Persistent Systems: Margin stability, higher growth in FY16

Persistent Systems: Stable margins, higher growth

Persistent Systems delivered better-than-expected net profit for the March  quarter, even as sales fell a tad short of expectations. Weakness in top clients, shelving of one project with a top-10 client and muted licensing sales impacted top-line growth, in at Rs 498 crore (up 0.6 per cent sequentially), 1.8 per cent lower than the consensus Bloomberg expectation of Rs 507 crore.

This was, however, more than offset by strong earnings growth, as net profit at Rs 76 crore (up 2.1 per cent sequentially) was nine per cent ahead of Bloomberg expectations of Rs 70 crore. Margin gains, along with lower taxes, aided Persistent’s bottom line. The earnings before interest, taxes, depreciation and amortisation (Ebitda) margin expanded eight basis points (bps) to 20.2 per cent on a sequential basis, on account of lower doubtful debt provision and better utilisation.

While the stock rallied as much as 4.3 per cent to an intra-day high of Rs 744 on Wednesday, it finally closed with gains of 0.5 per cent at Rs 717 versus a one per cent gain in the S&P BSE Sensex. This, however, was better, given that a large number of information technology stocks ended the day in red.

There is more good news for the stock, which has seen re-rating in the past year on the back of opportunity in the digital space. Persistent’s strong positioning in the digital transformation business is a key strength and is a growth enabler, believe analysts.

Compared to 13 per cent revenue growth in FY15, Persistent is expected to do better in this. While the management remains confident, analysts are factoring in revenue growth of 17 per cent, which they expect to improve to 18 per cent in FY17 on the back of strong deal wins and higher revenues from top-10 clients.

On margins, although there could be some pressure due to wage hikes and higher visa costs, the need for lower incremental investments should provide some cushion. While analysts at Antique estimate Persistent’s Ebitda margin at 19.9 per cent in FY16, those at Prabhudas Lilladher peg it at 20.8 per cent. This metric stood at 20.7 per cent in FY15, down 510 bps over FY14 as Persistent continued to invest in newer growth opportunities and technologies. Analysts believe investments in sales and marketing initiatives is also likely to bottom out in FY16. Second, the blended employee utilisation improved 40 bps sequentially to 74.7 per cent and can be scaled up further to 80 per cent and above, similar to that of larger peers, acting as another margin level.

At current levels, the stock is valued at about 20 times FY16 estimated earnings. Of the 14 analysts polled by Bloomberg in April so far, five have a ‘buy’ and another five have ‘sell’ rating on the stock. The remaining four have a ‘neutral’ view. The average target price stands at Rs 788.7 indicating upside potential of about 10%.