28 June 2017
TP: INR740 (+15%)
Headwinds to near-term profitability…
…but on track to revive margins
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:
710 / 501
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)
2017E 2018E 2019E
Adj. EPS (INR)
EPS Gr. (%)
244.5 254.3 264.6
Shareholding pattern (%)
Mar-17 Dec-16 Mar-16
FII Includes depository receipts
Stock Performance (1-year)
Sensex - Rebased
… 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.
(Ashish.Chopra@MotilalOswal.com); +91 22 6129 1530
(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.
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