Anand Rathi Brokerage recommends buy rating on Persistent System’s stocks

Anand Rathi Brokerage is optimistic for digital service provider, Persistent Systems and recommends the buy rating on the stocks where the target has been decided not to drop below Rs. 860. The company mentioned it in a recent research report that went public on October 26, 2015.

Persistent Systems is the top recommended company by Anand Rathi Brokerage in terms of reaping more benefits in digital industry. Persistent’s enterprise business contributes 27% to its total revenue which is growing at the rate of 31% every year. Managing Director of Anand Rathi Brokerage, Amit Rathi specified how Persistent Systems has coped with numerous challenges like stagnating to falling IP revenue, slower growth in its ISV business, and still tackling with the same. As per this report, Persistent’s growth in its enterprise business might compensate this drag.

18% PBT margins with wage hikes behind and revenue recovering lead us to believe that Q2 is a bottom out quarter for margins. Hence, we retain our Buy recommendation.

Revenue at $83m (up 5.5% qoq, 8.7% yoy): Revenue at its effort-led business was $69.5m, up 8.4% qoq, 13.2% yoy, including RGEN revenue of $2m (or 3% of qoq growth). 5.4% qoq organic growth was impressive after a weak Q1, driven by 14% qoq growth in the enterprise business. The IP business slid 7.2% qoq, 9.9% yoy, on weak sales of the TNPM product. The company is revamping this product and expects growth to return in Q4.

18.7% EBITDA margin, down 67bps qoq, 186bps yoy: Persistent is transforming from an offshore-heavy OPD operator to an onsite-plus-ITservices one with onsite bringing 30% to revenue now vs. 25% in Q2FY15. Consequently, wages have gone up 12% yoy (vs. 7% for TCS and 5% for Infosys). The drop in IP-led revenue from 18.4% in Q1 to 16.2% in Q2 FY16 is also weighing on margins as the entire shortfall flows through EBITDA. The effect of these two factors, coupled with acquisition-related costs (RGEN is a lower-margin business) and wage hikes completely offset the benefit of currency movements in Q2.

FY16/17 business outlook, upbeat: Persistent continues to be positive on the business environment for the enterprise segment. It expects the ISV segment to deliver growth and guided to a better H2 FY16 in growth and margins. We are incorporating Aepona into our estimates.

The stock trades at 14x our FY17 EPSe. We believe it should trade at 17.5x FY17e, a 5% discount to Mindtree due to lack of consistency. Risk. Shocks in its ISV or IP-led businesses, says Amit Rathi in Anand Rathi research report.

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