MOSL: PERSISTENT SYSTEMS (Buy) -Significant operating beat led by IP revenues - guidance of a stronger 2H
Motilal Oswal Securities Ltd.
22 Oct 2013
Available for Immediate Download
Persistent Systems (PSYS IN, Mkt Cap USD0.5b, CMP INR739, Buy) Ashish Chopra (Ashish.Chopra@MotilalOswal.com) / Siddharth Vora (Siddharth.Vora@MotilalOswal.com) Persistent Systems’ (PSYS) 2QFY14 revenue at USD68.45m grew 8.6% QoQ, above our estimate of USD66.5m (+5.5% QoQ). EBITDA margin during the quarter was up +480bp QoQ to 26%, v/s our estimate of 22.4%. Better-than-expected growth in IP-led revenue drove beat in EBITDA. PAT grew 6.5% QoQ to INR608m (significant beat to our estimate of INR488.6m) and was lower despite significant beat in revenue and margins, due to a forex loss of INR100m, compared to a gain of INR183.5m in the last quarter. Growth in Product Engineering and Platform was 3.5% QoQ to USD55.38m, in line with our estimate of USD55.65m. Beat in overall revenues was driven by IP-led revenue, which grew 37.4% QoQ to USD13.1m, well above our estimate of USD10.8m. HPCA contributed ~USD1m to revenue and the remaining growth was organic, led by location-based IP. Company’s guidance of sustaining 24-25% EBITDA margin over the longer term is a positive. Also, growth in IP-led segment should continue to remain strong as:  full quarter revenue from HPCA kicks in,  the location-based deal signed in South Africa ramps up and  4QFY14 will be a seasonally strong one for the segment for royalty revenue from top clients. We upgrade USD revenue estimates for FY14E/FY15E by 1.1%/1.4%, following a strong performance in 2QFY14 and healthy outlook for the remainder of the year. Our EBITDA margin estimates for FY14E/FY15E are revised upwards by 110bp/180bp. Thus, our EPS is raised by 6.4%/10.8% for FY14E/FY15E to INR61.3/74. We believe PSYS is one of the few choices in tier-II IT space, with the potential to grow revenue in the range of or above 20%, given its focus on the fast-growing SMAC business, multi-year relationships with marquee clientele in the Infrastructure vertical and unlikely obsolescence in the space where it operates. We expect PSYS to post USD revenue at a CAGR of 18% over FY13-15E and EPS at a CAGR of 25.6% during the period. Our target price of INR820 discounts FY15E EPS by 11x. Maintain Buy.