Persisent Systems
BSE SENSEX
25,285
S&P CNX
7,704
21 March 2016
Update
| Sector:
Technology
CMP: INR740
TP: INR820 (+11%)
Neutral
Collaborating with IBM on its IoT initiative…
… by co-investing in Watson’s continuous engineering platform
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val ( INR m)
Free float (%)
Preferred alliance partner for IBM Watson IoT solution
PSYS IN
80.0
817/563
7/10/11
59.2
0.9
108
61.5
Financials Snapshot (INR b)
Y/E Mar
2016E 2017E 2018E
Sales
22.6
31.3
36.7
EBITDA
4.3
5.3
6.5
Adj. PAT
3.0
3.5
4.3
Adj. EPS (INR)
37.6
43.7
54.3
EPS Gr. (%)
3.6
16.1
24.3
BV/Sh.(INR)
206.4 236.5 251.7
RoE (%)
20.0
20.3
22.9
RoCE (%)
19.5
19.6
22.8
P/E (x)
19.7
16.9
13.6
P/BV (x)
3.6
3.1
2.9
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Dec-15 Sep-15 Dec-14
38.5
26.4
7.9
22.2
38.5
11.8
16.6
33.1
38.9
11.1
27.7
22.4
PSYS recently entered into collaboration with IBM Watson’s IoT solution as a
preferred alliance partner for the product’s Continuous Engineering Platform.
Continuous engineering solutions provide the ability to upgrade on an ongoing
basis, the software in devices governed by IoT principles.
Two dimensions of the arrangement with IBM are:
Investments from PSYS on the IBM platform for continuous engineering
platform – a total of 500 employees. This will enable the company
revenue share in the sale of the solution.
It also allows PSYS to take its solutions and services to industry 4.0
customers worldwide, where the idea of Software-Defined Things is a
major driver for Digital Transformation
The collaboration has a revenue potential of 15-20% of the company’s FY16
revenue base (of ~USD345m), which implies USD52-69m revenues in FY17.
This has a significant growth potential in the long run.
The investments will pressurize the margins by 200-250bp in FY17 and FY18.
However, the mitigating factors to the same will likely be: [1] Exercising levers
elsewhere in the business to stem the decline and [2] Robust growth in the
sales of the solution in the near-medium term.
From PSYS, ~500 people will work towards this engagement, inclusive of
employees currently on IBM’s payroll, its own payroll and new hires. It will
also add a couple of small centers in Mexico and Israel.
Aligns organization and leadership with growth strategies
PSYS realigned its business around four growth strategies. The new structure
would be effective April 1, 2016.
[1] Digital:
Bringing together data, APIs and experiences for enterprise digital
transformation (EDT). President: Sudhir Kulkarni.
[2] IBM Alliance:
Multi-dimensional relationship between PSYS and IBM, including
the recent alliance for the IoT platform. President: Mike Kerr.
[3] Services:
Focus on services for software and product development including
agile and experience design, driven by adoption of SMAC for ISVs and enterprises
that are becoming software-driven. President: Mritunjay Singh.
[4] Accelerite:
Focus on current product suite as well as the takeover of non-
strategic products from other technology companies. President: Nara
Rajagopalan.
The company also plans to strengthen its corporate functions as part of ‘Corporate
Operations’ that will enable and accelerate the four growth strategies, which will
be headed by Atul Khadilkar.
FII Includes depository receipts
Stock Performance (1-year)
Persistent Sys
Sensex - Rebased
900
800
700
600
500
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); +91 22 3982 5424
Sagar Lele
(Sagar.Lele@MotilalOswal.com); +91 22 3982 5585
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Persisent Systems
Change in estimates
The deal would add 15-20% of FY16 revenue in FY17E. We have factored in
revenue of USD60m (mid-point of 15-20% range) in our FY17 estimates and
USD65m for FY18E. This increases our revenue estimates for FY17 by 14.7% and
FY18 by 13.9%.
Given the initial investments in the deal, we expect EBITDA margin to decline by
240bp in FY17E. However, owing leverage from growth in FY18, we expect FY18
EBITDA margin to decline by 170bp.
This results in an EPS change of 0.9% for FY17E and 4.9% for FY18E.
If we assume PSYS is able to mitigate some of this impact further by pulling
levers, and EBITDA margins decline by 100bp (instead of 170bp now), EPS
estimates for FY18E would increase by 9% (instead of ~5% now).
Exhibit 1: Exhibit 1: Change in estimates
Revised
FY16E
INR/USD
USD Revenue m
USD revenue gr. (%)
EBITDA Margin (%)
EPS - INR
65.4
346.5
12.3
19.2
37.6
FY17E
67.0
467.9
35.0
17.0
43.7
FY18E
69.0
532.0
13.7
17.7
54.3
FY16E
65.3
345.0
11.8
19.3
37.6
Earlier
FY17E
67.0
407.9
18.2
19.4
43.3
FY18E
69.0
467.0
14.5
19.4
51.7
FY16E
0.0%
0.5%
50bp
-10bp
0.0%
Change
FY17E
0.0%
14.7%
1680bp
-240bp
0.9%
FY18E
0.0%
13.9%
-80bp
-170bp
4.9%
Source: Company, MOSL
Exhibit 2: Addition of the IBM deal
Source: MOSL, Company
Valuation and view: Remain positive on business; Neutral on valuations
In Tier-II IT, we prefer PSYS’ business fundamentals, given the following factors:
One of the few Tier-II companies with the potential to grow revenues above
the industry given the focus on Enterprise Digital Transformation.
Unlikelihood of obsolescence in its chosen segments over the medium to
long term; and multi-year relationships, with marquee clientele in the ISV
space.
Credible experience in agile product development and iterative approach to
Product Engineering – two very relevant trends in today’s market
Strong balance sheet and adequate pricing power in the set of offerings
PSYS’ arrangement with IBM for its IoT Watson product may weigh on the
company’s performance in FY17, but has the potential to be significantly
earnings accretive beyond the next year. It lends strong revenue visibility from
PSYS’ top client; and a healthy growth in Watson’s IoT product sales would have
a direct bearing on PSYS’ revenues and profitability.
Based on the business model, financial performance and presence in potentially
high growth areas, there is a case for PSYS to be values at a premium multiple to
2
21 March 2016

Persisent Systems
its tier-II peers. Adjusting for our estimates from the deal, we now expect PSYS
to grow its revenues at a CAGR of 20% over FY15-18 and earnings at a CAGR of
14% over the same period. The stock trades 16.9x / 13.6x FY17E / FY18E
Earnings. In line with our thesis, the turnaround and visibility in the ISV business
is driving our uptick. Our revised price target of INR820 discounts FY18E
earnings by 15x, which implies 11% upside to CMP. Neutral.
Key triggers
Better-than-estimated margins from aggressive exercise of levers
Sharper growth in IBM Watson IoT
Stability in large ISV accounts
Key risk factors
Continued revenue sluggishness in ISV segment (ex-IBM)
Pressure on margins from higher S&M to sell products / investments in latest
collaboration with top customer
Decline in discretionary activity
Exhibit 4: 1-year forward PB band
5.0
24.2
4.0
3.0
14.0
6.7
2.0
1.0
2.3
2.0
1.2
2.6
PB (x)
Median(x)
Exhibit 3: 1-year forward PE band
30
25
20
15
10
5
PE (x)
Median(x)
Peak(x)
Min(x)
Avg(x)
Peak(x)
Min(x)
Avg(x)
4.5
12.3
11.6
Source: Company, MOSL
Source: Company, MOSL
Exhibit 5: Comparative valuation
Company
Mphasis
Mindtree
KPIT Tech
Cyient
Hexaware
NIIT Tech
Persistent Sys.
Mkt cap Rating TP Upside
EPS (INR)
(USD b)
(INR)
(%)
FY16E FY17E FY18E
1.5
0.8
0.4
0.7
1.2
0.5
0.9
Neutral 520
Neutral 165
Buy
550
Neutral 250
Neutral 610
Neutral 820
13.0
15.4
26.1
-7.4
24.2
10.7
34.6
35.9
13.6
33.1
12.9
45.4
37.6
38.5
42.5
14.9
37.8
14.9
51.4
43.7
42.3
52.1
17.3
42.7
17.4
57.4
54.3
Neutral 1600 139.5
FY16E
13.3
18.6
10.5
13.2
20.9
10.8
19.7
P/E (x)
FY17E
11.9
15.7
9.6
11.5
18.1
9.5
17.0
RoE (%)
FY16-18E CAGR (%)
FY18E FY16E FY17E FY18E USD rev.
EPS
10.9
12.8
8.3
10.2
15.5
8.6
13.7
12.9
27.4
18.8
17.7
28.9
18.9
20.0
13.6
27.3
17.1
17.7
30.5
18.5
20.3
14.2
27.6
16.7
17.5
33.4
18.0
22.9
6.6
16.9
6.6
11.8
14.8
7.8
23.9
10.6
20.5
12.8
13.6
15.9
12.4
20.1
Source: Company, MOSL
21 March 2016
3

Persisent Systems
Story in charts
Exhibit 6: Aggressive foray in IP-led revenues...
IP led revenues (USD m)
123.8
Growth (%)
Exhibit 7: … and strong traction in Enterprise business…
Enterprise revenues (USD m)
17.4
14.1
8.9
QoQ (%)
16.2
61.1
22.8
9.2
FY10
14.9
FY11
18.3
FY12
40.9
FY13
20.5
49.3
FY14
19.9
59.1
FY15
5.0
14.4
16.9
18.4
19.3
0.3
19.3
22.1
25.6
1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16
Source: Company, MOSL
Source: Company, MOSL
Exhibit 8: …have offset sluggish ISV business (~51% of rev)
Exhibit 9: Access to market is key to scale – beefed up front-
end hiring in recent quarters
Sales personnel
224 216
208 203
202 212 208
ISV Revenues (%)
60.3
58.3
139 150
119 128
51.3
57.9
57.8
57.0
57.2
1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16
Source: Company, MOSL
Source: Company, MOSL
Exhibit 10: IBM deal to significantly add to revenue growth
Revenue (USD m)
34.2
21.8
14.7
15.2
12.6
308.5
FY15
12.3
346.5
FY16E
467.9
FY17E
13.7
532.0
FY18E
Growth (%)
35.0
Exhibit 11: …but impact margins in the next year
PAT (INR m)
25.9
23.4
20.4
20.7
19.2
17.0
1397
FY11
1431
FY12
1876
FY13
2493
FY14
2906
3010
3493
25.8
EBITDA margin (%)
17.7
4340
170.2
FY11
207.4
FY12
237.8
FY13
274.1
FY14
FY15 FY16E FY17E FY18E
Source: Company, MOSL
Source: Company, MOSL
21 March 2016
4

Persisent Systems
Exhibit 12: Operating metrics
2QFY14
Verticals (%)
Telecom & Wireless
Infrastructure & Systems
Life Sciences & Healthcare
Geography (%)
North America
Europe
RoW
Industry Classification (%)
ISV
Enterprise
IP Led
Revenue Mix (%)
Services: Onsite
Services: Offshore
IP Led
Client Metrics (%)
Top Client
Top 2-5 Clients
Top 6-10 Clients
Clients billed
Prod. Eng. & Platforms
IP Led
Customer Engagement Size
USD3m+
USD1-3m
Repeat Business
DSO
Employee Metrics
Technical People
Sales & BD
Others
Total
Billable Person Months
- Onsite
- Offshore
Linear Utilization %
Onsite Utilization %
Offshore Utilization %
Attrition (%)
IP Led Person Months
Yield (USD/p.p.m)
Billing Rates (USD/p.p.m)
Onsite
Offshore
14,277
4,146
14,510
4,179
14,355
4,241
14,905
4,219
14,864
4,271
14,862
4,201
15,159
4,199
15,321
4,146
15,075
4,251
14,717
4,217
6,982
128
347
7,457
15,258
1,106
14,152
71.7
89.4
70.3
14.0
2,210
3,919
7,109
139
354
7,602
15,517
1,152
14,365
72.9
85.9
71.8
13.2
2,260
3,934
7,349
150
358
7,857
16,155
1,246
14,909
69.2
86.9
67.7
13.4
2,343
3,927
7,271
202
403
7,876
16,139
1,283
14,856
67.7
88.0
65.9
14.0
2,419
3,915
7,447
212
408
8,067
16,015
1,403
14,612
70.3
89.7
68.4
14.1
2,496
4,123
7,664
208
424
8,296
16,031
1,518
14,513
74.3
88.6
72.9
14.7
2,620
4,264
7,861
224
421
8,506
16,063
1,551
14,512
74.7
89.2
73.2
15.5
2,672
4,272
7,810
216
428
8,454
16,138
1,623
14,515
72.9
84.7
71.6
16.4
2,880
4,134
7,905
208
432
8,545
16,066
1,854
14,212
76.1
87.4
74.6
17.1
3,021
4,346
8,334
203
429
8,966
16,718
2,097
14,621
74.5
86.6
72.8
17.1
3,526
4,428
20.6
60.3
19.1
22.5
15.2
9.5
243
388
16
32
82.2
62
20.5
61.7
17.8
19.8
17.1
10.3
253
380
16
34
82.7
63
21.4
59.0
19.6
21.1
18.3
9.1
261
358
15
36
85.2
63
17.6
69.2
13.2
84.6
4.4
11.0
3QFY14
18.0
68.9
13.2
83.1
6.0
10.9
4QFY14
15.3
71.6
13.1
85.4
6.1
8.5
1QFY15
18.5
68.4
13.1
85.9
6.5
7.6
60.3
19.8
20.0
23.1
56.9
20.0
20.8
17.9
10.3
260
347
14
38
86.7
69
2QFY15
16.7
69.9
13.4
86.1
6.3
7.7
58.3
22.1
19.6
24.5
55.9
19.6
19.0
17.1
8.9
281
376
14
41
83.6
65
3QFY15
16.0
70.4
13.6
84.7
7.1
8.2
57.9
23.1
19.0
25.1
55.9
19.0
17.5
17.5
9.2
273
349
14
41
84.1
65
4QFY15
16.3
69.4
14.3
85.4
6.8
7.8
57.8
24.1
18.1
26.2
55.7
18.1
16.5
17.6
9.1
268
326
14
48
85.6
64
1QFY16
14.9
70.8
14.3
84.4
6.3
9.3
57.0
24.6
18.4
26.8
54.8
18.4
18.1
17.9
9.6
277
310
15
52
88.7
67
2QFY16
13.2
72.4
14.4
86.2
6.8
7.0
57.2
26.6
16.2
29.5
54.3
16.2
17.6
17.8
9.3
311
299
17
46
86.2
68
3QFY16
16.2
70.1
13.7
85.3
6.3
8.4
51.3
28.6
8.4
29.8
50.1
20.1
17.4
16.9
9.8
337
291
19
44
82.0
69
Source: MOSL, Company
21 March 2016
5

Persisent Systems
Financials and Valuations
Key assumption
2011
INR/USD Rate
Revenues (USD m)
Services Revenue (USD m)
IP Led Revenues (USD m)
Total Headcount
Net Addition
Per Capita Productivity (USD)
Linear Utilization (Blended %)
45.6
170.2
155.4
14.9
6,360
1,698
26,766
71.0
2011
7,758
29.1
1,583
20.4
424
1,159
344
1,504
108
7.2
1,396
1,396
21.3
2012
48.2
207.4
189.1
18.3
6,628
268
31,290
72.1
2012
10,003
28.9
2,337
23.4
611
1,726
256
1,981
551
27.8
1,431
1,431
2.5
2013
54.4
237.8
196.9
40.9
6,970
342
34,121
74.1
2013
12,945
29.4
3,352
25.9
783
2,569
61
2,630
754
28.7
1,876
1,876
31.2
2014
60.9
274.1
224.8
49.3
7,857
887
34,881
70.9
2014
16,692
28.9
4,303
25.8
1,026
3,277
150
3,427
934
27.3
2,493
2,493
32.9
2015
61.3
308.5
249.4
59.1
8,506
649
36,272
71.7
2015
18,913
13.3
3,906
20.7
939
2,967
932
3,900
993
25.5
2,906
2,906
16.6
2016E
65.4
346.5
280.5
66.0
9,477
971
36,565
74.1
2016E
22,647
19.7
4,338
19.2
933
3,405
657
4,062
1,052
25.9
3,010
3,010
3.6
2017E
67.0
467.9
382.0
85.9
12,107
2,630
38,647
73.4
2017E
31,349
38.4
5,324
17.0
966
4,358
330
4,688
1,195
25.5
3,493
3,493
16.0
2018E
69.0
532.0
437.2
94.8
12,763
656
41,684
75.2
2018E
36,709
17.1
6,513
17.7
1,013
5,500
325
5,825
1,485
25.5
4,340
4,340
24.3
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Other Income
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
(INR Million)
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2011
435
7,036
7,471
0
-60
7,441
4,543
2,281
2,261
605
2,500
3,677
1,582
1,000
1,095
1,602
1,206
396
2,075
7,441
2012
400
8,005
8,405
7
-107
8,376
6,090
2,892
3,197
528
123
6,189
2,033
3,290
866
1,660
879
781
4,528
8,376
2013
400
9,783
10,183
14
-190
10,646
6,951
3,449
3,502
1,174
173
7,690
2,509
3,677
1,503
1,893
845
1,048
5,797
10,646
2014
400
11,823
12,223
32
-260
12,389
8,545
4,468
4,077
307
823
9,966
3,028
5,028
1,910
2,785
1,574
1,211
7,181
12,389
2015
800
13,255
14,055
25
-315
13,885
9,408
5,331
4,076
40
2,116
11,201
3,586
6,036
1,579
3,549
1,793
1,755
7,653
13,885
2016E
800
15,238
16,038
26
-366
15,821
10,922
6,703
4,219
77
2,393
12,718
4,747
5,518
2,453
3,587
2,169
1,417
9,132
15,821
(INR Million)
2017E
800
17,575
18,375
26
-366
18,158
12,122
7,642
4,480
77
2,393
15,613
6,571
6,337
2,705
4,405
3,003
1,403
11,208
18,158
2018E
800
18,753
19,553
26
-366
19,336
12,422
7,893
4,529
77
2,393
16,934
6,999
7,171
2,764
4,597
3,198
1,399
12,337
19,336
21 March 2016
6

Persisent Systems
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
3.8
75
0
0
3.7
75
0
0
3.9
75
0
0
4.4
75
0
0
4.6
75
0
0
5.5
75
0
0
7.2
75
0
0
8.1
75
0
0
20.1
16.2
18.0
14.5
20.2
17.9
22.3
21.9
22.1
24.4
20.0
19.5
20.3
19.6
22.9
22.8
0.0
0.0
0.0
0.0
0.0
0.0
41.8
29.0
6.8
5.4
23.1
0.4
31.6
22.3
5.6
4.1
16.0
0.6
23.7
16.8
4.7
3.1
12.0
0.8
20.4
15.4
4.1
2.6
12.6
1.4
19.7
15.0
3.6
2.2
11.4
1.5
16.9
13.3
3.1
1.6
9.2
1.6
13.6
11.1
2.9
1.3
7.4
1.6
17.1
22.2
96.2
2.8
16.1
17.7
25.5
108.2
3.0
16.9
23.5
33.2
131.1
4.5
19.2
31.2
44.0
157.3
6.0
19.3
36.3
48.1
180.9
10.0
27.5
37.6
49.3
206.4
11.0
29.2
43.7
55.7
236.5
12.0
27.5
54.3
66.9
251.7
12.0
22.1
2011
2012
2013
2014
2015
2016E
2017E
2018E
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2011
1,583
-81
-460
-108
0
935
-971
-37
-939
0
-1,910
19
0
0
90
109
-866
1,866
1,000
2012
2,337
-260
27
-551
0
1,553
-1,470
83
2,378
0
908
38
7
0
-19
25
2,486
804
3,290
2013
3,352
181
260
-754
0
3,038
-1,735
1,304
-50
0
-1,785
128
8
0
-346
-211
1,043
2,634
3,677
2014
4,303
0
-403
-934
0
2,965
-734
2,232
-650
0
-1,384
96
18
0
-398
-284
1,297
3,731
5,028
2015
3,906
0
-207
-993
0
2,705
-670
2,035
-1,292
0
-1,963
-118
-7
0
-24
-149
593
5,443
6,036
2016E
4,338
0
-1,330
-1,052
0
1,955
-1,112
843
-278
0
-1,390
32
1
0
-402
-369
196
5,322
5,518
2017E
5,324
0
-1,257
-1,195
0
2,872
-1,227
1,644
0
0
-1,227
0
0
0
-825
-825
819
5,518
6,337
(INR Million)
2018E
6,513
0
-295
-1,485
0
4,733
-1,063
3,671
0
0
-1,063
-2,006
0
0
-830
-2,836
834
6,337
7,171
21 March 2016
7

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