Persistent Systems
BSE SENSEX
30,834
S&P CNX
9,491
28 June 2017
Update
| Sector:
Technology
CMP: INR649
TP: INR740 (+15%)
Buy
Headwinds to near-term profitability…
…but on track to revive margins
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, INRm
Free float (%)
We discussed with Persistent Systems (PSYS) about its business prospects amid
multiple headwinds to profitability. Key takeaways:
PSYS IN
80
710 / 501
12/-13/-24
51.4
0.8
70
65.0
Three key headwinds to 1QFY18 profitability…
Three factors challenge the 1QFY18 margin performance at PSYS, the collective
impact of which should be up to ~250bp+, in our view:
1. ~3.3% appreciation of the INR (~110bp)
2. Visa expenses (100-110bp)
3. 4Q base of some write-back of bad debt provision (~40-50bp).
Financials Snapshot (INR b)
Y/E March
2017E 2018E 2019E
Sales
28.8
31.0
34.8
EBITDA
4.7
5.2
6.1
Adj. PAT
3.1
3.5
4.2
Adj. EPS (INR)
37.7
44.0
52.3
EPS Gr. (%)
1.4
16.8
18.9
BV/Sh.(INR)
244.5 254.3 264.6
RoE (%)
17.0
18.2
20.8
RoCE (%)
16.7
16.0
17.3
P/E (x)
17.1
14.6
12.3
P/BV (x)
2.6
2.5
2.4
Shareholding pattern (%)
As On
Mar-17 Dec-16 Mar-16
Promoter
35.0
36.2
38.5
DII
14.3
13.5
12.0
FII
24.8
25.7
26.8
Others
25.9
24.6
22.7
FII Includes depository receipts
Stock Performance (1-year)
Persistent Sys
Sensex - Rebased
900
800
700
600
500
… could be partially negated by IBM-IoT seasonality
JFM is the weakest quarter for PSYS’ IoT deal with IBM, and in the previous
quarter too, it had a shortfall of ~USD3m.
The non-linear nature of the segment means that incremental revenues should
contribute positively to the operating margins.
We model USD1.5m incremental revenues from the same in 1QFY18, which
implies ~130bp offset to margin headwinds during the quarter.
We are modeling EBITDA margin of 16.5% (-140bp QoQ). This is expansion of
140bp YoY from 15.1% in 1QFY17, implying on-track margin recovery (key
thesis for our recent upgrade).
Revenue growth drivers intact
Digital and IBM IoT should continue their growth trajectory. Digital has grown
at a CQGR of 11.5% over the past three quarters. That may take a pause in 1Q
and grow in low-single-digit.
Alliance segment will grow, mainly on account of the IoT seasonality. Services
and Accelerite remain steady.
Considering these drivers, we expect 3.4% QoQ revenue growth in 1QFY18.
While this is a slightly soft start to the season at 7.6% YoY, Digital should come
back in the quarters going forward to drive ~10% full-year revenue growth.
No major changes to our estimates
We continue to expect CAGR of 10% in revenues and 16% in earnings over
FY17-19. Earnings are expected to be led by margin expansion of 120bp over
this period, despite a stronger INR.
We note that within the sector PSYS will be one of the rare companies
witnessing margin expansion in FY18, despite strengthening currency and other
challenges facing the industry.
The stock trades at 14.6x FY18E and 12.3x FY19E EPS. Our target price of
INR740 discounts FY19E EPS by 14x, implying 15% upside.
Buy.
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); +91 22 6129 1530
Sagar Lele
(Sagar.Lele@MotilalOswal.com); +91 22 6129 1531
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.

Persistent Systems
Valuation and view
In Tier-II IT, we prefer PSYS’ business fundamentals, given the following factors:
It is 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’ EBITDA margin contracted 180bp YoY to 16.2% in FY17. We believe that
the margins have bottomed out and should start showing improvement YoY
hereon, ending three years of contraction, from 26% in FY14 to 16% in FY17.
PSYS’ deal with IBM IoT’s Continuous Engineering Platform contributed toward
this contraction (~USD46m revenues with ~USD60m costs). Consequently,
despite overall revenue growth of 22% and organic growth of ~11%, EBITDA
grew by 11.6% YoY and PAT by 5.2% YoY in FY17. We expect this segment to
breakeven next year with some optimization of headcount. We are
conservatively building in 120bp expansion over the next two years, which
factors in some strengthening of the INR.
This, combined with 10% revenue CAGR over FY17-19E (facilitated by Digital,
20% of business, which on its own accord should contribute 6-7pp to overall
growth), leads to 15% earnings CAGR during this period (excluding exceptional
loss in FY17).
If the IoT arrangement with IBM breaks even for PSYS, that alone is a margin
driver upward of 300bp for the company. That provides some safety margin to
our expansion estimate of only 120bp. Our price target of INR740 discounts
FY19E earnings by 14x, implying an upside of 15%.
Buy.
Key triggers
Continued margin expansion that commenced a couple of quarters ago
Sharper growth in IBM Watson IoT
Revival of growth in Services
Key risk factors
Any pause in momentum of Digital segment, which is a key driver of growth
Pressure on margins from higher investments in new products
Continued strengthening of the INR v/s the USD.
28 June 2017
2

Persistent Systems
Financials and Valuations
Income Statement
Y/E March
Sales
Change (%)
Cost of Goods Sold
Gross Profit
% of Net Sales
Selling Expenses
EBITDA
% of Net Sales
Depreciation
EBIT
% of Net Sales
Other Income
PBT
Tax
Rate (%)
Net Income
Change (%)
2011
7,758
29.1
4,723
3,036
39.1
1,453
1,583
20.4
424
1,159
14.9
344
1,504
108
7.2
1,396
21.3
2012
10,003
28.9
5,910
4,094
40.9
1,757
2,337
23.4
611
1,726
17.3
256
1,981
551
27.8
1,431
2.5
2013
12,945
29.4
7,311
5,634
43.5
2,283
3,352
25.9
783
2,569
19.8
61
2,630
754
28.7
1,876
31.2
2014
16,692
28.9
9,517
7,174
43.0
2,872
4,303
25.8
1,026
3,277
19.6
150
3,427
934
27.3
2,493
32.9
2015
18,913
13.3
11,317
7,596
40.2
3,690
3,906
20.7
939
2,967
15.7
932
3,900
993
25.5
2,906
16.6
2016
23,123
22.3
14,305
8,819
38.1
4,647
4,171
18.0
965
3,206
13.9
750
3,956
983
24.8
2,974
2.3
2017
28,784
24.5
18,518
10,266
35.7
5,613
4,653
16.2
1,490
3,163
11.0
958
4,121
992
24.1
3,129
5.2
(INR Million)
2018E
30,962
7.6
19,746
11,216
36.2
6,001
5,215
16.8
1,586
3,629
11.7
1,067
4,696
1,174
25.0
3,522
12.6
2019E
34,836
12.5
22,002
12,835
36.8
6,760
6,075
17.4
1,624
4,451
12.8
1,132
5,583
1,396
25.0
4,187
18.9
Balance Sheet
Y/E March
Share Capital
Other Reserves
Net Worth
Loans
MI/others
Capital Employed
Net Block
CWIP
Investments
Deferred Tax Assets
Other
Current Assets
Debtors
Cash & BB
Loans & Advances
Other Current Assets
Current Liab. & Prov
Net Current Assets
Application of Funds
E: MOSL Estimates
2011
435
7,036
7,471
0
30
7,501
2,261
605
2,500
60
3,677
1,582
1,000
869
226
1,602
2,075
7,501
2012
400
8,005
8,405
7
71
8,483
3,197
528
123
107
149
6,040
2,033
3,290
535
182
1,660
4,379
8,483
2013
400
9,783
10,183
14
639
10,836
3,502
1,174
173
190
721
6,969
2,509
3,677
347
434
1,893
5,075
10,836
2014
400
11,823
12,223
32
394
12,649
4,077
307
823
260
597
9,368
3,028
5,028
410
902
2,785
6,584
12,649
2015
800
13,255
14,055
25
120
14,200
4,076
40
2,116
315
127
11,074
3,586
6,036
417
1,035
3,549
7,525
14,200
2016
800
15,593
16,393
26
126
16,544
4,363
265
1,348
233
1,721
13,136
4,275
6,260
812
1,788
4,521
8,614
16,544
2017
800
18,193
18,993
32
126
19,151
5,361
376
6,652
292
1,170
9,727
5,205
1,452
11
3,059
4,427
5,300
19,151
(INR Million)
2018E
800
18,957
19,757
32
126
19,915
5,267
376
6,652
292
1,170
10,660
5,250
2,340
11
3,059
4,501
6,159
19,915
2019E
800
19,757
20,557
32
126
20,715
5,175
376
6,652
292
1,170
11,459
5,351
3,038
11
3,059
4,408
7,050
20,715
28 June 2017
3

Persistent Systems
Financials and Valuations
Ratios
Y/E March
Diluted (INR)
EPS
Cash EPS
Book Value
DPS
Payout %
Valuation (x)
P/E
Cash P/E
EV/EBITDA
EV/Sales
Price/Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios
Debtors (Days)
Asset Turnover (x)
2011
17.1
22.2
96.2
2.8
16.1
2012
17.7
25.5
108.2
3.0
16.9
36.3
25.2
19.9
4.7
5.9
0.5
20.1
16.5
36.5
75
3.8
18.0
17.5
31.4
75
3.7
2013
23.5
33.2
131.1
4.5
19.2
27.4
19.3
13.8
3.6
4.9
0.7
20.2
14.8
35.4
75
3.9
2014
31.2
44.0
157.3
6.0
19.3
20.6
14.6
10.3
2.6
4.1
0.9
22.3
16.0
38.8
75
4.4
2015
36.3
48.1
180.9
10.0
27.5
17.7
13.4
10.7
2.2
3.6
1.6
22.1
18.6
35.4
75
4.6
2016E
37.2
49.2
211.0
11.0
29.6
17.3
13.1
10.2
1.8
3.0
1.7
19.5
18.9
32.8
75
5.5
2017
37.7
56.3
244.5
9.0
23.9
17.1
11.4
9.0
1.5
2.6
1.4
17.0
16.7
24.8
75
5.9
2018E
44.0
63.8
254.3
12.0
27.3
14.6
10.1
7.9
1.3
2.5
1.9
18.2
16.0
25.7
75
5.8
2019E
52.3
72.6
264.6
12.0
22.9
12.3
8.9
6.6
1.2
2.4
1.9
20.8
17.3
31.5
75
6.7
Cash Flow Statement
Y/E March
CF from Operations
Chg. in Working Capital
Net Operating CF
Net Purchase of FA
Free Cash Flow
Net Purchase of Invest.
Net Cash from Inv.
Issue of shares
Proceeds from LTB/STB
Dividend Payments
Net CF from Finan.
Net Cash Flow
Opening Cash Balance
Closing CashBalance
E: MOSL Estimates
2011
1,394
-460
935
-971
-37
-939
-1,910
19
0
-255
-235
-1,211
1,279
1,000
2012
1,526
27
1,553
-1,470
83
2,378
908
38
7
-274
-230
2,230
1,809
3,290
2013
2,778
260
3,038
-1,735
1,304
-50
-1,785
128
8
-407
-272
982
3,290
3,677
2014
3,369
-403
2,965
-734
2,232
-650
-1,384
96
18
-548
-434
1,147
3,677
5,028
2015
2,912
-207
2,705
-670
2,035
-1,292
-1,963
-118
-7
-957
-1,082
-339
5,028
6,036
2016
3,189
-859
2,329
-1,477
852
768
-709
426
1
-1,062
-635
985
6,036
6,260
2017
3,661
-1,494
2,168
-2,600
-432
-5,304
-7,904
456
7
-871
-408
-6,144
6,260
1,452
(INR Million)
2018E
4,041
29
4,070
-1,492
2,578
0
-1,492
-1,596
0
-1,161
-2,757
-179
1,452
2,340
2019E
4,679
-194
4,485
-1,531
2,954
0
-1,531
-2,227
0
-1,161
-3,388
-434
2,340
3,038
28 June 2017
4

Persistent Systems
NOTES
28 June 2017
5

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PERSISTENT SYSTEMS
Analyst ownership of the stock
No
Served as an officer, director or employee -
No
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subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in
the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.
In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Varun Kumar
Varun.kumar@motilaloswal.com
Contact : (+65) 68189232
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Persistent Systems
Motilal Oswal Securities Ltd
28 June 2017
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Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
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