Persistent Systems: Moving up the league

The company has moved up the value chain after building intellectual property and serving marquee clients.

The leading player in the outsourced product development (OPD) market, Persistent Systems, is a new entrant in the BSE Mid-cap index. This is expected to get the company more visibility. With its operations catching attention, analysts expect it to be a premium mid-cap information technology (IT) company soon.

The company’s revenues have been growing at a compounded rate of 33 per cent for the past five years, matched only by MindTree in the mid-cap IT segment. Also, its earnings before interests and tax (Ebit) margins, at 19 per cent in FY10, are the best among peers. This, analysts reckon, is due to its intellectual property- (IP-) related work and offshore business, which account for six per cent and 80 per cent of its revenues, respectively.

Moreover, the market for OPD is expected to grow in tandem with research and development (R&D). According to JP Morgan analysts, the next five years will see the OPD market grow to $2-2.5 billion in India (from the current $1 billion) and to $8 billion globally. Persistent has 31 customers that contribute more than $1 million to revenues. Most of these come from companies with $1 billion-plus revenues and 15 per cent R&D spend. Persistent enjoys the advantage of operating in all the segments of the product development life cycle used by the software majors. It has marquee clients like IBM and Microsoft. It will be climbing up the value chain with design for manufacture services.

However, as it grows and gets a larger operational base, maintaining growth will be a key challenge. Typically, in the OPD business, most assignments are project-based and of short duration, with limited commitments for further business from the same client, say analysts at JP Morgan. Even though Persistent has a broad client base, with top 10 of them contributing 45 per cent to its revenues (limiting the impact of a single client), its revenues are geographically concentrated. More than 80 per cent of revenues are sourced from North America, leaving it vulnerable to currency fluctuations and economic cycles.