Persistent Systems: Despite Q2 let-downs, analysts maintain buy

The shares of Persistent Systems have plunged sharply in the last two days after the company announced lower-than-expected Q2 results for the period ending September 2018. The stock, which on Monday crashed 16 per cent from ₹660 level, fell another 4 per cent to hit a day's low of ₹538.2 on the NSE, but recovered to close at ₹553.65, still a fall of one per cent from Monday’s close.

Reasonably valued

After the sharp fall, analysts feel the stock is at reasonable valuation and can be accumulated for the longer term.

Reliance Securities believes given strong hiring numbers, project starts plus a seasonally strong Q3 for IP business and resale business, revenue growth could see an uptick, which should further aid the margin profile. “After the steep stock decline, valuations are very reasonable at 10.4x FY-20 EPS. We maintain our buy rating on the stock, with a revised target price of ₹760 (earlier ₹820),” it said.

The IT major on Monday reported a 4.3 per cent quarter-on-quarter (q-o-q) decline in dollar revenue at $118.23 million in September quarter (Q2FY19), as against the expectation of less than 1 per cent fall.

Softer growth in Digital SBU led by slower offtake in Appian as well as sequential weakness in IBM alliance business have impacted the company's performance.

Apurva Prasad, Senior Analyst, HDFC Securities, expects strong sequential growth in the third quarter with recovery in Digital and strong seasonality of alliance business.

Good demand, but...

Weak operating metrics are due to poor execution despite a good demand scenario, said Emkay Global. “The frequent volatility in the performance could weigh in on investor confidence and could translate to a de-rating of the stock,” it cautioned though it recommend investors to hold the stock with a target of ₹615.

The company attributed the weakness in quarterly performance to multiple execution-led concerns (sales team pruning, lack of right resources, project closure, no visa renewals in some cases, etc) rather than demand-related challenges.

“Given the challenges reflected in H1 performance and expectations of gradual recovery, we have cut our estimates by 5.6 per cent each for FY19/20E,” said Motilal Oswal in its research report. The broking firm, which maintained its buy target on the stock with a target price of ₹750, said for growth that is relatively slower than peers and the impact of near-term execution issues, “we discount forward earnings by 15 multiples.”

IL&FS exposure

Persistent Systems has deposits of ₹43 crore with Infrastructure Leasing & Financial Services (IL&FS) and IL&FS Financial Services and the same are due for maturity from January 19 to June 19. As of end-September, there have been no defaults in payment of interest. Accordingly, the management believes that there is no immediate need to recognise any impairment, said a Kotak Securities report, which maintains buy rating with a target of ₹870 a share (earlier ₹1025/share) due to margin improvement and decent revenue visibility..

H1-B visa issue (not factored in FY19 yet) and workforce addition may impact the second-half of current fiscal said broking firm Narnolia Financial Advisors. Also, IL&FS issue may become a cause of concern for the management. “Thus we are keenly monitoring. We expect company to post revenue CAGR of 13 per cent over FY18-20. We value the stock at ₹701 (14x FY20EPS) and recommend buy,” it added.

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