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Finquest Sec. - Persistent Systems - Result Q3FY13 Feb-14-2013




Finquest Securities Pvt Ltd


14 Feb 2013





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Even though IP revenue declined in Q3FY13, this performance came after an exceptional IP revenue growth in Q2 (49% Q-o-Q).We believe the nature of IP revenue is lumpy and some volatility is bound be there which should not be construed as a major negative. While there was an EBITDA margin contraction during the quarter it partly due to higher investments in its sales force. The higher investments should be seen from a positive frame as management wants to cash in on the increasing spending in FY14.Managment's indication of a 50% higher deal pipeline in CY13 is a major confidence booster from the visibility point of view. The margin contraction in Q3FY13 has made us revise our margin expectations downwards for Q4FY13 and FY14E at 25.1% & 25.8% respectively from ~27% levels earlier while we have also revised our FY13E/FY14E EPS estimates to Rs 47/58 down from our earlier Rs 51/65. PSL is a mid-cap IT company having one of the best EBITDA margins amongst its peer set which is also comparable to some large Indian IT companies. On the other hand PSL has also delivered an earnings CAGR of ~23% over the past 3 years. Due to these reasons we believe PSL should command better valuations compared to other mid-cap IT companies. We reiterate our Buy rating on the stock and value the company at a slight premium compared to other midcap IT companies at 11x FY14 earnings arriving at a target price of Rs 638.

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