Set For Persistent Growth

Persistent Systems announced its Q3FY13 results on Jan 27, 2013. This result announcement was rather tepid and it resulted in a downward movement in stock prices of Persistent Systems on Monday, Jan 28, 2012 to the extent of 6.74%.

Their revenues grew sequentially by 1.17% to USD 60.75 million in Q3FY13. However, the EBITDA margins were heavily pressured. EBITDA declined sequentially by 7.43% to Rs 82.41 crore. Some major reasons for this decline were an increase in employee costs, sales and marketing costs and expansion of services and geographical presence. The net profit margin, however, grew by 10.89% to Rs 49.51 crore.

Revenues for Persistent are classified into onsite, offshore and IP led. Its strategy has led to the share of IP-led revenues to grow consistently and take up a larger chunk of the pie. However, due to the lumpy nature of this business, revenues are rather difficult to predict or be consistent. While IP-led revenues grew by 48.5% QoQ in Q2FY13, it declined by 2.58% in Q3FY13.

Persistent, for long, has been focussing on the areas of cloud, analytics, social and mobility areas for growth. These areas, which are now being termed as the growth drivers of the IT industry, contribute to 45% of its total revenues. This, combined with the IP-led approach had formed the basis of our recommendation of Persistent in our magazine, Dalal Street Investment Journal dated Nov 5 – 18, 2012 (Vol 27 Issue 24). Since the recommendation, the scrip has yielded returns of 8.86% (including Monday’s downfall).

We, regardless of this, continue to be bullish on the prospects of Persistent. It has, other than being focused at the right areas, been able to grow inorganically. In the quarter under review, Persistent acquired Doyenz rCloud service and Novaquest, a PLM (Product Lifecycle Management) and search-based solutions technology company. With this, Persistent’s focus and offerings would improve in the areas of cloud and collaboration. Moreover, it would also increase its customer base and allow cross-selling.

Although the result was moderate, the management is optimistic about the future. The order pipeline has been better than last year’s and the management believes that Persistent will beat NASSCOM’s guidance for FY13. Considering the above factors, we continue our bullish stance on Persistent.