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Analyst Research Report Snapshot


MOSL: PERSISTENT (Buy) - Significant profit beat led by above-estimate margins - Upgrading EPS by 6-7.5%




Motilal Oswal Securities Ltd.


28 Jan 2014





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Persistent Systems (PSYS IN, Mkt Cap USD0.5b, CMP INR994, Buy) Ashish Chopra (Ashish.Chopra@MotilalOswal.com) / Siddharth Vora (Siddharth.Vora@MotilalOswal.com) PSYS 3QFY14 revenue was USD69.9m (up 2.2% QoQ) and marginally below our estimate of USD70.66m. Key positive surprise was the EBITDA margin of 27.7% (+170bp QoQ), 320bp beat to our estimate of 24.5%, led by higher utilization and lower SGA. PAT at INR642m grew 5.6% QoQ and was significantly above our estimate of INR523m, led by higher operating profit and lower tax rate of 25.8% (v/s est. of 29.5%). Linear revenue grew 3.8% QoQ to USD57.5m, in line with our estimate, and IP-led revenue declined 4.8% QoQ to USD12.4m v/s our estimate of marginal sequential increase to USD13.2m (+0.7% QoQ). While HPCA gained momentum and location-based IP revenue was stable, royalty revenue from a top client saw seasonal decline during the quarter, thus dragging IP-led segment. S&M will increase going forward and should sustain in 8.5-9% range (v/s 8.1% in 3QFY13). G&A declined 40bp QoQ to 7.9% (v/s est. of 8.5%) due to lower bad debt provision and CSR expenses during the quarter (2Q sees a seasonally higher CSR spend). Stable G&A levels should be ~7.5-8%. Our EBITDA margin estimates for FY15E/16E are higher by 210bp/180bp and we model ~26% EBITDA margin during FY15E-16E. While the current quarters margin at 27.7% is much higher, we expect SGA levels to increase, going forward. The key driver for our margin upgrade is outperformance despite a decline in IP-led revenue (4.8% QoQ v/s our est. of flattish IP-led revenue) and multiple levers to expand margins going forward (utilization, IP-led revenue and pricing). We believe PSYS is among the few companies in tier-II IT space with the potential to grow revenue by ~20%, given its focus on the fast-growing SMAC business, multi-year relationships with marquee ISV clientele and unlikely obsolescence in the space over the medium-to-long term. Our target price of INR1,150 discounts FY16E earnings by 12x. Maintain Buy.

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