BSE SENSEX
26,490
S&P CNX
8,139
Persistent Systems
CMP: INR613
TP: INR700 (+14%)
Neutral
Raising its game in Digital transformation...
…By leveraging new trends and strengthening leadership
19 December 2016
Update
| Sector:
Technology
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 (%)
Financials Snapshot (INR b)
Y/E Mar
2016
PSYS IN
80.0
797/501
-1/-10/-11
49.1
0.7
72.6
62.1
In its 2016 Analyst Day, PSYS showcased the company’s ability to deliver
solutions and readiness to leverage key new trends such as IoT, Data
analytics, Blockchain etc.
PSYS has strengthened leadership along with focus on technology, global
presence and partnerships will in its attempt to win in the current market.
While Services business continues ward off impact from traditional ISVs,
Accelerite unit is focusing on Radia, Aepona and cloud stack as its growth
engines.
Formula to play and win
As Enterprises look at IT modernization in tandem with Digital transformation, PSYS
is striving to scale in the latter and expects to succeed in the same through a
combination of the following:
1.
Reorganization:
PSYS structured its business into 4 units earlier this year,
which are: [1] Services (Product Engineering work for old and new software
developers), [2] Digital (Implementation of software for partners such as
Salesforce.com and Appian along with Digital Transformation for Enterprises,
[3] IBM Alliance (all work with the company’s top client and [4] Accelerite
(Company’s IP-led revenues).
2.
Leadership strengthening:
Apart from 4 different individuals heading the
business units separately, PSYS has also deepened the pool of senior leadership
bandwidth through multiple additions across the board. It had appointed
Jacqueline White as Chief Customer from Accenture. Among many other
additions it has also hired senior PHDs in machine learning (Gauri Shah and
Rajshri Das).
3.
Focus on Global:
PSYS is now present in 10 countries and expects the global
diversified talent pool to add more mettle to its technology prowess
4.
Technology focus:
Sid Chatterjee heads PSYS’ Horizon-2 (Software-defined
things, actionable insights and Software 4.0) and Horizon-3 initiatives (Machine
Learning, Blockchain, Security, Genomics). PSYS has been building capabilities
in all the relevant technology trends.
5.
Focus on Partnerships:
Oracle, IBM, Appian, Salesforce are some of the
partnerships that have flourished and PSYS continues to focus on this route for
further enablement of its customers’ Digital Transformation.
2017E
2018E
Net Sales
EBITDA (Rs b)
NP
EPS
EPS Gr (%)
BV/Share (Rs)
P/E (x)
P/BV (x)
RoE (%)
RoCE (%)
23.1
4.2
3.0
37.2
2.3
211.0
16.6
2.9
19.5
18.9
29.2
4.9
3.0
37.9
2.1
237.7
16.2
2.6
17.4
16.9
33.9
6.3
3.6
45.1
18.8
247.5
13.7
2.5
19.1
16.0
Shareholding pattern (%)
As On
Sep-16 Jun-16 Sep-15
Promoter
37.9
38.1
38.5
DII
12.3
12.1
11.8
FII
26.7
27.2
16.6
Others
23.2
22.6
33.1
FII Includes depository receipts
Stock Performance (1-year)
Persistent Sys
Sensex - Rebased
780
705
630
555
480
Upping the ante in IoT post IBM and Aepona
Reports suggest that number of connected devices will increase to 38.5b by
2020, which presents addressable market of USD120b for software and
services players.
PSYS has its own IoT platform (Concert) which it has been building upon
following the acquisition of Aepona last year. This works in sync with and builds
upon IBM IoT wherever necessary.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); +91 22 6129 1530
Sagar Lele
(Sagar.Lele@MotilalOswal.com); +91 22 6129 1531

Persistent Systems
While IBM Watson‘s strength lies in the data processing and analytics engine,
Concert specializes in data modeling and monetizing for the clients. Examples of
some such solutions already built are: [1] Solid waste management, [2] Smart
Industrial machines, [3] Intelligent washrooms.
IoT focus as PSYS is on 3-4 verticals – Healthcare, Industrials, Smart Cities and
Agriculture.
The key end clients of IBM CE/CLM are the end coders/ software programmers.
The Continuous Engineering platform already has 3000+ customers for IBM,
implying a fairly predictable revenue base on which it expects to grow. The key
competitors in the market are Computer Associates, Mircrosoft and HP, which
are much smaller in size.
IBM has been trying to maintain an optimal size of its R&D team and their focus
needed to be channelized on Cloud (where they continue to lag Amazon and
MS) and Cognitive. In more stable platforms, they have been looking to partner
and the deal with PSYS is a consequence of the same.
PSYS recently also got approval to be the reseller of the CE/CLM product, which
would mean more revenues over and above royalty.
As far as PSYS’ IP is concerned, it is still work in progress on multiple areas
around CE/CLM.
PSYS cited that is remains on track to deliver on the guided USD50m revenues
this year, though the same will only be ascertained in January as the last
fortnight of the year too sees a lot of activity.
New age products gaining lot of traction and PSYS is focused on selling to start-
ups. ~10% of revenues in Services comes from this segment. Expecting
Enterprises also to contribute. Traditional ISVs will continue remain sluggish
given their own business challenges.
Services business has potential to grow but may not be a very high growth rate
considering that the base of revenues from traditional software developers is
still very high.
2 main priorities in the segment for PSYS are chasing startups and growing with
Enterprises for Services.
Radia (HPCA):
It was configurable in only a limited type of products. PSYS has
enabled the same for more devices like Macbooks etc. Revenues from the IP are
fairly stable.
IoT:
Upped investment in Aepona IoT. This is divided into two parts: [1] Telecom
company part, [2] Concert – run in cloud independent and cloud agnostic
manner. Selling a monetization platform on IoT, since Aepona had a billing
platform.
Cloud stack:
Main competition was form OpenStack, which has witnesses some
pressure in the recent times.
IBM continuous engineering
Services: The outlook is stable
Accelerite: Focused on three IPs
19 December 2016
2

Persistent Systems
Exhibit 1: The IBM IoT deal has been changing the revenue growth scenario
Revenue (USD m)
8.6
1.5
63
68
2.2
70
3.9
0.0
73
73
76
80
5.0
Revenue Growth QoQ (%)
12.0
4.2
0.6
80
-1.8
79
83
90
100
105
5.5
8.1
4.3
0.4
105
Exhibit 2: Accelerite now focused on Radia, IoT and Cloud Stack
IP business revenue (USD m)
37.4
14.4 2.1
-12.4
9.5
13.1
-4.8
12.4
14.2
14.5
2.9
15.0
QoQ growth (%)
57.2
34.1
1.0
15.1
-0.1
14.5
4.3
18.0
28.3
29.5
-1.0
29.2
-4.1
14.5
-7.1
13.4
Exhibit 3: Focus is to drive non-linearity…
EBITDA Margin (%)
8.9
8.9
7.6
27.0
21.8
20.6
20.1
20.2
19.4
18.7
18.8
15.9
15.1
15.7
9.0
9.4
9.9
S&M (%)
10.2
9.9
9.7
9.1
9.9
8.6
8.8
8.1
21.7
26.0
27.7
Exhibit 4: …But operational metrics are yet to align to optimum
Offshore Utilization %
84.9
68.8
89.4
85.9
71.8
86.9
88.0
89.7
88.6
72.9
89.2
73.2
Onsite Utilization %
84.7
71.6
87.4
74.6
86.6
72.8
85.9
73.6
84.2
74.0
84.0
72.9
70.3
67.7
65.9
68.4
Source: Company, MOSL
19 December 2016
3

Persistent Systems
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
its tier-II peers. Including the likely changes in financial performance on account
of the deal, we expect PSYS to grow its revenues at a CAGR of 17.4% over FY16-
18 and earnings at a CAGR of 12.2% over the same period. Although the concern
around revenue growth has been addressed by the new IBM deal to some
extent, revival in revenue from Services and Alliances would be necessary for re-
rating.
The stock trades 16.2/13.7x FY17/18E Earnings. We expect restrictions to uptick
in valuations till there is sustained performance in segments other than Digital.
Our price target of INR700 discounts FY18E earnings by 15x, which implies 15%
upside to CMP.
Neutral.
Revival of growth in Services
Sharper growth in IBM Watson IoT
Continued margin expansion
Continued revenue sluggishness in ISV segment
Pressure on margins from higher S&M to sell products / investments in latest
collaboration with top customer
Decline in discretionary activity
Exhibit 6: 1-year forward PB band
Avg(x)
24.4
5.0
4.0
PB (x)
Median(x)
Peak(x)
Min(x)
Avg(x)
4.3
Key triggers
Key risk factors
Exhibit 5: 1-year forward PE band
30
25
20
15
10
5
13.0
12.5
13.7
6.7
PE (x)
Median(x)
Peak(x)
Min(x)
3.0
2.0
1.0
2.3
2.2
1.2
2.4
19 December 2016
4

Persistent Systems
Story in charts
Exhibit 1: Aggressive foray in IP-led revenues...
IP led revenues (USD m)
123.8
Growth (%)
17.4
14.1
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
25.7
74.2
FY16
Source: Company, MOSL
8.9
5.0
0.3
Exhibit 2: … and strong traction in Enterprise business…
Enterprise revenues (USD m)
16.2
26.1
5.9
1.8
5.7
QoQ (%)
14.4 16.9 18.4 19.3 19.3 22.1 25.6
27.7 29.2
Source: Company, MOSL
Exhibit 3: …have offset sluggish ISV business (~45% of rev)
ISV Revenues (%)
60.3 58.3 57.9 57.8 57.0 57.2
51.3
45.8 45.4 44.4
Exhibit 4: Access to market is key to scale – beefed up front-
end hiring in recent quarters
Sales personnel
224 216
208 203 201 204 207
202 212 208
139 150
119 128
Exhibit 5: Turnaround in linear revenues is key to 20%+
growth…
Revenue (USD m)
Growth (%)
14.7
15.2
14.0
23.0
Exhibit 6: …and continued
profitability uptick
PAT (INR m)
25.9
25.8
IP
traction
is
crucial
to
EBITDA margin (%)
12.6
12.1
23.4
20.4
20.7
18.0
3077
15.7
3744
16.6
237.8
FY13
274.1
FY14
308.5
FY15
351.7
FY16
432.7
FY17E
485.0
FY18E
1397
FY11
1431
FY12
1876
FY13
2493
FY14
2906
FY15
2974
FY16 FY17E FY18E
Source: Company, MOSL
Source: Company, MOSL
19 December 2016
5

Persistent Systems
Operating metrics
Exhibit 7: Operating metrics
1QFY15
Segments (%)
Services
Digital
Alliance
Accelerite
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
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
47.6
14.2
30.0
8.2
2QFY17
46.6
15.2
29.4
8.8
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
85.3
6.3
8.4
86.1
6.7
7.2
87.0
5.2
7.8
85.4
6.1
8.5
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
51.3
28.6
8.4
45.8
26.0
28.2
45.4
26.4
28.2
44.4
27.8
27.8
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
29.8
50.1
20.1
26.3
45.5
28.2
26.3
45.5
28.2
26.3
45.9
27.8
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
17.4
16.9
9.8
337
291
19
44
82.0
69
25.4
15.4
8.8
319
353
18
42
82.1
62
29.0
15.7
8
340
338
15
50
nm
63
28.4
15.9
8.5
314
335
15
51
nm
66
7,271
202
403
7,876
16,139
1,283
14,856
67.7
88.0
65.9
14.0
2,419
3,915
14,905
4,219
7,447
212
408
8,067
16,015
1,403
14,612
70.3
89.7
68.4
14.1
2,496
4,123
14,864
4,271
7,664
208
424
8,296
16,031
1,518
14,513
74.3
88.6
72.9
14.7
2,620
4,264
14,862
4,201
7,861
224
421
8,506
16,063
1,551
14,512
74.7
89.2
73.2
15.5
2,672
4,272
15,159
4,199
7,810
216
428
8,454
16,138
1,623
14,515
72.9
84.7
71.6
16.4
2,880
4,134
15,321
4,146
7,905
208
432
8,545
16,066
1,854
14,212
76.1
87.4
74.6
17.1
3,021
4,346
15,075
4,251
8,334
203
429
8,966
16,718
2,097
14,621
74.5
86.6
72.8
17.1
3,526
4,428
14,717
4,217
8,618
201
445
9,264
16,631
2,108
14,523
75.2
85.9
73.6
16.4
4,082
4,849
14,574
4,275
8,698
204
487
9,389
17,030
2,121
14,909
75.3
84.2
74
16.7
5,235
4,705
15,437
4,325
8,612
207
486
9,305
17,474
2,048
15,426
74.2
84.0
72.9
15.9
5,015
4,677
16,101
4,288
Source: MOSL, Company
19 December 2016
6

Persistent Systems
Financials and Valuations
Key assumption
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 %)
2011
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
0
344
0
1,504
108
7.2
0
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
0
256
0
1,981
551
27.8
0
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
0
61
0
2,630
754
28.7
0
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
0
150
0
3,427
934
27.3
0
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
0
932
0
3,900
993
25.5
0
2,906
2,906
16.6
2016
65.8
351.7
277.4
74.2
9,264
758
37,959
74.7
2016
23,123
22.3
4,171
18.0
965
3,206
0
750
0
3,956
983
24.8
0
2,974
2,974
2.3
2017E
67.5
432.7
309.2
123.5
9,645
381
44,858
74.5
2017E
29,202
26.3
4,916
16.8
1,396
3,520
2018E
70.0
485.0
348.5
136.5
10,501
856
46,187
74.1
2018E
33,935
16.2
6,315
18.6
1,410
4,906
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
(INR Million)
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
0
533
0
4,052
1,017
25.1
0
3,035
3,035
2.1
0
-76
0
4,830
1,224
25.3
0
3,606
3,606
18.8
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
Inventory
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
0
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
0
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
0
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
0
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
0
3,586
6,036
1,579
3,549
1,793
1,755
7,653
13,885
2016
800
15,593
16,393
26
-233
16,312
10,951
6,589
4,363
265
1,348
14,857
0
4,275
6,260
4,321
4,521
3,293
1,228
10,335
16,311
2017E
800
17,671
18,471
31
-182
18,445
13,268
7,965
5,303
432
6,134
10,234
0
5,280
532
4,422
3,659
2,779
880
6,575
18,445
(INR Million)
2018E
800
18,425
19,225
31
-182
19,200
13,568
8,309
5,259
432
6,134
11,034
0
5,447
1,166
4,422
3,660
2,867
793
7,375
19,200
19 December 2016
7

Persistent 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)
2011
17.1
22.2
96.2
2.8
16.1
2012
17.7
25.5
108.2
3.0
16.9
2013
23.5
33.2
131.1
4.5
19.2
2014
31.2
44.0
157.3
6.0
19.3
2015
36.3
48.1
180.9
10.0
27.5
17.0
12.8
3.4
2.1
10.2
1.6
20.1
16.5
3.8
75
0
0
0.0
18.0
17.5
3.7
75
0
0
0.0
20.2
14.8
3.9
75
0
0
0.0
22.3
16.0
4.4
75
0
0
0.0
22.1
18.6
4.6
75
0
0
0.0
2016
37.2
49.2
211.0
11.0
29.6
16.6
12.5
2.9
1.7
9.7
1.8
19.5
18.9
5.5
75
0
0
0.0
2017E
37.9
55.4
237.7
12.0
31.6
16.2
11.1
2.6
1.4
8.4
1.9
17.4
16.9
6.0
75
0
0
0.0
2018E
45.1
62.7
247.5
12.0
26.6
13.7
9.8
2.5
1.2
6.4
1.9
19.1
16.0
6.4
75
0
0
0.0
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
Cash Flow Statement
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
2016
4,171
0
-859
-983
0
2,329
-1,477
852
768
0
-709
426
1
0
-312
115
1,735
4,525
6,260
2017E
4,916
0
-2,530
-1,017
0
1,369
-2,504
-1,135
-4,786
0
-7,291
203
6
0
-628
-420
-6,341
6,873
532
(INR Million)
2018E
6,315
0
-166
-1,224
0
4,925
-1,365
3,560
0
0
-1,365
-1,690
0
0
-1,237
-2,927
633
532
1,166
19 December 2016
8

Persistent Systems
NOTES
19 December 2016
9

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