30 July 2013
1QFY14 Results Update | Sector: Technology
Persistent Systems
BSE SENSEX
19,593
Bloomberg
Equity Shares (m)
M.Cap. (INR b) / (USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Financials & Valuation (INR m)
Y/E MAR
Sales
EBITDA
Adj. PAT
Adj. EPS
EPS Gr. (%)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
2013
12.9
3.4
1.9
46.9
32.4
20.2
14.7
11.2
2.0
2014E
15.7
3.5
2.1
53.4
13.9
302.4
19.5
16.1
9.8
1.7
2015E
18.0
4.0
2.5
63.7
19.2
358.5
19.8
15.8
8.3
1.5
S&P CNX
5,832
PSYS IN
40.0
21.0/0.4
590/364
4/-1/27
CMP: INR526
TP: INR575
Buy
EBITDA margin disappoints; currency gains to be reinvested
EBITDA margin disappoints:
Revenue grew 1.5% QoQ to USD63m, in line with
our estimate. However, EBITDA margin declined 310bp QoQ to 21.8%, well
below our estimate of 24.3%, on account of higher S&M (110bp) and travel-
related expenses (150bp). PAT grew 4.8% QoQ to INR571m, higher than our
estimate of INR530m, driven by forex gain of INR183m.
Strong growth in product engineering revenues:
Linear revenues grew 4.5%
QoQ (higher than our estimate of 1.5% QoQ) to USD53.5m, while IP-led
revenues declined 13% QoQ to USD9.5m (v/s our estimate of USD11.4m). The
company’s outlook of healthy growth in Product Engineering is a positive.
Reinvesting currency gains:
PSYS sees itself very well positioned with respect
to its SMAC offering. It has taken the opportunity of favorable currency to
invest aggressively in the sales team. Sales personnel increased 20% QoQ to
119, with more additions expected, going forward. This is driving a cut in our
margin estimates (of 310bp/140bp) for FY14/FY15.
2H to be better than 1H:
The Product Engineering business is witnessing good
momentum and IP-led revenues will add to that, helping to achieve better
performance in 2H than in 1H. Revenues from HP client automation should
flow in largely from the next quarter, and that along with healthy traction in
Product Engineering segment keeps growth outlook sanguine.
Valuation and view:
We expect PSYS to grow its USD revenues at a CAGR of
15% over FY13-15 and EPS at a CAGR of 16.5%. The stock trades at 9.8x FY14E
and 8.3x FY15E EPS. Maintain
Buy
with a target price of INR575 (9x FY15E EPS).
BV/Sh.(INR) 262.1
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); +91 22 3982 5424
Siddharth Vora
(Siddharth.Vora@MotilalOswal.com); +91 22 3982 5585
Investors are advised to refer through disclosures made at the end of the Research Report.

Persistent Systems
1QFY14: Margins decline a key disappointment; Above estimate PAT driven
by forex gains
PSYS’ 1QFY14 revenue at USD63m grew 1.5% QoQ, and was in line with our
estimate of USD63.4m. However, while linear revenues in Product Engineering
and Platform grew 4.5% QoQ to USD53.5m (above our estimate of 1.5%
growth), IP led revenues at USD9.5m came below our estimate of USD11.4m,
and declined 13% QoQ.
USD revenue in 1QFY14 was in line with our estimate
Revenue (USD m)
8.8
5.8
2.6
39
41
6.7
43
47
6.3
52
50
3.1
52
0.3
54
4.9
55
1.3
60
61
1.2
62
2.2
1.5
Revenue Growth QoQ (%)
9.4
Source: MOSL, Company
Revenues at onsite grew 14.6% QoQ, driven by volume growth of 10.5% QoQ
and pricing improvement of 3.5% QoQ. Offshore revenues grew 1.5% QoQ, with
pricing decline of 0.8% QoQ and volume growth of 2.3% QoQ.
EBITDA margin during the quarter declined 310bp QoQ to 21.8%, well below our
estimate of 24.3%. The 250bp delta was on the back of 150bp increase in travel-
related expenses (up to 3.9% of revenues) and 110bp QoQ increase in S&M
expenses. The company increased its Sales & Business development personnel
by 20% QoQ to 119. Additionally, there was also mix shift in favor of onsite by
240bp QoQ, that potentially impacted margins.
EBITDA margin was below estimate due to increase investments in S&M and visa cost
9.1%
7.9%
7.2%
EBITDA Margin - % (LHS)
7.7%
7.9%
7.0%
6.3%
6.5%
S&M - % (RHS)
7.2%
7.6%
7.8%
8.9%
7.1%
19.0% 23.0% 21.9% 17.9% 17.9% 19.0% 26.0% 28.6% 26.8% 27.2% 24.7% 24.9% 21.7%
Source: Company, MOSL
PAT grew 10% QoQ to INR571m, (above our estimate of INR530.4m), despite
miss on the margins, mainly due to forex gains of INR183m, contribution of
~23% to pre-tax profits during the quarter.
30 July 2013
2

Persistent Systems
Infrastructure and Systems continues to drive growth; North America
remains the region of focus
Infrastructure and Systems continues to grow strongly for the fourth
consecutive quarter, being the only vertical to show growth at 5.5% QoQ, while
Telecom and Wireless declined for the third consecutive quarter (-8% QoQ).
Revenues growth driven by Infrastructure and Systems among verticals
Verticals
Telecom & Wireless
Infrastructure and Systems
Life Sciences and Healthcare
Contribution to Rev. (%)
20.7
69.1
10.2
Growth - QoQ (%)
(8.0)
5.5
(3.4)
Contr to incr. rev (%)
(123.9)
222.1
1.8
Source: MOSL, Company
North America was the only region to show growth this quarter, and PSYS
expects this to continue with increased traction in SMAC related product
engineering services in the region. PSYS’ presence in Europe is small and
dominated by few customers. During the quarter, one project ended and
another client is facing stress, driving weak performance in the geography.
North America will continue to be the growth geography in coming quarters too
Geographies
North America
Europe
India, APAC
Contribution to Rev. (%)
87.6
4.8
7.6
Growth - QoQ (%)
4.5
(14.5)
(16.2)
Contr to incr. rev (%)
155.7
(30.7)
(25.0)
Source: MOSL, Company
Takeaways from management commentary: Strong deal pipeline; Investing for
growth
Investing aggressively for growth:
The company sees itself very well positioned
with respect to its SMAC offering. Hence, PSYS has taken the advantage of
favorable currency to invest heavily in S&M, adding 20 senior sales executives
this quarter; and will add further in the coming quarter too. It is also adding
capacity with 500 freshers joining in the coming two quarters.
Growth to be higher in the second half:
Product engineering business is seeing
good momentum and IP-led revenues will add to that going forward, making the
outlook for second half definitely look better than 1H.
Deal pipeline in Product Engineering strong:
The deal pipeline has improved by
50% compared to last quarter, the company is continuing to observe increase in
budgets of clients and excitement related to its SMAC stack of services.
IP-led revenues to stabilize with HPCA:
IP led revenues declined for the third
consecutive quarter as Radia HPCA revenues were delayed and its contribution
this quarter was miniscule. The company is not concerned with the drop during
the quarter. This deals are annual maintenance contracts from HPCA which
would see significant ramp up in the second half and provide stability to IP led
revenues.
30 July 2013
3

Persistent Systems
IP revenues declines as revenues from HPCA are yet to materialize
IP business revenue (USD m)
49
21
-7
3.5
3.3
-1
3.1
-37
28
38
21
QoQ growth (%)
49
16
-3
4.8
3.9
4.8
6.6
7.6
11.3
11.1
-2
10.9
-12
9.5
3.2
Source: MOSL, Company
18% PBT margin target:
The management has stated its desire to maintain 18%
PBT by the end of the year and invest any incremental benefits from currency in
S&M and capacity buildup.
Change in estimates: Assumption of lower margins going forward drive ~7% cut in
earnings estimates
PSYS’ below estimate margin in 1QFY14 was a function of 4 factors: [1] Visa
costs, [2] higher investments in sales and marketing [3] costs incurred on
knowledge towards HP client automation and [4] provisions for bad debt. Of
these, investment in sales is the sole factor that will persist going forward,
offsetting the gains from currency.
PSYS’ heavy investment in sales and marketing bodes well for the company’s
revenue scale in the future, however, the time lag between the two drives ~7%
decline in our FY14 and FY15 estimates. While we did expect the company to
incrementally invest more in the front end to shore up the business, the same
has come much ahead of our expectations, driving 300bp decline in our revised
EBITDA margin for FY14 v/s 150bp decline for FY15.
Against these investments, our revenue growth estimate is unchanged for FY14,
and up by 1pp in FY15. We now expect FY14 revenue growth to be 14.6% (to
USD272.5m) and FY15 revenue growth to be 15.7% to USD315m. With traction
revival in Product engineering and HP client automation revenues from 2Q, we
expect healthy revenue growth of 5.3% QoQ in 2QFY14 and 5% revenue CQGR
over the rest of the year.
Change in estimates
Revised
FY14E
FY15E
57.7
57.0
272.5
315.3
14.6
15.7
22.0
22.1
53.4
63.7
Earlier
FY14E
FY15E
57.5
57.0
271.7
311.8
14.3
14.8
25.1
23.5
57.5
68.2
Change (%)
FY14E
FY15E
0.3
0.0%
0.3
1.1%
30bp
100bp
-310bp
-140bp
-7.1
-6.6
Source: MOSL, Company
INR/USD
USD Revenue - m
USD revenue growth (%)
EBITDA Margin (%)
EPS - INR
30 July 2013
4

Persistent Systems
Valuation and View
PSYS’ decline in margins in 1Q and the commentary of weak margin outlook in
2Q is expected to be construed disappointingly, especially given that the strong
currency tailwind was expected to offset wage-hike driven headwinds. However,
we believe that the investments were imperative and the company has used
currency as an opportunity to invest more aggressively in the business much
earlier than our expectation of a gradual uptick.
While PSYS’ efforts bode well for the business in the long run, we keep our
revenue growth estimates in check for now, till any visible indicators of fruition
of the investments. We remain confident that PSYS' capabilities gear it up
strongly for growth over the long term. Also, despite the cut in estimates, its
margins remain in the upper half of the peer set, with leverage potential from
IP-led revenues and utilization; and financials healthy.
We expect PSYS to grow its USD revenues at a CAGR of 15% over FY13-15 and
EPS at a CAGR of 16.5% during this period. The stock trades at 9.8x FY14E and
8.3x FY15E EPS. Our target price of INR575 discounts FY15E EPS by 9x. Maintain
Buy.
Other result highlights
Revenue mix shifted in favor of onsite by 240bp QoQ to 21.2%.
Attrition rate dropped marginally to 14.2% in 1QFY14 from 14.4% in 4QFY13.
Receivables remained flat at 65 days during the quarter.
PSYS closed the quarter with 253 (v/s 279 in 4QFY13) active clients in the
Product Engineering and Platform business and 387 clients (v/s 418 in 4QFY13)
in the IP-driven business.
Number of USD3m+ clients remained constant at 15.
Cash and cash equivalents at the end of the quarter were INR4.6b.
Repeat business accounted for 83% of revenues, v/s 78.2% in the previous
quarter.
The company’s total hedge book stands at USD106m at an average rate of
INR58.17.
Utilization during the quarter dropped to 70%, v/s 72% in the previous quarter.
30 July 2013
5

Persistent Systems
Persistent Systems: an investment profile
Company description
Persistent is a global company specializing in software
product and technology innovation, partnering with
pioneering start-ups, innovative enterprises and the
world’s largest technology brands. The company staffs
over 7,100 employees and clocked revenues of
USD246m (LTM). It has a clear focus on new initiatives
that are witnessing greater demand and will drive the
next wave of growth in technology - Cloud, Mobility,
Data Analytics and Collaboration.
Recent developments
Launched Radia Client Automation at HP® Discover
2013
Expanded presence in Africa, announces
Partnership with SysCare Technology in Morocco.
Announced ShareInsights, the company’s big data
analytics platform at the Hadoop Summit North
America 2013
We expect PSYS to grow its revenues at a CAGR of
15% over FY13-15 and an EPS CAGR of 16.5%
during this period.
The stock trades at 9.8x FY14E and 8.3x FY15E EPS.
Maintain
Neutral,
with a target price of INR575,
which discounts our FY15E EPS by 9x.
Persistence of weak macroeconomic fundamentals
across geographies have been driving deceleration
in growth for Indian IT services. Indicators from US
are turning positive, but it is too early to be
construed as a trend
Demand
fundamentals however, are being
overridden by the potential business model
changes that the industry will be compelled to
undergo, if the immigration bill is passed in current
form.
MOSL
Forecast
Consensus
Forecast
55.5
62.1
Variation
(%)
-3.7
2.6
Valuation and view
Key investment arguments
PSYS is an early entrant and has marquee clientele
in cutting-edge technologies around cloud,
mobility, collaboration and analytics; witnessing
faster growth.
The company’s foray into IP-driven businesses by
acquiring assets has helped improved its margin
profile.
Increasing thrust on expanding IP-led revenue
share introduces greater volatility and higher risk
in the business model.
Sensitivity of margins to currency fluctuations is
higher.
Sector view
Key investment risks
Comparative valuations
Persistent
P / E (x)
P / BV(x)
EV / Sales (x)
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
9.8
8.3
1.8
1.5
1.0
0.8
4.7
3.6
Mindtree
8.9
8.1
2.4
1.9
1.1
0.9
5.6
4.3
Hexaware
9.1
8.6
2.7
2.4
1.3
1.1
6.0
5.4
EPS: MOSL forecast v/s consensus (INR)
FY14
FY15
53.4
63.7
Target price and recommendation
Current
Price (INR)
525
Target
Price (INR)
575
Upside
(%)
9.5
Reco.
Neutral
EV / EBITDA (x) FY14E
FY15E
Shareholding pattern (%)
Jun-13
Promoter
Domestic Inst
Foreign
Others
39.0
14.5
20.6
26.0
Mar-13
39.0
16.7
18.1
26.2
Jun-12
39.0
12.8
21.7
26.5
Stock performance (1-year)
30 July 2013
6

Persistent Systems
Financials and valuation
30 July 2013
7

Disclosures
Persistent Systems
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PERSISTENT SYSTEMS
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30 July 2013
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