Several mid-tier IT companies have proved to be resilient to the global slowdown and have also been able to benefit from the rise in outsourcing. Persistent Systems, an outsourced software product development player, is one such company.

Growth across key segments such as telecom and infrastructure and systems, increase in revenues from the US and large-client additions are key positives for the company. The company also has a healthy offshore-onsite mix which helps optimise costs.

At Rs 344, the share trades at 8 times its likely per share earnings for FY13. This valuation is at a discount to the multiples enjoyed by other mid-tier IT companies such as Infotech Enterprises and KPIT Cummins, making it a reasonable entry point for investors with a two-year horizon.

In FY12, Persistent's revenues rose 28.9 per cent over 2010-11 to Rs 1000.3 crore, while net profits increased marginally to Rs 141.8 crore. The profit growth was tepid because of a five-fold increase in tax outflows as the sunset clause for incentives in housing facilities in software technology parks of India (STPIs) set in. Persistent partners with companies such as IBM, Cisco, Salesforce, Microsoft and Oracle and develops some of their products. It offers testing, support and maintenance services too. In the process of helping partners and clients, the company has also developed its own IP.

Healthy business-mix

Persistent operates in three segments — telecom (21.4 per cent of revenues), infrastructure and systems (67.5 per cent) and life sciences (11.1 per cent). It has kept its focus by catering to a limited segment, which is important for niche providers to scale up meaningfully.

In FY12, telecom and life sciences verticals grew at a rate that was faster than the overall company growth rate, suggesting a well-blended growth across segments. Its mainstay, infrastructure and systems, too grew, though at a slower pace than the company's rate.

As with most mid-tier IT companies, North America contributes a bulk of overall revenues. Persistent generates 82.5 per cent of its revenues from this geography and grew by 17.4 per cent in dollar terms; The Asia-Pacific region has, however, grown at a faster rate, accounting for more than 10 per cent of overall revenues.

Client additions robust

The company has had healthy client additions in FY12. The overall number of clients has increased from 302 in FY11 to 351 currently.

What has been even more desirable is the fact that it has added a couple of large customers in the $3-million category and the total number of clients in this bucket stands at 11. It has also added four customers in the $1-3 million range.

Persistent has indicated that its sweet spot is the clients in the $1-10 million range, where it has the right capabilities to offer and can generate good margins. So, these additions suggest the company has been able to add the appropriate set of clients, apart from gaining reasonable revenue visibility. The company's top 10 clients, which account for 48.6 per cent of revenues too, have grown, albeit at a slower pace.

Operational positives

The company derives 78.6 per cent of its revenues from services delivered from offshore (mainly Indian) locations. This is among the best in the industry and helps the company maintain an optimal cost structure.

Persistent has also increased its offshore billing rate by over 4 per cent in FY12, which augurs well for margins and suggests reasonable execution capabilities. The company has decreased the proportion of revenues spent on wages as well as sales and marketing, indicating a tight leash on costs.

Risks

Attrition at 18.3 per cent is fairly high. Any significant wage hikes given to reduce this churn may dent margins. Competition from many mid-tier as well as large players in the offshore product development space may create pricing pressures.

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