Persistent Systems: Digitally sound

Focus on select areas and healthy client additions are positives for the company

There are a few mid-sized companies that operate in specialised areas and deliver well on their financials consistently.

Persistent Systems, which operates in the outsourced software product development space, is one such mid-tier player that has been outpacing the IT industry’s growth rates over the years.

Focus on select industry segments, increasing digital revenues and thrust on IP-led offerings are positives. Client additions have been healthy for Persistent; key operational parameters such as utilisation and attrition have improved too.

Being a predominantly US-focused business means that the company will benefit from the continuing weakness of the rupee against the dollar, which would aid margins.

Despite a reasonable rally over the past one year, Persistent still trades at reasonable valuation.

Investors with two-year horizon can buy the shares of the company.

At ₹860, the stock trades at 16 times its likely per share earnings for FY-20, which is much lower than the multiples that mid-tier IT players such as Mindtree and Hexaware (20-22 times) enjoy.

In FY-18, Persistent’s revenues rose by 9.7 per cent over 2016-17 in dollar terms, which was much better than several peers and among the best in the industry. The company generated revenues of ₹3,034 crore in 2017-18; net profits came in at ₹323 crore, an increase of 7.2 per cent. As IP revenues were weak during the fiscal, margins were affected, though this was made up somewhat by the robust growth in the services business. IP revenues are expected to pick up over the next few quarters.

Differentiated offering

Persistent partners with companies such as IBM, Salesforce, Microsoft and Oracle and develops some of their products. The company is also gearing itself for newer platforms, delivering through the cloud and gaining from the digital transformation projects of clients. It offers testing, support and maintenance services too. The association with global partners and clients has helped the company develop its own intellectual property (IP).

The company has retained its focus by catering to a limited set of segments; this is important for niche providers to scale up meaningfully.

It caters to independent software vendors (ISVs; 39.9 per cent of revenues) and enterprise clients (34.5 per cent). More than a fourth (25.6 per cent) of its revenues is from the delivery of intellectual property-led services.

IP-led revenues are non-linear — growth is not linked to headcount addition — and hence generate higher margins.

The company has been steadily expanding its digital footprint over the past couple of years. It is working on areas such as artificial intelligence, internet of things and cloud, where clients are expected to increase spends considerably.

The proportion of digital revenues has increased from 16.3 per cent in FY-17 to 21.3 per cent in 2017-18, suggesting that Persistent has been able to tap into customer spends in the space.

 

As with most mid-tier IT companies, North America contributes the bulk of overall revenue for Persistent, accounting for 83.5 per cent of the pie as of March 2018. Given that the geography is set for economic revival, discretionary spends from clients may witness a robust comeback.

For every one per cent depreciation in the rupee against the dollar, companies such as Persistent would be able to improve operating margins by 30-40 basis points.

Operational factors improve

The company’s utilisation rates have improved steadily over the past four quarters from 76.5 per cent levels a year ago to 79.2 per cent at the end of FY-18.

It has also managed to increase billing rates even in a tough spending environment. In FY-18, Persistent managed to increase billing rates by 5.7 per cent over FY-17 on its non-IP revenues, suggesting strong execution capabilities.

Persistent has had healthy large-sized client additions. In the greater than $3-million category, it added three new clients in FY-18 over the previous fiscal, taking the total number of customers in this bracket to 18.

Attrition, at 14.7 per cent, has declined in the last one year, though there is scope for further improvement on this parameter.

 

Persistent has also been increasing its onsite manpower deployment in the last one year. This may increase costs, though it indicates that the deal pipeline is robust for the company as most projects start overseas before being transitioned offshore.

Read the rest of this article by Signing up for Portfolio.It's completely free!

What You'll Get





TOPICS

Related

MORE FROM BUSINESSLINE


 Getting recommendations just for you...
This article is closed for comments.
Please Email the Editor