Result Update on Persistent Systems for 3QFY2012 with a Neutral recommendation - Angel Broking

For 3QFY2012, Persistent Systems (Persistent) reported lower-than-expected numbers on the top-line front but outperformed expectations on the bottom-line front. Management has revised FY2012 sales guidance downwards to 20.5-23.5% yoy from 29% yoy and PAT guidance to Rs.125cr-135cr from Rs.140cr. Persistent is into pure-play offshore product development (OPD), which is highly discretionary in nature and, thus, poses a huge risk for the company if any slowdown kicks in the economy. We maintain our Neutral view on the stock.

Quarterly highlights: For 3QFY2012, Persistent reported revenue of US$51.7mn, up merely 0.3% qoq. Again in this quarter, the company witnessed a decline in onsite billing rates to US$12,387 people per minute (ppm) from US$12,665 ppm due to higher fixed price contracts. In INR terms, revenue growth was robust at 12.4% qoq to Rs.268cr due to steep INR depreciation against USD. The company's EBITDA and EBIT margins increased by 696bp and 688bp qoq to 26.0% and 20.1%, respectively, aided by ~600bp qoq due to INR depreciation.

Outlook and valuation: Persistent, due to its niche focus on OPD, is exposed to higher risks if any slowdown kicks in developed economies. This, along with the cautious outlook on the economy, has led to management revising its FY2012 revenue growth guidance downwards. Over, FY2011-13E, the company is expected to record USD and INR revenue CAGR of 14.8% and 20.3%, respectively. On the EBITDA margin front, we expect margin to increase to 22.7% and 23.0% for FY2012 and FY2013 from 20.4% in FY2011, majorly due to INR depreciation and higher utilization level, from 74% in 3QFY2012 to 74.7% in FY2013. On the bottom-line front, the company has revised its guidance to Rs.125cr-135cr from Rs.140cr previously. Thus, over FY2011-13E, we expect the company to record EBITDA and PAT CAGR of 27.8% and 0.1%, respectively. At the CMP of Rs.333, the stock is trading at 9.5x FY2013E EPS of Rs.35.0. We value the stock at 9.5x FY2013 EPS i.e., 50% discount to Infosys, which gives us a fair price of Rs.332, and maintain our Neutral rating on the stock.

Source : Equity Bulls

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