Persistent 1QFY18
- 1. Anand Rathi Share and Stock Brokers Limited (hereinafter “ARSSBL”) is a full-service brokerage and equities-research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst certifications are present in the Appendix. Anand Rathi Research India Equities Technology Company Update India I Equities Mohit Jain Research Analyst +9122 6626 6531 mohitjain@rathi.com Shobit Singhal Research Associate +9122 6626 6511 shobitsinghal@rathi.com Key financials (YE Mar) FY15 FY16 FY17 FY18e FY19e Sales (` m) 18,913 23,123 28,784 30,783 34,575 Net profit (` m) 2,906 2,974 3,015 3,319 4,098 EPS (`) 36.3 37.2 37.7 41.5 51.2 Growth (%) 16.6 2.3 1.4 10.1 23.5 PE (x) 18.1 17.7 17.4 15.8 12.8 PBV (x) 3.7 3.2 2.8 2.5 2.2 RoE (%) 22.1 19.5 17.0 16.5 18.1 RoCE (%) 20.5 19.2 16.2 14.7 17.2 Dividend yield (%) 1.3 2.4 1.1 1.8 2.7 Net debt/equity (x) -0.4 -0.4 -0.4 -0.5 -0.5 Source: Company, Anand Rathi Research *Notes- Adjusted sequentially. , Rating: Buy Target Price: `800 Share Price: `657 Key data PSYS IN / PERS.BO 52-week high / low `710/ `501 Sensex / Nifty 32029/9915 3-m average volume $2.1m Market cap `53bn/$819m Shares outstanding 80m Shareholding pattern (%) June'17 Mar'17 Dec'16 Promoters 30.7 35.0 36.2 - of which, Pledged Free float 69.3 65.0 63.8 - Foreign institutions 22.3 20.8 21.5 - Domestic institutions 14.1 14.3 13.5 - Public 32.9 29.9 28.8 22 July 2017 Persistent Systems Revenues in-line, deferred wage hikes to help margins; Buy Persistent had an operationally good quarter with US$ revenues growing at 3.6%qoq, top 10 clients growing at 9%qoq, 3 accounts moving to >US$3m bracket, and revenue per client going up. This was achieved with reduction in headcount (-64 net). However, margin performance was weak for two reasons – currency (offshore rev are 59%) and SG&A investments (PARX acquisition, visa exp, and hiring). Wage hikes are deferred to 2H and hence, 1Q miss can be reversed during FY18. We maintain buy rating with TP of `800. Traditional business bounces back; Digital takes a breather. Persistent reported in-line revenues at US$113m, +3.6%qoq and +7.8%yoy. The surprise this quarter was growth in the two traditional businesses (Services +5%qoq and Alliance – ex IoT, +10%qoq). The focus businesses of Digital and Accelerite disappointed with a decline of -1.3%qoq and -10%qoq, pulling down margins (Digital margins -351bps qoq, Accelerite -473bps qoq). In addition, 70bps one-time expenses were incurred towards visa and acquisition related travel. EBITDA margins were 14.3%, -257bps qoq* and -73bps yoy. Acquires PARX (Salesforce Platinum Partner in Europe) for US$8.5m (+US$7.5m earn-outs after 3Y). PARX (CY16 Rev US$8.5m, +28% over CY15-17) has worked for 300 customers and has operations in Switzerland, Germany, and Austria. Focus industry verticals are consumer goods, manufacturing, and services but works across industries. Interesting acquisition as it fetches enterprise customers and improves PSYS’ Europe footprint (just 6% of Rev currently). Margins were not disclosed but we are building in ~6% EBITDA in our estimates. Estimates largely retained adj for currency, maintain Buy. We cut our earnings estimates by ~4%/2% each for FY18/FY19e, factoring in Rs64.5/US$, deferred wage hikes, and PARX. We retain a Buy, with target of `800, at 16x FY19e EPS. Risk: Sharp rupee appreciation. Relative price performance Source: Bloomberg PSYS Sensex 550 600 650 700 750 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Estimates revision (%) FY18e FY19e Sales($) 1.6 2.1 EBITDA (9.3) (4.7) PAT (4.2) (2.0) Change in Estimates Target Reco
- 2. 22 July 2017 Persistent Systems – Revenues in-line, deferred wage hikes to help margins; Buy Anand Rathi Research 2 Quick Glance – Financials and Valuations Fig 1 – Income statement (`m) Year-end: Mar FY15 FY16 FY17 FY18e FY19e Net revenues 18,913 23,123 28,784 30,783 34,575 Revenue growth (%) 13.3 22.3 24.5 6.9 12.3 - Oper. expenses 15,007 18,952 24,131 25,942 28,585 EBIDTA 3,906 4,171 4,653 4,842 5,990 EBITDA margins (%) 20.7 18.0 16.2 15.7 17.3 - Interest - - - - - - Depreciation 939 965 1,490 1,548 1,621 + Other income 932 750 843 1,106 1,050 - Tax 993 983 992 1,080 1,320 Effective tax rate (%) 25.5 24.8 24.8 24.6 24.4 + Associates/(minorities) - - - - - Adjusted PAT 2,906 2,974 3,015 3,319 4,098 + Extraordinary items - - - - - Reported PAT 2,906 2,974 3,015 3,319 4,098 Adj. FDEPS (`/sh) 36.3 37.2 37.7 41.5 51.2 Adj. FDEPS growth (%) 16.6 2.3 1.4 10.1 23.5 Source: Company, Anand Rathi Research Fig 3 – Cash-flow statement (`m) Year-end: Mar FY15 FY16 FY17 FY18e FY19e Adjusted PAT 2,906 2,974 3,015 3,319 4,098 + Non-cash items 939 965 1,490 1,548 1,621 Cash profit 3,845 3,939 4,505 4,867 5,719 - Incr./(decr.) in WC 186 1,594 614 34 347 Operating cash-flow 3,659 2,344 3,891 4,833 5,372 - Capex 670 1,477 2,511 569 1,150 Free cash-flow 2,989 868 1,379 4,264 4,222 - Dividend 667 1,251 578 963 1,393 + Equity raised -405 613 163 -0 - + Debt raised -62 84 -172 - - - Investments 1,854 297 716 1,627 2,115 - Misc. items - - - - - Net cash-flow 0 16 76 1,675 714 + Op. cash & bank bal. 1,416 1,416 1,432 1,510 3,184 Cl. Cash & bank bal. 1,416 1,432 1,510 3,184 3,898 Source: Company, Anand Rathi Research Fig 5 – Price movement Source: Bloomberg Fig 2 – Balance sheet (`m) Year-end: Mar FY15 FY16 FY17 FY18e FY19e Share capital 800 800 800 800 800 Reserves & surplus 13,258 15,593 18,193 20,549 23,254 Net worth 14,058 16,393 18,993 21,349 24,054 Total debt 25 26 22 22 22 Minority interest - - - - - Def. tax liab. (net) -315 -233 -401 -401 -401 Capital employed 13,767 16,186 18,614 20,970 23,675 Net fixed assets 3,097 3,031 2,817 3,021 3,162 Intangible assets 1,019 1,597 2,832 1,648 1,037 Investments 6,749 7,046 7,761 9,388 11,503 - of which, Liquid 4,620 4,828 5,422 7,049 9,163 Working capital 1,486 3,080 3,694 3,728 4,075 Cash 1,416 1,432 1,510 3,184 3,898 Capital deployed 13,767 16,186 18,614 20,970 23,675 Working capital (days) 29 49 47 44 43 Book value (`/sh) 175.7 204.9 237.4 266.9 300.7 Source: Company, Anand Rathi Research Fig 4 – Ratio analysis@ `657 Year-end: Mar FY15 FY16 FY17 FY18e FY19e P/E (x) 18.1 17.7 17.4 15.8 12.8 Cash P/E (x) 13.7 13.3 11.7 10.8 9.2 EV/EBITDA (x) 11.9 11.1 9.8 8.7 6.6 EV/sales (x) 2.5 2.0 1.6 1.4 1.1 P/B (x) 3.7 3.2 2.8 2.5 2.2 RoE (%) 22.1 19.5 17.0 16.5 18.1 RoCE (%) 20.5 19.2 16.2 14.7 17.2 Dividend yield (%) 1.3 2.4 1.1 1.8 2.7 Dividend payout (%) 23.0 42.1 19.2 29.0 34.0 Net debt/equity (x) -0.4 -0.4 -0.4 -0.5 -0.5 Debtor (days) 69 67 60 60 60 Inventory (days) - - - - - Payables (days) 10 26 15 15 15 CFO:EBITDA% 79.8 60.9 61.5 85.3 73.8 FCF:EBITDA% 55.3 21.1 14.8 61.6 54.6 Source: Company, Anand Rathi Research Fig 6 – Digital revenue Source: Company 100 200 300 400 500 600 700 800 900 1,000 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 (`) PSYS 15 16 19 21 20 0 5 10 15 20 25 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 ($m)
- 3. 22 July 2017 Persistent Systems – Revenues in-line, deferred wage hikes to help margins; Buy Anand Rathi Research 3 Result Highlights Q1FY18 Results at a Glance Fig 8 – Quarterly result Year-end: Mar Q1FY18 % qoq % yoy FY17 FY16 % yoy Sales ($ m) 113 3.6 7.8 429 352 22.0 Sales (`m) 7,280 0.1 3.7 28,784 23,123 24.5 EBITDA (`m) 1,044 (19.8) (1.3) 4,653 4,171 11.6 EBITDA margin (%) 14.3 -357 bps -73 bps 16.2 18.0 -187 bps EBIT (`m) 652 (28.2) (8.8) 3,163 3,206 (1.3) EBIT margin (%) 9.0 -353 bps -123 bps 11.0 13.9 -287 bps PBT (`m) 1,019 8.8 5.3 4,007 3,956 1.3 Tax (`m) (269) 28.8 14.2 (992) (983) 1.0 Tax rate (%) (26.3) -407 bps -205 bps (24.8) (24.8) 8 bps Net Income (`m) 751 3.1 2.5 3,015 2,974 1.4 Source: Company Fig 7 – Segment-wise results Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 QoQ% YoY% Revenues ($ m) 105 105 110 109 113 3.6% 7.8% Growth YoY % 33% 27% 23% 9% 8% -73bps -2543bps Volume growth % ND ND ND ND ND Revenues (` m) 7,018 7,040 7,455 7,271 7,280 0% 4% Eff. exchange rate 67.0 66.9 67.8 66.7 64.4 -3% -4% Employees (EoP) 8,698 8,612 8,562 8,808 8,744 Revenue Productivity ($ ‘000/employee) 12.0 12.2 12.9 12.4 12.9 4% 7.3% Gross Utilization (IT services) 75.3% 74.2% 78.9% 77.8% 77.2% -61bps 190bps Attrition 16.7% 15.9% 15.8% 15.7% 15.5% -20bps -120bps CoR (excluding D&A) (4,585) (4,539) (4,751) (4,644) (4,783) 3% 4% As % of Revenues -65% -64% -64% -64% -66% -183bps -37bps SG&A (1,376) (1,394) (1,518) (1,326) (1,453) 10% 6% As % of Revenues -20% -20% -20% -18% -20% -173bps -36bps EBITDA 1,058 1,108 1,187 1,302 1,044 -20% -1% EBITDA margins % 15% 16% 16% 18% 14% -357bps -73bps EBIT 715 741 800 907 652 -28% -9% EBIT margins % 10% 11% 11% 12% 9% -353bps -123bps Other Income 172 203 143 57 183 224% 6% Forex gain/loss 81 41 174 (28) 184 -768% 128% Interest expense PBT 968 984 1,118 936 1,019 9% 5% PBT margins % 14% 14% 15% 13% 14% 112bps 21bps Taxes (235) (250) (299) (209) (269) 29% 14% ETR % -24% -25% -27% -22% -26% 407bps 205bps PAT 733 735 819 728 751 3% 2% PAT Margin % 10% 10% 11% 10% 10% 30bps -13bps Source: Company, Anand Rathi Research
- 4. 22 July 2017 Persistent Systems – Revenues in-line, deferred wage hikes to help margins; Buy Anand Rathi Research 4 Conference Call Takeaways Company Impact on margins in Q1FY18- lower offshore utilization impacted 40bps, Currency impacted 120bps, visa cost and PARX acquisition impacted 70bps, incremental onsite hiring impacted 30bps and provisioning of bad debts impacted 40bps. Hike in wages is deferred from July to October for some employees and from July to January for others. The rise in `200m for cost of professional is due to hiring of special skill professional for new projects which is of recurring nature. Acquisition of PARX- Acquired for consideration of upfront $8.5mn and $7.5m after 3 years based on earn-outs. PARX reported revenues of CHF 8mn (~`54cr) in 2016 and consists of 80 people in its workforce (including contractors). The company is profitable although PSYS did not disclose its EBITDA margins. Management restated that last quarter they managed to move some IBM employees to lower cost geographies. Thus, can expect better management on margins in the IBM alliance going forward. The company’s product business, Accelerite declined sequentially this quarter due to settlement dispute with one of the customers. Overall pipeline is robust and expects this segment to do well. Notes from the last two quarters’ conference calls From Q4FY17 Revenue growth is expected to be in double digits as Accelerite, Alliance and Digital are expected to continue their growth momentum. Services may continue to be a drag on overall growth rates. FY18 margins are likely to be better than FY17, as IoT breakseven and some benefits of non-linearity start coming in. From Q3FY17 The services business (44% of revenue) may have constrained growth but the balance (56% of revenue) would grow fast. The IBM IoT business is likely to break even in FY18. Costs are fixed and hence may not increase in FY18. There are additional levers to reduce costs.
- 5. 22 July 2017 Persistent Systems – Revenues in-line, deferred wage hikes to help margins; Buy Anand Rathi Research 5 Factsheet Fig 9 – Revenue split (%) Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Effort-Led 71.8 72.2 71.6 72.4 72.8 IP-Led 28.2 27.8 28.4 27.6 27.2 Source: Company Fig 10 – Revenue-split, by region (%) Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 North America 87.0 85.4 86.6 86.5 85.5 Europe 5.2 6.1 5.3 5.3 5.9 Asia-Pacific 7.8 8.5 8.1 8.2 8.6 Source: Company Fig 11 – Revenue-split, by segment ($m) Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Services 49.9 49.0 48.3 47.9 50.3 Digital 15 16 19 21 20 Alliance 31.4 30.9 33.7 30.1 33.0 Accelerite 9 9 9 10 9 Source: Company Fig 12 – Client concentration (%) Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Top 1 29.0 28.4 29.5 26.5 27.9 Top 5 44.7 44.3 46.0 43.3 45.7 Top 10 52.7 52.8 54.6 52.4 55.2 Source: Company Fig 13 – Workforce (%) Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Employee Movement Technical(EOP) 8,698 8,612 8,562 8,808 8,744 Net Adds (Qtr) 80 -86 -50 246 -64 Net Adds (LTM) 888 707 228 190 46 Utilization % 75.3 74.2 78.9 77.8 77.2 Attrition % 16.7 15.9 15.8 15.7 15.5 Sales(EOP) 204 207 200 193 210 Net Adds (Qtr) 3 3 (7) (7) 17 Net Adds (LTM) (12) (1) (3) (8) 6 Source: Company
- 6. 22 July 2017 Persistent Systems – Revenues in-line, deferred wage hikes to help margins; Buy Anand Rathi Research 6 Fig 14 – Revenue-split, by delivery type and billing rates Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Delivery type (%) On-site 26.3 26.3 26.7 27.8 29.9 Offshore 45.5 45.5 44.9 44.6 42.9 Reported billing rates ($ /hr) On-site 82.6 86.1 84.0 85.1 85.8 Offshore 23.1 22.9 22.8 22.7 22.5 Source: Company Fig 15 – Key geographies and horizontals growth (%) (%) Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Horizontals growth (qoq) Services NA -1.7% -1.5% -0.9% 5.0% Digital NA 7.5% 16.3% 10.8% -1.3% Alliance NA -2% 9% -11% 10% Accelerite NA 8% 2% 11% -10% Key area-wise growth (yoy) North America 37.4 25.6 24.6 9.1 6.0 Europe 10.0 13.7 3.3 (14.1) 22.4 Asia-Pacific 11.8 54.0 18.3 23.6 18.9 Source: Company Fig 16 – Segment-wise growth (yoy) (%) Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Effort-Led 17.4 9.2 10.0 9.5 9.2 IP-Led 103.7 117.7 73.5 6.1 4.3 Source: Company
- 7. 22 July 2017 Persistent Systems – Revenues in-line, deferred wage hikes to help margins; Buy Anand Rathi Research 7 Valuations The stock trades at 12.8x FY19e EPS of `51.2. This, we reckon, is attractive, given that Persistent has a differentiated range of service offerings and is expected to grow at a faster-than-industry rate of ~10%, organically. With a strong balance sheet (cash balance: ~$140m) and cash-flow generation (CFO:NI ~90%), it is one of the best midcap IT stocks, which could command a higher multiple if growth accelerates. The company is likely to touch $536m in revenue by FY19, helping it morph into a reasonably large and differentiated IT-services company. Also, it has margin levers in the business, primarily the offshore mix and utilisation to absorb potential headwinds in margins. More than 50% of Persistent’s business is non-linear (or not dependent on T&M billing), giving it a potential margin upswing if the growth here turns out to be higher. Its reliance on one client is at present a high 28%, but that gives it a better positioning to grow faster by aligning its interests with its largest client. We value Persistent based on a target PE of 16x FY19e EPS, similar to Mindtree and Cyient. This reflects constrained profitability and the potential to grow faster than the industry. Fig 17 – Change in estimates FY18 FY19 New Old Chg % New Old Chg % Revenues ($m) 477 470 1.6 536 525 2.1 Revenues (`m) 30,783 31,335 (1.8) 34,575 35,001 (1.2) EBITDA (`m) 4,842 5,336 (9.3) 5,990 6,287 (4.7) EBITDA margin % 16% 17% (130) 17% 18% (64) EBIT (`m) 3,294 3,742 (12.0) 4,369 4,574 (4.5) EBIT margin % 10.7% 11.9% (124) 12.6% 13.1% (43) PBT 4,399 4,563 (3.6) 5,419 5,510 (1.7) Net profit 3,319 3,464 (4.2) 4,098 4,183 (2.0) Source: Anand Rathi Research Fig 18 – PE band Source: Bloomberg, Anand Rathi Research Risks Sharp rupee appreciation. 5 9 13 17 21 25 Sep-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 PSYS
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Important Disclosures on subject companies Rating and Target Price History (as of 21 July 2017) Persistent 10 7 1 2 3 4 5 6 8 9 400 500 600 700 800 900 1000 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Date Rating TP (`) Share Price (`) 1 30-Sep-14 Buy 975 693 2 05-Jan-15 Buy 1,000 932 3 28-Jan-15 Hold 975 902 4 09-Apr-15 Buy 930 780 5 24-Jun-15 Buy 860 647 6 08-Apr-16 Buy 950 727 7 26-Jul-16 Buy 900 664 8 25-Oct-16 Buy 875 662 9 21-Dec-16 Buy 840 609 10 25-Apr-17 Buy 800 568 Anand Rathi Ratings Definitions Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below: Ratings Guide (12 months) Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5% Research Disclaimer and Disclosure inter-alia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 Anand Rathi Share and Stock Brokers Ltd. 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