Persistent Systems
BSE SENSEX
25,638
S&P CNX
7,782
4 December 2015
Update | Sector: Technology
CMP: INR662
TP: INR675 (+2%)
Neutral
Taking strides in Enterprise Digital Transformation
After readying capabilities, focus on winning EDT deal
Refreshing to see Digital in action
We attended the Analyst day at PSYS, where the company demonstrated its
capabilities in the Enterprise Digital Transformation (EDT) apart from laying out the
strategic roadmap. Through multiple workshops PSYS showcased its:
1. Design Thinking Approach
2. Agile & iterative methodology-based development
3. Analytics capability through Share Insights platform
4. IoT opportunity following the Aepona acquisition
5. An example of Digital Banking
6. Citizen engagement through Smart Cities
7. New-Age patient care
8. Digital Transformation of its workplace
Focus on winning business with rich EDT capability set:
PSYS’ R&D efforts over
the past couple of years have endowed the company with multiple capabilities,
which it can take to the market. Revenue proportion from EDT still remains
insignificant to move the needle on growth. However, with a suite of offerings to
take to market and foot-in-the-door enabled by its sell-with strategy, focus going
forward is on pushing these solutions to clients. Deal sizes in EDT are getting
bigger (USD3m-5m range), and PSYS has won a couple of large engagements in the
recent past.
Product Engineering remains a big opportunity, but faces near-term challenges:
R&D spend by Software Product companies is expected to grow at a CAGR of 12%
to USD79b, implying healthy opportunity to grow the company’s bread-n-butter
business offering in the long run. However, PSYS’ dependency on pre-Internet
software product heavyweights continues to drag overall company growth despite
strong traction in the Enterprise segment.
Latest acquisition to facilitate CMO reach:
PSYS recently announced a small buy of
Nashua-based Akumina, which sells content management solution to CMOs. The
acquisition lends PSYS access to 80 CMOs and enables a development center on
the East Coast in New Hampshire.
Sell-with partnerships with emerging players bearing fruit:
PSYS has for long
adopted the sell-with strategy to deepen relationship with ISVs and gain an entry
into enterprise customers. In the process, it has partnered with :
[1]
Large and established players
like Salesforce, IBM, Microsoft, Amazon,
Dassault, Oracle and SAP.
[2]
Smaller emerging players
like Jive, Apigee, Attivio, Appian and Lithium.
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); +91 22 3982 5424
Sagar Lele
(Sagar.Lele@MotilalOswal.com); +91 22 3982 5585
Stock Info
Bloomberg
Equity Shares (m)
M.Cap. (INR b) / (USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
PSYS IN
80.0
53.6/0.8
957 / 575
1/-8/-5
131
61.5
Financials Snapshot (INR b)
Y/E March
2015 2016E 2017E
Sales
18.9
22.5
27.8
EBITDA
3.9
4.5
5.8
Adj. PAT
2.9
3.1
3.9
Adj. EPS (INR)
36.3
38.7
48.2
EPS Gr. (%)
16.6
6.4
24.5
BV/Sh.(INR)
180.9 205.4 240.1
RoE (%)
22.1
20.6
22.3
RoCE (%)
24.4
19.6
20.3
P/E (x)
18.2
17.1
13.7
EV/EBITDA (x)
11.1
9.8
7.3
Shareholding pattern (%)
As on
Sep-15 Jun-15 Sep-14
Promoter
38.5
38.5
39.0
DII
11.8
11.0
10.0
FII
16.6
20.4
27.7
Others
33.1
30.1
23.4
FII Includes depository receipts
Stock Performance (1-year)
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
While PSYS can be a part of the large partner ecosystem with established players, it
gets the advantage of riding the wave and becoming a top partner with the
emerging players.
For example, with Appian it started out in product development in 2009, built a
connector in 2012 and became a sell-with partner in 2013. Today, PSYS is one of the
top partners of Appian, with a revenue run-rate of USD25m. The company has been
able to enter into long-term relationship with at least 3 of its ~20 customers, with
revenue of USD5m per annum.
Extending the opportunity in IP post acquisition:
Persistent’s IP strategy is centered
on getting into the core development of products that are non-core to ISVs. Given
that these products are at the end of their lifecycle, PSYS undertakes the following 8
steps to extend the opportunity in the product:
[1] Move to agile release cycles
[2] Refresh user experience
[3] Enable cloud and multi-tenancy
[4] Analytics
[5] Extend to platform
[6] Connectors
[7] SaaS
[8] Build a support ecosystem
Focusing on where the spend is shifting:
While IT spend continues to grow, the
composition of spend has been changing. Spend on application development and
maintenance, enterprise software, and other traditional areas is expected to decline
by 15-20%—led by increasing adoption of cloud. Enterprises have been moving this
spend to digital transformation, involving the elements of user experience, extreme
personalization and business model disruption. It is difficult for enterprises to keep
pace with
[1] The ability to test, experiment and deploy rapidly,
[2] Integration with many products in the ecosystem
[3] Ability to leverage data to be smart
In this scenario, enterprises will need to focus on
[1] Not mixing IT modernization and digital transformation
[2] Transformation starting from the middle (API layer)
[3] Building incrementally and iteratively
Persistent’s strategy is to focus on the areas of user interface and data integration
by concentrating on the API layer and increasing speed to market. The company’s
implementation philosophy is based on the tenants of: [1] Think vision: Build to a
roadmap, [2] disrupt with technology, [3] focus on user experience, [4] build a digital
team, [5] build incrementally and iteratively, and [6] Involve all stakeholders.
4 December 2015
2

Persistent Systems
Valuation and view: Positive on the 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 revenue 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
Healthy profitability, with EBITDA margin in the top quartile of the industry
However, increasing growth pressure on large ISVs—some of which are counted
by PSYS among its top customers—poses a risk to growth in the near term. We
expect PSYS to post revenue CAGR of 16% over FY15-17 and EPS CAGR of 15%
during the period. The stock trades at 17.1x FY16E EPS and 13.7x FY17E EPS.
Our current estimates model 5% CQGR over the next six quarters (aided by
integration of RGen and Aepona) to meet revenue growth estimate of 11.7% for
FY16 and 20.3% for FY17. Given the small sizes of projects and shorter duration
of work, one could continue to witness volatility in revenue growth
performance. Our current target price of INR675 discounts FY17E EPS by 14x,
which implies 1% upside.
Based on the business model, financial performance and execution thus far, we
believe PSYS’s premium valuation to peers is justified. Two factors that will be
imperative to revisiting our rating are the turnaround in ISV—and consequently
the overall organic growth—and ascertaining the impact from three recent
acquisitive transactions. We currently maintain our Neutral rating on the stock.
However, PSYS and MTCL are our preferred business models in this space from a
long-term perspective.
Key triggers
Uptick in margin on IP-led revenue
Further growth acceleration in linear business
INR depreciation-led earnings upgrade
Key risk factors
Continued revenue sluggishness in the ISV segment
Pressure on margin from higher S&M to sell products
Decline in discretionary activity
4 December 2015
3

Persistent Systems
Story in charts
Exhibit 1: Aggressive foray in IP-led revenues...
IP led revenues (USD m)
123.8
Growth (%)
Exhibit 2: … and strong traction in Enterprise business…
Enterprise revenues (USD m)
17.4
19.3
14.1
QoQ (%)
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
14.4
1QFY15
16.9
2QFY15
8.9
5.0
18.4
3QFY15
19.3
4QFY15
0.3
1QFY16
22.1
2QFY16
Source: Company, MOSL
Source: Company, MOSL
Exhibit 3: …have offset sluggish ISV business (~57% of rev)
ISV Revenues (%)
60.3
58.3
Exhibit 4: Access to market is key to scale - hiring actively on
front end
Sales personnel
150
128 139
119
224 216
208
202 212 208
57.9
57.8
57.0
94 99 101 99
57.2
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
Source: Company, MOSL
Source: Company, MOSL
Exhibit 5: Turnaround in linear revenues is key to 20%+
growth…
Revenue (USD m)
34.2
21.8
14.7
15.2
12.6
308.5
FY15
11.7
344.7
FY16E
414.8
FY17E
Growth (%)
Exhibit 6: …and continued IP traction is crucial to profitability
uptick
PAT (INR m)
25.9
23.4
25.8
EBITDA margin (%)
20.3
20.4
20.7
20.1
21.0
170.2
FY11
207.4
FY12
237.8
FY13
274.1
FY14
1,397
FY11
1,431
FY12
1,876
FY13
2,493
FY14
2,906
FY15
3,094
FY16E
3,853
FY17E
Source: Company, MOSL
Source: Company, MOSL
4 December 2015
4

Persistent Systems
Exhibit 7: Operating metrics
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
1QFY14
20.7
69.1
10.2
2QFY14
17.6
69.2
13.2
3QFY14
18.0
68.9
13.2
4QFY14
15.3
71.6
13.1
1QFY15
18.5
68.4
13.1
2QFY15
16.7
69.9
13.4
3QFY15
16.0
70.4
13.6
4QFY15
16.3
69.4
14.3
1QFY16
14.9
70.8
14.3
2QFY16
13.2
72.4
14.4
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
7.7
84.7
7.1
8.2
85.4
6.8
7.8
84.4
6.3
9.3
86.2
6.8
7.0
60.3
19.8
20.0
58.3
22.1
19.6
57.9
23.1
19.0
57.8
24.1
18.1
57.0
24.6
18.4
57.2
26.6
16.2
21.2
63.7
15.1
20.6
60.3
19.1
20.5
61.7
17.8
21.4
59.0
19.6
23.1
56.9
20.0
24.5
55.9
19.6
25.1
55.9
19.0
26.2
55.7
18.1
26.8
54.8
18.4
29.5
54.3
16.2
21.2
15.2
10.9
253
387
15
30
83.0
65
22.5
15.2
9.5
243
388
16
32
82.2
62
19.8
17.1
10.3
253
380
16
34
82.7
63
21.1
18.3
9.1
261
358
15
36
85.2
63
20.8
17.9
10.3
260
347
14
38
86.7
69
19.0
17.1
8.9
281
376
14
41
83.6
65
17.5
17.5
9.2
273
349
14
41
84.1
65
16.5
17.6
9.1
268
326
14
48
85.6
64
18.1
17.9
9.6
277
310
15
52
88.7
67
17.6
17.8
9.3
311
299
17
46
86.2
68
6,689
119
336
7,144
15,161
1,081
14,080
70.0
84.9
68.8
14.2
2,335
3,602
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
14,538
4,147
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
15,321
15,075
4,199
4,146
4,251
Source: MOSL, Company
4 December 2015
5

Persistent Systems
Financials and valuations
Key Assumptions
Y/E March
INR/USD Rate
Revenues (USD m)
Services Revenue (USD m)
IP Led Revenues (USD m)
Total Headcount
Net Addition
Per Capita Ptoductivity (USD)
Linear Utilization (Blended %)
2010
46.0
127.3
118.1
9.2
4,662
453
27,306
70.5
2011
45.6
170.2
155.4
14.9
6,360
1,698
26,766
71.0
2012
48.2
207.4
189.1
18.3
6,628
268
31,290
72.1
2013
54.4
237.8
196.9
40.9
6,970
342
34,121
74.1
2014
60.9
274.1
224.8
49.3
7,857
887
34,881
70.9
2015
61.3
308.5
249.4
59.1
8,506
649
36,272
71.7
2016E
65.3
344.7
280.7
64.0
9,270
764
37,182
74.3
2017E
67.0
414.8
335.0
79.8
10,514
1,244
39,451
74.6
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 (%)
2010
6,012
1.2
3,687
2,324
38.7
860
1,464
24.3
335
1,128
18.8
112
1,241
91
7.3
1,150
70.2
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
(INR Million)
2016E
22,517
19.1
13,405
9,112
40.5
4,587
4,525
20.1
977
3,548
15.8
641
4,189
1,095
26.1
3,094
6.5
2017E
27,791
23.4
16,521
11,270
40.6
5,446
5,824
21.0
1,092
4,731
17.0
437
5,169
1,316
25.5
3,853
24.5
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
2010
432
5,990
6,422
0
45
6,467
1,834
485
1,562
7
4,259
1,363
1,918
638
340
1,679
2,580
6,467
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
(INR Million)
2016E
800
15,159
15,959
26
122
16,107
4,877
92
2,352
442
907
10,403
4,252
4,571
654
927
2,967
7,436
16,107
2017E
800
17,855
18,655
26
122
18,803
5,006
92
2,352
442
907
13,304
5,248
6,322
807
927
3,302
10,002
18,803
4 December 2015
6

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
Turnover Ratios
Debtors (Days)
Asset Turnover (x)
2010
14.0
18.1
82.7
1.3
8.9
2011
17.1
22.2
96.2
2.8
16.1
2012
17.7
25.5
108.2
3.0
16.9
37.4
26.0
20.6
4.8
6.1
0.5
22.7
12.1
83
3.3
20.1
16.2
75
3.8
18.0
14.5
75
3.7
2013
23.5
33.2
131.1
4.5
19.2
28.2
19.9
14.2
3.7
5.1
0.7
20.2
17.9
75
3.9
2014
31.2
44.0
157.3
6.0
19.3
21.2
15.1
10.6
2.7
4.2
0.9
22.3
21.9
75
4.4
2015
36.3
48.1
180.9
10.0
27.5
18.2
13.8
11.1
2.3
3.7
1.5
22.1
24.4
75
4.6
2016E
38.7
50.9
205.4
12.0
31.0
17.1
13.0
9.8
2.0
3.2
1.8
20.6
19.6
75
5.0
2017E
48.2
61.8
240.1
12.0
24.9
13.7
10.7
7.3
1.5
2.8
1.8
22.3
20.3
75
5.6
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
2010
1,533
-141
1,392
-476
916
-682
-1,158
1,507
0
-115
1,392
1,626
1,505
1,918
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
(INR Million)
2016E
3,430
-1,374
2,056
-1,830
226
-236
-2,066
-33
1
-1,157
-1,189
-1,200
6,036
4,571
2017E
4,508
-815
3,693
-1,222
2,471
0
-1,222
0
0
-1,157
-1,157
1,314
4,571
6,322
4 December 2015
7

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8