Analyst Research Report Snapshot

Title:

Spark Capital: Persistent 2QFY14 result review - Strong Beat led by IP revenues; Retain Add

Price:

$46.00

Provider:

Spark Capital Advisors(India) Private Limited

Date:

22 Oct 2013

Pages:

6

Type:

AcrobatPDF

Companies referenced:

PERS.NS

Available for Immediate Download
Summary:

Strong Beat led by IP revenues; Retain Add Persistent (PSYS) reported strong 2QFY14 numbers. US$ revenues grew 8.6% qoq (vs. our estimate of 4.3% qoq) led by strong growth in IP revenues (38% qoq). IP grew with scale up of HPCA & Location IPs. Persistent won a major deal with a South African firm for Location IP, which started generating revenues this quarter. EBITDA margins improved 589 bps qoq with currency gains & operational efficiencies offsetting offshore wage hikes given. Management sounded upbeat on FY14E outlook led by improving deal pipeline in both traditional OPD and IP business. We believe IP would continue to outperform traditional business in the current year (growing 25% yoy) led by incremental revenue flow from HPCA & improved traction in the Location IP. OPD business would continue to be onsite driven as the composition of growth is moving towards higher professional services. Management also noted that they would reinvest benefits from rupee depreciation in driving higher revenue growth & targets EBITDA margin of 24-25% in the long term. Being in a sweet spot, PSYS provides an unique opportunity to play the macro tech spend in the areas of cloud, mobile, social and analytics. We upgrade the multiple to 10x from previous 9x, in line with other mid cap peers with improving revenue and EPS growth which would better return ratios in the coming years. Retain Add with increased target price of Rs.800. US$ revenue growth of 8.6% qoq: US$ revenues grew 8.6% qoq led by growth in IP (38% qoq). Traditional business grew 3.5% qoq. OPD business was driven by higher onsite volume growth of 7.6% while offsite volumes came around 2.6%. Top client grew 15.3% qoq and non Top 10 grew 8.8% qoq. The company added 36 new accounts and increased its footprint in Asia and EMEA markets. EBITDA Margins at 25.6% : EBITDA margins improved 589 bps sequentially led by currency benefits (270 bps) & operational efficiencies (~600 bps) offsetting offshore wage hikes (310 bps). Management reiterated that it would continue to invest rupee gains to drive growth by improving front end capabilities & employee (technical) hiring. For FY14E, we have modeled EBITDA margins of 23% vs. 25% in FY13. Retain Add: Being in a sweet spot, PSYS provides an unique opportunity to play the macro tech spend in the areas of cloud, mobile, social and analytics. We upgrade the multiple to 10x from previous 9x, in line with other mid cap peers with improving revenue and EPS growth which would better return ratios in the coming years. Retain Add with TP of Rs.800, arrived by attaching 10x to our Sept-15 EPS

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