a holder of a capital markets services license and an exempt financial adviser in Singapore. SBICAP (Singapore) Limited s services are available only to accredited investors (other than individuals), and institutional investors in Singapore as defined in section 4A of the Securities and Futures Act (Cap. 289) of Singapore. SBICAP (Singapore) is a wholly owned subsidiary of SBICAP. SBICAP (UK) Limited, a fellow subsidiary of SSL, incorporated in United Kingdom is authorised and regulated by the Financial Services Authority. [SBICAP, SBICAP (Singapore) Limited, SBICAP (UK) Limited and SSL are collectively referred to as SBICAP Entities]. Recipients of this report should assume that SBICAP Entities (and/or its Affiliates) is seeking (or may seek or will seek) Investment Banking, advisory, project finance or other businesses and may receive commission, brokerage, fees or other compensation from the company or companies that are the subject of this material/ report. SSL (and/or its Affiliates) and its officers, directors and employees, including the analysts and others involved in the preparation/issuance of this material and their dependant(s), may on the date of this report/from time to time, have long/short positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. SSL s sales people, dealers, traders and other professionals may provide oral or written market commentary or trading strategies to its clients that reflect opinion that are contrary to the opinions expressed herein, and its proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. SSL may have earlier issued or may issue in future reports on the companies covered herein with recommendations/ information inconsistent or different from those made in this report. In reviewing this document, you should be aware that any or all of the foregoing, among other things, may give rise to potential conflicts of interest. Please ensure that you have read Risk Disclosure Document for Capital Market and Derivatives Segments as prescribed by Securities and Exchange Board of India before investing in Indian Securities Market. The projections and forecasts described in this report should be carefully evaluated as these 1. Are based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. 2. Can be expected that some of the estimates on which these were based, will not materialize or will vary significantly from actual results, and such variances may increase over time. 3. Are not prepared with a view towards compliance with published guidelines or generally accepted accounting principles. No independent accountants have expressed an opinion or any other form of assurance on these. 4. Should not be regarded, by mere inclusion in this report, as a representation or warranty by or on behalf of SSL the authors of this report, or any other person, that these or their underlying assumptions will be achieved. dipesh.mehta@sbicapsec.com I neerav.dalal@sbicapsec.com October 21,

7 This report is for information purposes only and SBICAP Entities accept no liabilities for any loss or damage of any kind arising out of the use of this report. Though disseminated to clients simultaneously, not all clients may receive this report at the same time. SSL will not treat recipients as clients by virtue of their receiving this report. It should not be construed as an offer to sell or solicitation of an offer to buy, purchase or subscribe to any securities this report shall not form the basis of or be relied upon in connection with any contract or commitment, whatsoever. This report does not solicit any action based on the material contained herein. It does not constitute a personal recommendation and does not take into account the specific investment objectives, financial situation/circumstances and the particular needs of any specific person who may receive this document. The securities discussed in this report may not be suitable for all the investors. SSL does not provide tax advice to its clients and you should independently evaluate the suitability of this report and all investors are strongly advised to seek professional consultation regarding any potential investment. Nothing in this report is intended by SBICAP Entities to be construed as legal, accounting or tax advice. Certain transactions including those involving futures, options, and other derivatives as well as non-investment grade securities give rise to substantial risk and are not suitable for all investors. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. Investors in securities such as ADRs, the value of which are influenced by foreign currencies effectively assume currency risk. The price, value and income of the investments referred to in this report may fluctuate and investors may realize losses on any investments. Past performance is not a guide for future performance. Actual results may differ materially from those set forth in projections. SSL has reviewed the report and, the current or historical information included here is believed to be reliable, the accuracy and completeness of which is not guaranteed. SSL endeavors to update on a reasonable basis the information discussed in this document/material/ report, but regulatory compliance or other reasons may prevent it from doing so. This report/document has been prepared by SSL based upon information available to the public and sources, believed to be reliable. No representation or warranty, express or implied is made that it is accurate or complete. The opinions expressed in this report are subject to change without notice and have no obligation to tell the clients when opinions or information in this report change. This report has not been approved and will not or may not be reviewed or approved by any statutory or regulatory authority in India, United Kingdom or Singapore or by any Stock Exchange in India, United Kingdom or Singapore. This report may not be all inclusive and may not contain all the information that the recipient may consider material. This report does not constitute or purport to constitute investment advice in publicly accessible media and should not be reproduced, transmitted or published by the recipient. The report is for the use and consumption of the recipient only. This report or any portion hereof may not be printed, sold or distributed without the written consent of SBICAP Entities. The securities described herein may not be eligible for sale in all jurisdictions or to all categories of investors. The countries in which the companies mentioned in this report are organized may have restrictions on investments, voting rights or dealings in securities by nationals of other countries. Distributing /taking/sending/dispatching/transmitting this document in certain foreign jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. Failure to comply with this restriction may constitute a violation of any foreign jurisdiction laws. Neither SBICAP Entities nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Further, no representation or warranty, expressed or implied, is made or given by or on behalf of SBICAP Entities, nor any person who controls it or any director, officer, employee, advisor or agent of it, or affiliate of any such person or such persons as to the accuracy, authenticity, completeness or fairness of the information or opinions contained in this report and SBICAP Entities or such persons do not accept any responsibility or liability for any such information or opinions and therefore, any liability or responsibility is expressly disclaimed. Legal Entity Disclosure Singapore: This report may be distributed in Singapore by SBICAP (Singapore) Limited (Registration No R), a holder of a capital markets services license and an exempt financial adviser in Singapore and solely to persons who qualify as institutional investors or accredited investors (other than individuals) as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore (the SFA ) and is not intended to be distributed directly or indirectly to any other class of person. Persons in Singapore should contact SBICAP (Singapore) Limited in respect of any matters arising from, or in connection with this report. United Kingdom: This marketing communication is being solely issued to and directed at persons (i) fall within one of the categories of Investment Professionals as defined in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the Financial Promotion Order ), (ii) fall within any of the categories of persons described in Article 49 of the Financial Promotion Order ( High net worth companies, unincorporated associations etc. ) or (iii) any other person to whom it may otherwise lawfully be made available (together Relevant Persons ) by SSL. The materials are exempt from the general restriction on the communication of invitations or inducements to enter into investment activity on the basis that they are only being made to Relevant Persons and have therefore not been approved by an authorised person as would otherwise be required by section 21 of the Financial Services and Markets Act 2000 ( FSMA ). This report is issued and distributed by SBICAP Entities without any liability / undertaking / commitment on the part of itselves or SBI Capital Markets Limited or State Bank of India or any other entity in the State Bank Group. Further, in case of any commitment on behalf of State Bank of India or SBI Capital Markets Limited or any entity in the State Bank Group, such commitment is valid only when separately confirmed by that entity. dipesh.mehta@sbicapsec.com I neerav.dalal@sbicapsec.com October 21,