ANALYST MEET UPDATE

7 DEC 2015

Persistent Systems
NOT RATED
INDUSTRY

IT

CMP (as on 7 Dec 2015)

Rs 680

Target Price

N.A.

Nifty

7,765

Sensex

25.530

KEY STOCK DATA

Bloomberg

PSYS IN

No. of Shares (mn)

80

MCap (Rs bn) / ($ mn)

54/815

6m avg traded value (Rs mn)

89

STOCK PERFORMANCE (%)

52 Week high / low

Rs 957/574

3M

6M

12M

Absolute (%)

(0.9)

(9.4)

(15.1)

Relative (%)

(3.4)

(4.8)

(4.8)

SHAREHOLDING PATTERN (%)

Promoters

38.53

FIs & Local MFs

11.75

FIIs

16.61

Public & Others

33.11

Source : BSE

Harit Shah
haritj.shah@hdfcsec.com
+91-22-6171-7325
Amit Chandra
amit.chandra@hdfcsec.com
+91-22-6171-7345

A transformational differentiator
At Persistent Systems investor day meet, project
demos across initiatives such as digital banking, Agile
and health care exhibited the companys capabilities.
These boost our confidence that Persistent is
focusing on a niche business that will drive nonlinearity.
We acknowledge issues in the OPD business (~57% of
revenue), which is facing headwinds because of
scaling down of legacy products by customers (precloud era companies like Microsoft). When these
ISVs invest in cloud products, Persistent will benefit
given its long-term relationships (15-20 years with
IBM and Microsoft). Product R&D spends by ISVs are
likely to touch US$ 79bn by 2020 (US$ 54bn in 2015).

EDT a substantial market: Persistents key

differentiator is its focus on EDT. Clients are

increasingly focusing on growth through
leveraging technology, and are becoming
software-driven. Thus, EDT is irreversible and will
continue to play out over the next several years.
EDT is a US$ 400bn market and with Persistents
inherent strength, we believe the company is wellpositioned to ride the wave.

Fundamental shift in business model: With its

focus on enterprise software, we believe
Persistent will see a fundamental shift in its
revenue composition, with enterprise likely to
contribute 35% of revenue in 2-3 years (~27%
now). The addressable market is considerably
larger and solutions are vertical-agnostic. We
believe these factors will enable the company to
boost the revenue growth trajectory (likely to be
in single digits for FY16).

Persistent stands apart with its focus on enterprise

digital transformation (EDT), plus the verticalagnostic nature of its solutions, thereby opening up a
US$ 400bn market. Its focus on building IP adds an
element of non-linearity Persistent having
acquired four companies in FY16 expanding its
service offerings and increasing addressable market.

Financial Summary (Consolidated)

We believe Persistent is positioned well, with its EDT

focus, co-selling with customers and IP business
lending an element of non-linearity. While the OPD
business is going through an air pocket, we believe
the company is well-placed to leverage its ISV clients
spending on cloud products. We expect 15% EPS
CAGR over FY16E-18E. We arrive at a fair value of Rs
725, implying 17x 1-year rolling forward EPS.

Source: Company, HDFC sec Inst Research

Y/E March (Rsmn) FY14 FY15 FY16E FY17E FY18E

Net Sales
16,692 18,913 21,536 24,211 27,162
EBITDA
3,866 3,871 4,019 4,557 5,243
APAT
2,493 2,906 2,846 3,248 3,763
Diluted EPS (Rs)
31.2
36.3
35.6
40.6
47.0
P/E (x)
21.8
18.7
19.1
16.7
14.4
EV / EBITDA (x)
12.4
12.4
11.6
9.9
8.3
RoE (%)
22%
21%
18%
18%
19%

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

PERSISTENT SYSTEMS : ANALYST MEET UPDATE

Persistent Systems: Key Facts

Revenue (USD mn)
Growth QoQ
Revenue Rs mn
Growth QoQ
EBITDA (Rs mn)
EBITDA Margin
PAT (Rs mn)
PAT Margin
Vertical Revenue Mix %
Telecom
Infrastructure & Systems
Life Sciences
Financial Services*
Business Practice Mix %
ISV
Enterprise
IP driven
Onsite Revenue %
Offshore Revenue %
Geographic Revenue Mix %
North Americas
Europe
RoW
Client Buckets
Large > US$ 3mn
Medium US$ 1-3mn
Client Concentration %
Top 1
Top 5
Top 10
No of Employees
Blended Utilization %
Attrition Rate %
Volume growth Services %
Volume growth IP-Led %

1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16
63.0
68.5
69.9
72.6
72.7
76.3
79.5
80.0
78.6
83.0
1.5%
8.6%
2.2%
3.9%
0.0%
5.0%
4.2%
0.6% (1.8%)
5.5%
3,573
4,324
4,328
4,467
4,350
4,642
4,946
4,975
5,004
5,427
7.0%
21.0%
0.1%
3.2%
(2.6)
6.7%
6.6%
0.6%
0.6%
8.5%
704
1,008
1,043
1,111
912
962
995
1,002
969
1,018
19.7%
23.3%
24.1%
24.9%
21.0%
20.7%
20.1%
20.2%
19.4%
18.7%
571
608
642
672
688
713
745
760
672
718
16.0%
14.1%
14.8%
15.0%
15.8%
15.4%
15.1%
15.3%
13.4%
13.2%
20.7%
69.1%
10.2%
0.0%

17.6%
69.2%
13.2%
0.0%

18.0%
68.9%
13.1%
0.0%

15.3%
71.6%
13.1%
0.0%

18.5%
54.6%
13.1%
13.8%

16.7%
56.0%
13.4%
13.9%

16.3%
54.5%
14.3%
14.9%

16.3%
54.5%
14.3%
14.9%

14.9%
54.2%
14.3%
16.6%

13.2%
54.7%
14.4%
17.7%

84.9%
0.0%
15.1%
21.2%
63.7%

80.9%
0.0%
19.1%
20.6%
60.3%

52.2%
0.0%
17.8%
20.5%
61.7%

80.4%
0.0%
19.6%
21.4%
59.0%

60.3%
19.7%
20.0%
23.1%
56.9%

58.3%
22.1%
19.6%
24.5%
55.9%

57.9%
23.1%
19.0%
25.1%
55.9%

57.8%
24.1%
18.1%
26.2%
55.7%

57.0%
24.6%
18.4%
26.8%
54.8%

57.2%
26.6%
16.2%
29.5%
54.3%

87.6%
4.8%
7.6%

84.6%
4.4%
11.0%

83.1%
6.0%
10.9%

85.4%
6.1%
8.5%

85.9%
6.5%
7.6%

86.1%
6.3%
7.6%

84.7%
7.1%
8.2%

85.4%
6.8%
7.8%

84.4%
6.3%
9.3%

86.2%
6.8%
7.0%

15
30

16
32

16
34

15
36

14
38

14
41

14
41

14
48

15
52

17
46

21.2%
36.4%
47.3%

22.5%
37.7%
47.2%

19.8%
36.9%
46.9%

21.1%
39.4%
48.5%

20.8%
38.7%
49.0%

19.0%
36.1%
45.0%

17.5%
35.0%
44.2%

16.5%
34.1%
43.2%

18.1%
36.0%
45.6%

17.6%
35.4%
44.7%

7,144
70.0%
14.2%
3.0%
3.0%

7,457
71.7%
14.0%
3.1%
-5.4%

7,602
72.9%
13.2%
3.4%
2.3%

7,857
69.2%
13.4%
-1.1%
3.7%

7,876
67.7%
14.0%
-2.3%
3.2%

8,067
70.3%
14.1%
3.0%
3.2%

8,296
74.3%
14.7%
5.9%
5.0%

8,506
74.7%
15.5%
0.7%
2.0%

8,454
72.9%
16.4%
-2.0%
7.8%

8,545
76.1%
17.1%
3.9%
4.9%

Source: Company, HDFC sec Inst Research

Page | 2

PERSISTENT SYSTEMS : ANALYST MEET UPDATE

Recent Acquisition details

Year
FY13
FY14
FY16
FY16
FY16
FY16

Company
Doyenz (rCloud)
Radia
Convirture
Rgen Solutions
Aepona
Akumina

Comments
Cloud disaster recovery platform, bought from IBM
Client automation platform, bought from HP
Cloud workload management software
Microsoft technology stack expertise
Cloud network solutions
Digital content management

Source: Company, HDFC sec Inst Research

The OPD business is

Persistents Achilles Heel,
slowing down the companys
overall revenue growth

USD Revenue, Growth: Some Inconsistency Owing To OPD Business

(US$ mn)

Revenue (US$ million)

90

QoQ growth (RHS)

(%, QoQ)
15

Air pocket owing to OPD headwinds

72

11

54

36

18

(1)

(5)
2QFY13

4QFY13

2QFY14

4QFY14

2QFY15

4QFY15

2QFY16

Source: Company, HDFC sec Inst Research

Page | 3

PERSISTENT SYSTEMS : ANALYST MEET UPDATE

Vertical Split: Financial Services Outperform

Financial Services

ISV

IP driven

Enterprise

100%

13.8

13.9

14.9

14.9

16.6

17.7

13.1

13.4

14.3

14.3

14.3

14.4

54.6

56.0

54.5

54.5

54.2

54.7

20.0

19.6

19.0

18.1

18.4

16.2

22.0

22.1

23.1

24.1

24.6

26.6

58.0

58.3

57.9

57.8

57.0

57.2

3QFY15

80%

Infrastructure & Systems

Life Sciences

2QFY15

100%

Telecom

1QFY15

Financial services have been

the best performer in terms of
growth among verticals, led
by strong digital adoption

Practice Mix: Enterprise Drives Growth, ISV A Laggard

80%
60%

60%

20%
14.9

13.2

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

0%

Source: Company, HDFC sec Inst Research

Source: Company, HDFC sec Inst Research

Geo Mix: The US Is The Biggest Market

Client Concentration
Top 1

RoW

2QFY16

1QFY16

4QFY15

3QFY15

2QFY15

1QFY15

4QFY14

3QFY14

2QFY14

1QFY14

2QFY13

2QFY16

1QFY16

0%

4QFY15

0%

3QFY15

20%

2QFY15

20%

1QFY15

40%

4QFY14

40%

3QFY14

60%

2QFY14

60%

1QFY14

80%

4QFY13

80%

Source: Company, HDFC sec Inst Research

Top 10

Top 5

100%

4QFY13

100%

Europe

3QFY13

North Americas

2QFY16

16.3

1QFY16

16.3

3QFY13

Client concentration remains

high, with Persistents largest
client contributing close to
18% of revenue

16.7

2QFY13

The US remains Persistents

key geography

18.5
1QFY15

20%
0%

40%

4QFY15

40%

Source: Company, HDFC sec Inst Research

Page | 4

PERSISTENT SYSTEMS : ANALYST MEET UPDATE

8,545

8,296

8,067

7,876

7,857

7,602

7,457

7,144

6,970

6,719

10.0

10
8
6.2
4.7

3.1

Source: Company, HDFC sec Inst Research

Source: Company, HDFC sec Inst Research

Onsite Billing Rates

Offshore Billing Rates

QoQ growth (RHS)

QoQ growth (RHS)

4,251

4,271

(%, QoQ)

(US$ mn)

4,219

15,075

15,321

14,862

14,864

14,905

15,159

(%, QoQ)

(US$/person-month)
16,000

Offshore

4,241

Onsite

FY15

FY14

FY13

FY12

2QFY16

1QFY16

4QFY15

3QFY15

2QFY15

1QFY15

4QFY14

3QFY14

2QFY14

1QFY14

4QFY13

4,032

4,146

4,199

4,201

15
11
7

2QFY16

1QFY16

4QFY15

3QFY15

2QFY15

1QFY15

4QFY14

3QFY14

2QFY14

1QFY14

4QFY13

3QFY13

3,978
2QFY13

4QFY14

3QFY14

2QFY14

1QFY14

4QFY13

12,772
3QFY13

12,863

Source: Company, HDFC sec Inst Research

4,179

(5)

4,111

3,800

4,109

(5)

4,143

11,000

2QFY16

(1)

1QFY16

3,900

4QFY15

(1)

3QFY15

12,000

2QFY15

4,000

1QFY15

13,000

14,355

4,100

14,510

14,000

14,283

4,200

14,567

4,300

11

15,000

14,014

15

2QFY13

Billing rates witness a strong

long-term trend, signifying
the higher-end and core
nature of Persistents work
with its clients

(Rs)

3QFY13

9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0

2QFY13

Dividend per share sees a

consistent uptick, signifying
good cash generation

6,370

(Nos.)

8,454

Dividend Per Share

8,506

Employee Headcount

Source: Company, HDFC sec Inst Research

Page | 5

PERSISTENT SYSTEMS : ANALYST MEET UPDATE

Utilisation: On the Up

EBITDA, EBIT, PAT Margin Trend

EBITDA Margin%

68%

76.1%
72.9%

70.3%

71%

EBIT Margin %

17.1%
2QFY16

1QFY16

4QFY15

PAT Margin %

25%
22%
19%

67.7%

69.2%

72.9%

16%
13%

Source: Company, HDFC sec Inst Research

2QFY16

1QFY16

4QFY15

3QFY15

2QFY15

1QFY15

4QFY14

3QFY14

2QFY14

1QFY14

4QFY13

10%

3QFY13

2QFY16

1QFY16

4QFY15

3QFY15

2QFY15

1QFY15

4QFY14

3QFY14

65%

2QFY13

74%

74.3%

77%

74.7%

80%

15.5%

16.4%

Source: Company, HDFC sec Inst Research

14.7%

14.1%
2QFY15

Source: Company, HDFC sec Inst Research

3QFY15

14.0%
1QFY15

13.4%
4QFY14

13.2%
3QFY14

14.0%
2QFY14

14.2%
1QFY14

2QFY13

2QFY16

1QFY16

4QFY15

3QFY15

2QFY15

1QFY15

4QFY14

13%

3QFY14

0%

2QFY14

14%

1QFY14

20%

4QFY13

15%

3QFY13

40%

2QFY13

16%

71.7%

Margin trend is clearly down,

owing to acquisitions, higher
onsite business share and
business investments

60%

2QFY14

Steady uptick in utilisation,

providing a buffer to the
margin profile

17%

80%

14.4%

Attrition has seen a worrying

spike, which we believe needs
to be addressed

18%

4QFY13

100%

16.0%

Onsite proportion sees a

consistent uptick, owing to
acquisitions and onsite-heavy
nature of digital work. This
has led to margin pressures
over the past few quarters

IP-Led %

3QFY13

Offshore %

Onsite %

Attrition: Worrying Increase

16.9%

Onsite, Offshore, IP Break-up: Onsite On The Rise

Source: Company, HDFC sec Inst Research

Page | 6

PERSISTENT SYSTEMS : ANALYST MEET UPDATE

Income Statement (Consolidated)

Year ending March (Rs mn)
Net Revenues
Growth (%)
Personal Expenses
SG&A Expenses
EBITDA
EBITDA Margin (%)
EBITDA Growth (%)
Depreciation
EBIT
Other Income (Including EO Items)
Interest
PBT
Tax (Incl Deferred)
RPAT
APAT
APAT Growth (%)
Adjusted EPS (Rs)
EPS Growth (%)
Source: Company, HDFC sec Inst Research

FY14
16,692
28.9%
9,995
2,830
3,866
23.2%
-1.3%
1,026
2,840
587
1
3,427
934
2,493
2,493
32.9%
31.2
32.9%

Balance Sheet (Consolidated)

FY15 FY16E FY17E FY18E
18,913 21,536 24,211 27,162
13.3% 13.9% 12.4% 12.2%
12,203 14,235 15,902 17,709
2,838 3,282 3,753 4,210
3,871 4,019 4,557 5,243
20.5% 18.7% 18.8% 19.3%
-11.6% -8.8%
0.9%
2.6%
939
985 1,164 1,277
2,933 3,034 3,393 3,966
970
825
968 1,086
3
1
2
2
3,900 3,857 4,359 5,051
993 1,011 1,112 1,288
2,906 2,846 3,248 3,763
2,906 2,846 3,248 3,763
16.6% -2.1% 14.1% 15.9%
36.3
35.6
40.6
47.0
16.6% -2.1% 14.1% 15.9%

Year ending March (Rs mn)

SOURCES OF FUNDS
Share Capital - Equity
Reserves
Total Shareholders Funds
Total Debt
Net Deferred Taxes
Long-term Provisions & Others
TOTAL SOURCES OF FUNDS
APPLICATION OF FUNDS
Net Block
CWIP
Goodwill
Investments
LT Loans & Advances
Total Non-current Assets
Debtors
Other Current Assets
Cash & Equivalents
Total Current Assets
Creditors
Other Current Liabilities & Provns
Total Current Liabilities
Net Current Assets
TOTAL APPLICATION OF FUNDS

FY14

FY15

FY16E

FY17E

FY18E

400
11,823
12,223
32
1
394
12,650

800
13,255
14,055
25
3
117
14,200

800
15,175
15,975
25
3
117
16,120

800
17,366
18,166
25
3
117
18,311

800
19,905
20,705
25
3
117
20,850

4,054
307
23
823
858
6,066
3,028
1,312
5,028
9,368
434
2,351
2,785
6,584
12,650

4,053
40
24
2,116
443
6,675
3,586
1,452
6,036
11,074
529
3,020
3,549
7,525
14,200

4,567
40
24
2,116
443
7,190
4,130
1,551
7,105
12,786
672
3,183
3,855
8,930
16,120

4,903
40
24
2,116
443
7,525
4,643
1,743
8,614
15,001
754
3,461
4,215
10,786
18,311

5,126
40
24
2,116
443
7,748
5,209
1,956
10,657
17,822
841
3,880
4,720
13,102
20,850

Source: Company, HDFC sec Inst Research

Page | 7

PERSISTENT SYSTEMS : ANALYST MEET UPDATE

Cash Flow (Consolidated)

Year ending March (Rs mn)
Reported PBT
Non-operating & EO items
Interest expenses
Depreciation
Working Capital Change
Tax Paid
OPERATING CASH FLOW ( a )
Capex
Free cash flow (FCF)
Investments
Non-operating Income
INVESTING CASH FLOW ( b )
Debt Issuance/(Repaid)
Interest Expenses
FCFE
Share Capital Issuance
Dividend
FINANCING CASH FLOW ( c )
NET CASH FLOW (a+b+c)
EO Items, Others
Closing Cash & Equivalents
Source: Company, HDFC sec Inst Research

Key Ratios (Consolidated)

FY14
3,427
(587)
1
1,026
(158)
(934)
2,774
(704)
2,069
(650)
587
(768)
18
(1)
2,087
0
(558)
(541)
1,465
(115)
5,028

FY15 FY16E FY17E FY18E

3,900 3,857 4,359 5,051
(970)
(825)
(968) (1,086)
3
1
2
2
939
985 1,164 1,277
67
(336)
(346)
(273)
(993) (1,011) (1,112) (1,288)
2,944 2,671 3,099 3,682
(594) (1,500) (1,500) (1,500)
2,351 1,171 1,599 2,182
(1,292)
0
0
0
970
825
968 1,086
(916)
(675)
(532)
(414)
(7)
0
0
0
(3)
(1)
(2)
(2)
2,340 1,170 1,598 2,181
400
0
0
0
(930)
(926) (1,057) (1,224)
(540)
(927) (1,058) (1,226)
1,488 1,069 1,510 2,043
(480)
(0)
0
0
6,036 7,105 8,614 10,657

PROFITABILITY (%)
GPM
EBITDA Margin
APAT Margin
RoE
RoIC (or Core RoCE)
RoCE
EFFICIENCY
Tax Rate (%)
Fixed Asset Turnover (x)
Debtors (days)
Payables (days)
Cash Conversion Cycle (days)
Debt/EBITDA (x)
Net D/E (x)
Interest Coverage (x)
PER SHARE DATA (Rs)
EPS
CEPS
Dividend
Book Value
VALUATION
P/E (x)
P/BV (x)
EV/EBITDA (x)
EV/Revenues (x)
OCF/EV (%)
FCF/EV (%)
FCFE/Mkt Cap (%)
Dividend Yield (%)

FY14

FY15

FY16E

FY17E

FY18E

40.1%
23.2%
14.9%
21.7%
20.7%
17.7%

35.5%
20.5%
15.4%
21.4%
19.3%
17.5%

33.9%
18.7%
13.2%
18.4%
18.1%
15.1%

34.3%
18.8%
13.4%
18.5%
18.9%
15.3%

34.8%
19.3%
13.9%
18.8%
20.6%
15.7%

27.3%
2.0
66
12
54
0.0
(0.4)
7294

25.5%
2.0
69
13
56
0.0
(0.4)
1149

26.2%
2.0
70
14
56
0.0
(0.4)
3089

25.5%
2.0
70
14
56
0.0
(0.5)
2955

25.5%
2.0
70
14
56
0.0
(0.5)
3400

31.2
44.0
7
153

36.3
48.1
12
176

35.6
47.9
12
200

40.6
55.1
13
227

47.0
63.0
15
259

21.8
4.4
12.4
2.9
5.8%
4.3%
3.9%
0.9%

18.7
3.9
12.4
2.5
6.1%
4.9%
4.3%
1.5%

19.1
3.4
11.6
2.2
5.7%
2.5%
2.2%
1.5%

16.7
3.0
9.9
1.9
6.8%
3.5%
3.0%
1.7%

14.4
2.6
8.3
1.6
8.5%
5.0%
4.0%
2.0%

Source: Company, HDFC sec Inst Research

Page | 8

PERSISTENT SYSTEMS : ANALYST MEET UPDATE

1YR PRICE MOVEMENT

1,000
950
900
850
800
750
700
650
600
550

Dec-15

Nov-15

Oct-15

Sep-15

Aug-15

Jul-15

Jun-15

May-15

Apr-15

Mar-15

Feb-15

Jan-15

Dec-14

500

Rating Definitions
BUY

: Where the stock is expected to deliver more than 10% returns over the next 12 month period

NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL

: Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Page | 9

PERSISTENT SYSTEMS : ANALYST MEET UPDATE

Disclosure:
We, Harit Shah, PGDBA and Amit Chandra, MBA, authors and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our
views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in
this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its
Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.
Any holding in stock No
Disclaimer:
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HDFC Securities or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research
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not based on any specific merchant banking, investment banking or brokerage service transactions. HDFC Securities may have issued other reports that are inconsistent with and reach
different conclusion from the information presented in this report.
Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We
have not received any compensation/benefits from the subject company or third party in connection with the Research Report.

HDFC securities
Institutional Equities
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Senapati Bapat Marg, Lower Parel, Mumbai - 400 013
Board : +91-22-6171 7330 www.hdfcsec.com
Page | 10