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Company Overview:

Established in 1990, Persistent Systems (BSE & NSE: PERSISTENT) is a global company specializing in software product development services.  For more than two decades, Persistent has been an innovation partner for the world's largest technology brands, leading enterprises and pioneering start-ups. With a global team of 6,600+ employees, Persistent has 350+ customers spread across North America, Europe, and Asia. Today, Persistent focuses on developing best-in-class solutions in four key next-generation technology areas: Cloud Computing, Mobility, BI & Analytics, Collaboration across technology, telecommunications, life sciences, consumer packaged goods, banking & financial services and healthcare verticals.

Business Growth Outlook

The PSL management expects Q4FY2017 to be strong, as it has acquired new logos for its digital business. Further, the recent partnership with Dell Boomi will drive its digital business going ahead.  The company has successfully completed the transition of the IBM IOT business and could be able to take the entire team into its Board. The management foresees traction in this IBM CE/CLM product and expects a strong growth in FY2018; for the nine months ended December 31, 2016, the partnership has fallen short of its revenue target of $50 million (contributed $48 million; the management expects some contribution to come by the end of FY2017).  Digital, Alliance and Accelerite will continue to deliver sustainable growth in the coming years. The management stated that the Services segment (43.9% of total revenue in Q3FY2017) has bottomed out and believes this business may do well in the coming quarters (for Q4FY2017, the management has indicated it could trim some tail-end clients).

Key Points:

Persistent Systems (PSL) delivered better-than-expected revenue growth of 3.6% QoQ at $113 million during Q1FY2018, led by a 2.4% QoQ growth in IP-led revenue and a 3.6% QoQ growth (1.8% QoQ growth in volume and 2.2% QoQ increase in realisations) in IT Services. However, the company delivered lower-than-expected EBITDA margin at 14.3% (down 357BPS QoQ), due to the appreciation of the rupee (120BPS), higher onsite revenue mix, investments in partnerships (90BPS), lower offshore utilisations (40BPS), visa and acquisition expenses (70BPS), investments in sales team (30BPS) and provision of debts (40BPS), partially offset by higher revenue from IP-Led business. Forex gains increased to Rs 18.5 crore (vs negative Rs 2.8 crore in Q4FY2017), resulting in a 3.2% QoQ growth in the adjusted net profit at Rs75.1 crore.

Revenue drivers are intact, but margins to improve gradually:

The management remains optimistic on the prospects of acceleration of its revenue growth going ahead. This is on the back of strong traction in the IOT business, a healthy pipeline of deals in the digital space, deal closures of the reseller contract for IBM IOT solutions, good response for its IP products and strengthening of partnerships with USAA and Partners Healthcare for digital offerings. Further, the company has closed three deals (one deal in India for the legislative assembly of the State of Madhya Pradesh and two deals in USA) in the Service vertical, which is expected to sustain the growth momentum. The management believes that the traction in growth in the service segment will be mainly on account of its strong focus on large and strategic accounts as well as higher adoption of digital technologies in the Enterprise. On margin front, It expects improvement from Q2FY18 onwards despite high investments in sales team, higher onsite mix and developing global delivery centres. The management highlighted the key levers for the margins improvement are (1) higher revenue from IP-Led business, (2) improvement in profitability in IBM Watson, (3) cost control measures.

Acquisition of PARX to strengthen its presence in Europe:

PSL has agreed to acquire ParxWerk AG to strengthen its presence in the European region (5.9% of total revenue as of June 30, 2017) as part of its global expansion strategies. PSL will initially pay CHF 8.5 million (~Rs 58 crore) and will pay an additional CHF 7.5 million (Rs 51 crore) over three years depending on performance. PARX reported revenue of CHF 8 million (~Rs 54 crore) for CY2016. As Parx is a certified partner of Salesforce, we believe this acquisition would provide opportunities to PSL to cross-sell its products.

Outlook and valuation:

We have tweaked estimates for FY2018/FY2019 due to below-than-expected Q1FY18 margin performance and higher onsite mix. We believe there could be pressure to profitability in near-term owing to currency headwinds, shifting from effort-based business model and macro uncertainties. In long term, however, we continue to remain positive on PSL, as the company has been continuously focusing on strengthening its digital capabilities to remain relevant to customers in the ongoing IT industry transition. PSL’s stock price has already gained close to 16% in last three months, we do not see major upside from current levels owing to weak margin performance. Hence, we downgrade our rating on PSL from ‘Buy’ and ‘Hold’ with a target of Rs700.


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Indian Indices: Indian equity benchmarks came off day’s highs but trade continued on strong note in late afternoon session with gains of half a per cent each. Buying in Utilities, Banking and FMCG stocks aided the markets, while the broader indices failed to hold the rally and slipped into negative territory.

 Traders took some support with the private report that the Reserve Bank is expected to go for a 25 basis points (bps) repo rate cut in its policy review meet on August 2 as inflation is likely to have reached a new normal of 4 percent. Banking shares were trading higher despite Moody’s latest report that India's banking system remain most vulnerable among South and Southeast Asia, revising the outlook on several Indian banks to stable or negative from positive. 

However, some profit booking ahead of the derivatives expiry of the July series pared some gains.Moody’s also signalled lowered government support to some extent as it appeared reluctant to increase capital injections into the PSU banks, despite the limited ability of these to access equity markets for the much-needed capital. Indian PSBs have experienced significant asset quality problems and capital shortages over the last three years.

The BSE Sensex is currently trading at 32543.19, up by 160.73 points or 0.50% after trading in a range of 32473.12 and 32672.66. There were 12 stocks advancing against 19 stocks declining on the index.The broader indices were trading in red; the BSE Mid cap index was down by 0.22%, while Small cap index was down by 0.46%.

The CNX Nifty is currently trading at 10074.50, up by 53.85 points or 0.54% after trading in a range of 10052.35 and 10114.85. There were 23 stocks advancing against 28 stocks declining on the index.




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Crporate Front: Battery manufacturer Exide Industries today reported a 3.59 per cent decline in net profit at Rs 189 crore for the quarter ended June. It had posted a net profit of Rs 196.05 crore in the corresponding period a year ago, the company said in a filing to the Bombay Stock Exchange. Total income grew by 4.80 per cent to Rs 2,389.57 crore during the quarter under review as against Rs 2,279.93 crore in the year-ago period, Exide Industries said in a BSE filing.


Macroeconomic front: An official release said that JDI was concluded on May 30 in Berlin during the fourth Inter-Governmental Consultations between India and Germany between Prime Minister Modi and German Chancellor Angela Merkel to to promote cooperation between German and Indian scientists on fundamental and applied scientific research. It includes areas such as policy support, teaching, training and dissemination of information in the area of sustainable development and climate change through inter-disciplinary/trans-disciplinary research.


On the global front: On the global front, European Markets were trading mixed after the US Federal Reserve kept interest rates unchanged and investors reacted to a slew of earnings reports. Asian markets were trading in green. Back home, in scrip specific development, Tamil Nadu Newsprint & Papers (TNPL) was trading jubilantly after the company resumed normal production / operation in the plant from July 27, 2017, pursuant to availability of water.

Commodity Updates:

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Top Sectoral& Stock Screening:The top gaining sectoral indices on the BSE were Bankex up by 1.10%, Utilities up by 0.28%, FMCG up by 0.27%, Oil & Gas up by 0.06%, and PSU up by 0.02%, while Telecom down by 2.03%, TECK down by 1.15%, IT down by 1.10%, Consumer Durables down by 0.96% and Metal down by 0.73% were the top losing indices on BSE.

Top Nifty Movers:The top gainers on Nifty were HDFC up by 6.11%, Yes Bank up by 4.48%, HDFC Bank up by 2.45%, Indusind Bank up by 2.39% and ACC up by 2.15%. On the flip side, BhartiAirtel down by 3.18%, Tata Motors - DVR down by 2.59%, TCS down by 2.29%, Tech Mahindra down by 2.03% and Tata Motors down by 1.80% were the top losers.


Global Signals:

All Asian markets were trading in green; Shanghai Composite increased 2.11 points or 0.06% to 3,249.78, FTSE Bursa Malaysia KLCI increased 3.27 points or 0.19% to 1,769.27, KOSPI Index increased 8.73 points or 0.36% to 2,443.24, Jakarta Composite increased 9.81 points or 0.17% to 5,810.02, Nikkei 225 increased 29.48 points or 0.15% to 20,079.64, Taiwan Weighted increased 89.26 points or 0.86% to 10,508.37 and Hang Seng increased 190.15 points or 0.71% to 27,131.17.

European markets were trading mixed; France’s CAC increased 17.65 points or 0.34% to 5,207.82. On the flip side, Germany’s DAX decreased 45.88 points or 0.37% to 12,259.23 and UK’s FTSE 100 decreased 1.13 points or 0.02% to 7,451.19.



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