Technology

India I Equities
Result Update
Change in Estimates Target Reco

26 July 2016

Persistent Systems
Rating: Buy
In-line Q1; revenue growth should help to better margins; Buy Target Price: `900
Share Price: `664
With 4.3%qoq revenue growth, Persistent saw a good Q1. IBM IoT
revenue and costs are now fully built into the P&L, and traditional Key data PSYS IN / PERS.BO
levers such as utilisation and offshore mix suggest scope for margin 52-week high / low `796 / `562
Sensex / Nifty 25679 / 7855
expansion. In FY18, Persistent is likely to touch $500m in revenue,
3-m average volume $1.8m
qualifying it to be a reasonably large midcap, unlocking fresh growth Market cap `53bn / $792m
and margin-expansion levers. In this context, the multiple, at 17x Shares outstanding 80m
FY18e, appears reasonable to us. Hence, we retain a Buy, with
estimates adjusted for a new currency rate and greater amortization. Shareholding pattern (%) Jun'16 Mar'16 Dec'15

Revenue at $105m, up 4.3% qoq, 33.3% yoy.The quarter was impressive Promoters 38.2 38.5 38.5
- of which, Pledged - - -
for Persistent, with both services (up 4.4% qoq) and IP (up 4.1% qoq)
Free Float 61.8 61.5 61.5
contributing equally. Services grew organically while elements of inorganic
- Foreign Institutions 22.6 22.1 13.3
growth were found in IP15 days consolidation of IBM IoT (additional - Domestic Institutions 12.1 12.0 21.1
~$1.5m) and Citrix (another $1.5m). The company also curtailed business of - Public 27.1 27.4 27.2
$1m to sharpen its focus and expand its margins.
A 15.1% EBITDA margin, down 79bps qoq, 430bps yoy. Margins were Estimates revision (%) FY17e FY18e

lower due to visa expenses (~100bps), wages adjusted for the IBM employees Sales ($) (0.4) (0.3)
EBITDA (4.8) (2.5)
taken over, and rupee appreciation. Q2 is Persistents wage-hike quarter, but
PAT (3.8) (4.7)
we expect the impact to be fully absorbed using the levers mentioned above.
Net profit came at `733m, down 9% qoq, up 9% yoy, supported by forex
gains and a lower tax rate (24%). Financials (YE Mar) FY17e FY18e
Sales (`m) 29,645 34,472
Business outlook. For the quarter, IBM IoT revenue was estimated to be Net profit (`m) 3,382 4,230
$11m (estimated not disclosed), up 10%qoq, with growth fructifying in Q1. EPS (`) 42.3 52.9
Management expects this deal to bring in $45m-50m in revenue in FY17 Growth (%) 13.7 25.1
`(~15-20% of revenue) and guided to 200-250bp margin erosion in FY17. PE (x) 15.6 12.4
Margins should now improve as all costs have been included and the PBV (x) 2.8 2.4
favourable operating leverage would play out. RoE (%) 19.2 20.8
Valuation. We adjust our estimate for FY17, primarily taking into account RoCE (%) 18.4 21.3
the new exchange rate and higher amortization, maintaining our Buy call with Dividend yield (%) 1.7 2.3
a revised price target of `900 (17x FY18e). Risks: Execution and high client- Net debt/equity (x) -0.4 -0.5
concentration (top client). Source: Anand Rathi Research

Quarterly results (YE: Mar) Q1FY17 % qoq % yoy FY16 FY15 % yoy
Sales ($m) 105 4.3 33.3 352 309 14.0
Sales (`m) 7,018 3.6 40.2 23,123 18,913 22.3
EBITDA (`m) 1,058 (1.5) 9.1 4,171 3,906 6.8
EBITDA margin (%) 15.1 -79 bps -430 bps 18.0 20.7 -261 bps
EBIT (`m) 715 (12.6) (3.7) 3,206 2,967 8.0
EBIT margin (%) 10.2 -190 bps -465 bps 13.9 15.7 -183 bps
Mohit Jain
PBT (`m) 968 (5.8) 3.0 3,956 3,900 1.5
Research Analyst
Tax (`m) (235) 7.0 (12.2) (983) (993) (1.1)
Tax rate (%) (24.3) -291 bps 421 bps (24.8) (25.5) 64 bps
Net income (`m) 733 (9.3) 9.0 2,974 2,906 2.3
Source: Company

Anand Rathi Shares and Stock Brokers Limited (hereinafter ARSSBL) is a full-service brokerage and equities research firm and the views expressed therein are solely of
ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst
certifications are present in the Appendix.

Anand Rathi Research India Equities

26 July 2016 Persistent Systems In-line Q1; revenue growth should help to better margins; Buy

Quick Glance Financials and Valuations

Fig 1 Income statement (`m) Fig 2 Balance sheet (`m)
Year-end:Mar FY14 FY15 FY16 FY17e FY18e Year-end:Mar FY14 FY15 FY16 FY17e FY18e
Net revenues 16,692 18,913 23,123 29,645 34,472 Share capital 400 800 800 800 800
Revenue growth (%) 28.9 13.3 22.3 28.2 16.3 Reserves & surplus 11,823 13,258 15,593 18,063 21,068
- Oper. expenses 12,389 15,007 18,952 24,834 28,317 Net worth 12,223 14,058 16,393 18,863 21,868
EBIDTA 4,303 3,906 4,171 4,811 6,155 Total debt 32 25 26 26 26
EBITDA margins (%) 25.8 20.7 18.0 16.2 17.9 Minority interest - - - - -
- Interest - - - - - Def. tax liab. (net) -260 -315 -233 -233 -233
- Depreciation 1,026 939 965 1,289 1,463 Capital employed 11,995 13,767 16,186 18,656 21,661
+ Other income 150 932 750 906 833 Net fixed assets 3,093 3,097 3,031 3,337 3,479
- Tax 934 993 983 1,047 1,295 Intangible assets 1,292 1,019 1,597 1,802 1,347
Effective tax rate (%) 27.3 25.5 24.8 23.6 23.4 Investments 4,895 6,749 7,046 8,494 10,377
+ Associates/(minorities) - - - - - - of which, Liquid 4,071 4,620 4,828 6,276 8,159
Adjusted PAT 2,493 2,906 2,974 3,382 4,230 Working capital 1,300 1,486 3,080 3,901 4,453
+ Extraordinary items - - - - - Cash 1,416 1,416 1,432 1,122 2,005
Reported PAT 2,493 2,906 2,974 3,382 4,230 Capital deployed 11,995 13,767 16,186 18,656 21,661
Adj. FDEPS (` / sh) 31.2 36.3 37.2 42.3 52.9 Working capital (days) 28 29 49 48 47
Adj. FDEPS growth (%) 32.9 16.6 2.3 13.7 25.1 Book value (`/sh) 152.8 175.7 204.9 235.8 273.3
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 3 Cash-flow statement (`m) Fig 4 Ratio analysis @ 664

Year-end:Mar FY14 FY15 FY16 FY17e FY18e Year-end: Mar FY14 FY15 FY16 FY17e FY18e
Adjusted PAT 2,493 2,906 2,974 3,382 4,230 P/E (x) 21.1 18.1 17.7 15.6 12.4
+ Non-cash items 1,026 939 965 1,289 1,463 Cash P/E (x) 15.0 13.7 13.4 11.3 9.2
Cash profit 3,519 3,845 3,939 4,671 5,693 EV/EBITDA (x) 11.0 11.9 11.1 9.4 6.9
- Incr./(decr.) in WC 343 186 1,594 821 552 EV/sales (x) 2.8 2.5 2.0 1.5 1.2
Operating cash-flow 3,175 3,659 2,344 3,850 5,141 P/B (x) 4.3 3.7 3.2 2.8 2.4
- Capex 734 670 1,477 1,800 1,150 RoE (%) 22.2 22.1 19.5 19.2 20.8
Free cash-flow 2,441 2,989 868 2,050 3,991 RoCE (%) 25.9 20.5 19.2 18.4 21.3
- Dividend 515 667 1251 912 1,225 Dividend yield (%) 1.0 1.3 1.4 1.7 2.3
+ Equity raised 63 -405 613 -0 - Dividend payout (%) 20.6 23.0 25.0 27.0 29.0
+ Debt raised -53 -62 84 - - Net debt/equity (x) -0.4 -0.4 -0.4 -0.4 -0.5
- Investments 1,606 1,854 297 1,448 1,883 Debtor (days) 66 69 67 71 72
- Misc. items - - - - - Inventory (days) - - - - -
Net cash-flow 331 0 16 -310 883 Payables (days) 9 10 26 27 26
+ Op. cash & bank bal. 1,085 1,416 1,416 1,432 1,122 CFO to EBITDA% 65.3 79.8 60.9 66.6 71.9
Cl. Cash & bank bal. 1,416 1,416 1,432 1,122 2,005 FCF to EBITDA% 51.8 55.3 21.1 29.2 53.3
Source: Company, AnandRathi Research Source: Company, AnandRathi Research

Fig 5 Enterprise revenue rises Fig 6 Price movement

($m) (`)
30
1,000
25.6 26.1 PSYS
25 900
22.1 800
20 19.3 19.3 700
600
15 500
400
10
300
5 200
100
0 0
4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

Sep-13
Nov-13
Jan-14

Sep-14
Nov-14
Jan-15

Sep-15
Nov-15
Jan-16
Mar-14
May-14

Mar-15
May-15

Mar-16
May-16
Jul-13

Jul-14

Jul-15

Jul-16

Source: Company Source: Bloomberg

Anand Rathi Research 2

26 July 2016 Persistent Systems In-line Q1; revenue growth should help to better margins; Buy

Result Highlights
Q1FY17Results at a Glance

Fig 7 Segment-wise results

Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17 QoQ % YoY %

Revenues ($ m) 79 83 90 100 105 4.3 33.3

Growth YoY 8 9 13 25 33
Volume growth ND ND ND ND ND
Revenues (` m) 5,004 5,427 5,921 6,771 7,018 3.6 40.2
Eff. exchange rate 63.7 65.4 66.0 67.4 67.0 (0.6) 5.2
Employees (EoP) 7,810 7,905 8,334 8,618 8,698 0.9 11.4
Revenue productivity ($ 000/employee) 10.1 10.5 10.8 11.7 12.0 2.5 19
Gross utilisation (IT services) 72.9 76.1 74.5 75.2 75.3 10bps 240bps
Attrition 16.4 17.1 17.1 16.4 16.7 30bps 30bps
CoR (excluding D&A) (3,015) (3,314) (3,622) (4,353) (4,585) 5.3 52.1
As of revenue -60 -61 -61 -64 -65 -133bps -533bps
SG&A (1,020) (1,096) (1,188) (1,344) (1,376) 2.4 34.9
As of revenue -20 -20 -20 -20 -20 39bps 39bps
EBITDA 969 1,018 1,110 1,074 1,058 -1.5 9.1
EBITDA margin 19 19 19 16 15 -79 bps -430 bps
EBIT 742 781 864 818 715 -12.6 -3.7
EBIT margin 15 14 15 12 10 -190 bps -465 bps
Other Income 128 111 119 246 172 (29.8) 34.3
Forex gain/loss 69 71 42 (36) 81 NM 16.5
PBT 940 964 1,024 1,028 968 (5.8) 3.0
PBT margin 19 18 17 15 14 -100bps -500bps
Taxes (268) (245) (250) (220) (235) 7.0 (12.2)
ETR -29 -25 -24 -21 -24.3 -291 bps 421 bps
PAT 672 718 775 808 733 (9.3) 9.0
PAT Margin 13 13 13 12 10 -115bps -335bps
Source: Company, Anand Rathi Research

Anand Rathi Research 3

26 July 2016 Persistent Systems In-line Q1; revenue growth should help to better margins; Buy

Conference call takeaways

Company-specific
Revenue growth due to the IBM alliance, adjusted for seasonality, is
turning out to be better than expected.
This is the first quarter with segregation of the four businesses
services (business head: Mritunjay Singh), digital (Sudhir Kulkarni),
alliance (Jitendra Gokhale) and accelerite (Nara Rajagopalan).
There has been no IP acquisition during the quarter. The capex of
`806m was largely on account of the IBM acquisition (MDM deal),
followed by Citrix and Genwi CRM.
Wage hikes are effective Q2and would impact margins by 200-300bps
on a gross basis. Persistent does not expect any major impact of this
headwind in Q2as higher revenues and lack of one-time costs such as
visa expenses (a 100bp impact on margins) should help it absorb the
bulk.
$111m hedges at an average rate of `70.47 to the dollar. This means
forex gains for FY17 are expected to be high.

FY17 outlook
All the investments (IBM employees and ~200 people on product
development) for the IBM IoT deal have already been taken into
account in the Q1 P&L; therefore, revenue growth from now should
lead to higher margins.
Management feels that the impact on margins would be within the
guided-to range (<200bps) while quarterly fluctuations cannot be ruled
out.
A sales team will be hired but, as a percent of revenue, may hold at a
similar level.
The effective tax rate (ETR) for FY17 is expected at ~24-25%.

Anand Rathi Research 4

26 July 2016 Persistent Systems In-line Q1; revenue growth should help to better margins; Buy

Factsheet
Fig 8 Revenue-split (%)
Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17
Effort-driven 81.6 83.8 79.9 71.8 71.8
IP-driven 18.4 16.2 20.1 28.2 28.2
Source: Company, Anand Rathi Research

Fig 8 Revenue-split, by industry (%)

Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16
Telecoms 16.3 14.9 13.2 16.2 13.5
Infrastructure &systems 54.5 54.2 54.7 50.8 55.7
Life sciences 14.3 14.3 14.4 13.7 12.4
Financial services 14.9 16.6 17.7 19.3 18.4
Source: Company, Anand Rathi Research

Fig 9 Revenue-split, by region (%)

Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17
North America 84.4 86.2 85.3 86.1 87.0
Europe 6.3 6.8 6.3 6.7 5.2
Asia-Pacific 9.3 7 8.4 7.2 7.8
Source: Company, Anand Rathi Research

Fig 10 Client profiles (LTM)

(%) Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17
Top 1 18.1 17.6 17.4 25.4 29.0
Top 5 36.0 35.4 34.3 40.8 44.7
Top 10 45.6 44.7 44.1 49.6 52.7
Source: Company, Anand Rathi Research

Fig 11 Employeemovement (%)

Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17
Employee Movement
Technical (EOP) 7,810 7,905 8,334 8,618 8,698
Net Adds (Qtr) -51 95 429 284 80
Net Adds (LTM) 539 458 670 757 888
Utilization % 72.9 76.1 74.5 75.2 75.3
Attrition % 16.4 17.1 17.1 16.4 16.7

Sales (EOP) 216 208 203 201 204

Net Adds (Qtr) (8) (8) (5) (2) 3.0
Net Adds (LTM) 14 (4) (5) (23) (12)
Source: Company, Anand Rathi Research

Fig 12 Revenue-split, by delivery type and billing rates

Anand Rathi Research 5

26 July 2016 Persistent Systems In-line Q1; revenue growth should help to better margins; Buy

Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17

Delivery type (%)
On-site 26.8 29.5 29.8 26.3 26.3
Offshore 54.8 54.3 50.1 45.5 45.5
Reported billing rates ($/hr)
On-site 82 81 79 78 83
Offshore 22 23 23 23 23
Repeat business (%)
Repeat business 88.7 86.2 82.0 82.1 NA
New business 11.3 13.8 18.0 17.9 NA
Source: Company, Anand Rathi Research

Fig 13 Key areas and horizontals growth (%)

Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17

Horizontals growth (yoy)

Telecoms (12.9) (14.1) 14.1 3.9 NA

Infrastructure &systems 7.4 6.2 3.6 28.3 NA

Life sciences 18.1 16.8 13.6 8.8 NA

Key area-wise growth (yoy)

North America 6.3 8.8 13.5 26.5 37.4

Europe 4.9 17.3 0.0 23.6 10.0

Asia-Pacific 32.4 0.1 15.5 15.8 11.8

Segment growth (yoy)

Effort-driven 10.3 13.2 11.2 10.0 17.4

IP-driven (0.2) (9.9) 19.4 95.4 103.7

Source: Company, Anand Rathi Research

Anand Rathi Research 6

26 July 2016 Persistent Systems In-line Q1; revenue growth should help to better margins; Buy

Valuation
The stock trades at 13x FY18e EPS of `52.9. This, we think, is fair, given
that Persistent is one of the fastest-growing IT-services companies in India
with a strong balance sheet and cashflow generation. It is likely to cross
$500m in revenue by FY18, thus becoming a reasonably large and
differentiated IT-services company. Also, it has margin levers in the
business, primarily the offshore mix and utilisation to absorb potential
headwinds in margins.We agree that its reliance on one client is at preset
high, at 29%, but this is also likely to result in exceptional growth.
We value Persistentbased on a target PE of 17x FY18e EPS, similar to
Mindtree and Cyient and reflecting subdued EBITDA due to the absorption
of the IBM IoT deal costs over FY17 and FY18.
Risks
Quarterly fluctuations in revenue and margins on account of the high
proportion of the IP-led business.
Cross-currency headwinds.

Anand Rathi Research 7

Appendix
Analyst Certification
The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the
compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research
analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange
Board of India (hereinafter SEBI) and the analysts compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have
no bearing whatsoever on any recommendation that they have given in the Research Report.

Important Disclosures on subject companies

Rating and Target Price History (as of 25 July 2016)
TP Share
1000 Persistent Date Rating (`) Price (`)
1 30-Sep-14 Buy 975 693
900
2 2 05-Jan-15 Buy 1,000 932
4 3 28-Jan-15 Hold 975 902
800 3 4 09-Apr-15 Buy 930 780
700 1 5 24-Jun-15 Buy 860 647
6 6 08-Apr-16 Buy 950 727
600 5

500

400
Jan-14
Feb-14
Mar-14
Apr-14

Feb-15
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15

Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Anand Rathi Ratings Definitions
Analysts ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described
in the Ratings Table below:
Ratings Guide
Buy Hold Sell
Large Caps (>US$1bn) >15% 5-15% <5%
Mid/Small Caps (<US$1bn) >25% 5-25% <5%

Anand Rathi Research Ratings Distribution (as of 25 July 2016)

Buy Hold Sell
Anand Rathi Research stock coverage (196) 60% 27% 13%
% who are investment banking clients 4% 0% 0%

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established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The
ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the
foregoing provisions.
1. ARSSBL or its Affiliates may or may not have been beneficial owners of the securities mentioned in this report.
2. ARSSBL or its affiliates may have or not managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.
3. ARSSBL or its affiliates may have or not received compensation for investment banking services from the issuer of these securities in the past 12 months and do not expect
to receive compensation for investment banking services from the issuer of these securities within the next three months.
4. However, one or more of ARSSBL or its Affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those
securities or options thereon, either on their own account or on behalf of their clients.
5. As of the publication of this report, ARSSBL does not make a market in the subject securities.
6. ARSSBL or its Affiliates may or may not, to the extent permitted by law, act upon or use the above material or the conclusions stated above, or the research or analysis on
which they are based before the material is published to recipients and from time to time, provide investment banking, investment management or other services for or solicit
to seek to obtain investment banking, or other securities business from, any entity referred to in this report.
Enclave Capital LLC is distributing this document in the United States of America. ARSSBL accepts responsibility for its contents. Any US customer wishing to effect
transactions in any securities referred to herein or options thereon should do so only by contacting a representative of Enclave Capital LLC.
2016. This report is strictly confidential and is being furnished to you solely for your information. All material presented in this report, unless specifically indicated otherwise,
is under copyright to ARSSBL. None of the material, its content, or any copy of such material or content, may be altered in any way, transmitted, copied or reproduced (in
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Additional information on recommended securities/instruments is available on request.
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