Stock Fundamentals

IT’s on a strong platform

K Venkatasubramanian | Updated on January 23, 2018

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The company will benefit from new offerings such as cloud-based applications



Mid-tier IT player Persistent Systems, which operates in the outsourced software product development space, has been consistently outpacing the industry over the past two-three years.

The stock has corrected more than 20 per cent from its recent highs as the management indicated that revenue growth in the March quarter would be muted due to client-specific issues and that margins would be affected due to higher investments in sales and R&D. But these may be largely one-offs as the company continues to do well across operational parameters.

Growth across key segments such as infrastructure and systems, life sciences and increasingly from financial services, steady traction in revenue from the US and large client additions are positives for the company. A predominantly US focused business means that the company is not significantly affected by the weakness in the euro that has hurt the earnings of several large- and mid-tier IT players.

Persistent has also witnessed substantial growth in intellectual property (IP)-led revenues over the past few years. At ₹737, the Persistent stock trades at 18 times its likely per share earnings for 2015-16.

This valuation is at par with several mid-tier players such as Mindtree, Cyient and at a discount to Hexaware. Though not cheap, investors with a two-year horizon may see healthy capital appreciation.

In the nine months so far in 2014-15, Persistent’s revenues rose 14 per cent to ₹1,394 crore, while net profits increased about 18 per cent to ₹215 crore. At 15.4 per cent, the company’s net margins are among the highest within the mid-tier IT universe.

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 IP.

Key segments deliver

Key verticals such as infrastructure and systems (about 55 per cent of revenue), financial services (15 per cent) and life sciences (14 per cent) have all managed to grow at faster-than-the-company’s overall revenue rate in the last three quarters.

But the telecom segment, as with most players in the industry, remains weak. The company has kept its focus by catering to a limited segment, which is important for niche providers to scale up meaningfully.

As with most mid-tier IT companies, North America contributes the bulk of overall revenue, accounting for nearly 85 per cent of the pie as of December 2014. Given that the geography is set for economic revival, discretionary spends from clients may see a comeback.

The other key improvement for Persistent has been in the area of IP-led revenues, which are not linked to headcount additions and, thus, aid margins. The company has witnessed an improvement in IP revenues from 17 per cent of overall revenue a couple of years back to over 19 per cent currently.

Persistent has had healthy large-sized client additions. In the $1-3-million category, it has added five new clients over the last year, taking the total number of clients in this bracket to 41.

Operational factors improve

The company’s utilisation rates have improved sharply from 69.2 per cent levels a year ago to 74.3 per cent now, on the back of strong onsite volumes.

It has also managed to derive increase in billing rates with onsite rates going up 3.5 per cent, though offshore billing remains flat.

Risks

Attrition, at 14.7 per cent, though not very high, is on a steady rise. Any significant wage hikes to reduce this churn may dent margins. 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.

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Published on April 19, 2015
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