Persistent Systems at inflection point; outlook robust

Edelweiss Research Report

Persistent Systems (PSYS IN, INR 568, Buy)

Persistent Systems’ (Persistent) Q4FY17 revenue fell 0.9% versus Street’s 1.5% growth estimate led by seasonal weakness in the alliance business. However, EBITDA margin jumped 200bps QoQ to 17.9% (excluding one-off). Management issued robust revenue and margin outlook on account of strength in alliance, digital & Accelerite businesses (~56% of revenue) and meaningful investments being behind. Persistent has repositioned itself as a niche and fast-growing digital player versus an ISV in the past 3 years. This transition, we believe, will lead to massive re-rating hereon. Maintain ‘BUY’ with revised target price of INR723 (INR756 earlier) as we revise exchange rate to INR67 from INR69 earlier.

Seasonality mars revenue; traction in key verticals

Persistent clocked USD109.0mn revenue, down 0.9% QoQ, as the alliance business declined 10.6% QoQ due to seasonality; balance business grew 3.4% QoQ. Accelerite and digital businesses were key drivers clocking 10.6% and 10.8% QoQ spurt, respectively. Reported EBITDA margin jumped 40bps, despite 160bps one-off cost related to litigation settlement, as the company is restructuring its delivery mechanism to prune delivery cost in the alliance business and conservative accounting leading to reversal of charges in Q4.

Robust revenue and margin outlook

The company envisages strong traction in the alliance business, leading to double digit growth. The digital business catapulted over 50% in FY17 and should clock robust spurt in FY18 as well riding strong deals and partnerships. As high growth segments contribute ~56% to Persistent’s revenue and robust margin outlook, we are confident of the company clocking 12.1% revenue and 17.0% EPS CAGR over FY17-19E.

Outlook and valuations: Long-term bet; maintain ‘BUY’

We believe, Persistent is at an inflection point with contribution of the ISV business falling from 60.3% in Q1FY15 to 43.9% and share of high-growth businesses jumping to ~56%. We expect it to post revenue and EPS CAGR of 12.1% and 17.0%, respectively, over FY17-19E. The stock trades at 12.7x and 11.0x FY18E and FY19E EPS, respectively.We maintain ‘BUY/SP’ with revised target price of INR723 (14x FY19E EPS).

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