Marel Q1 2024 Investor Presentation from May 8, 2024
Persistent systems
1. 1QFY2012 Result Update | IT
July 18, 2011
Persistent Systems ACCUMULATE
CMP `373
Performance highlights Target Price `424
Y/E March (` cr) 1QFY12 4QFY11 % chg (qoq) 1QFY11 % chg (yoy) Investment Period 12 Months
Net revenue 224 213 5.2 181 23.6
EBITDA 40 38 5.3 34 16.6
Stock Info
EBITDA margin (%) 17.9 17.9 3bp 19.0 (108)bp
Sector IT
PAT 28 33 (16.8) 35 (20.2)
Market Cap (` cr) 1,490
Source: Company, Angel Research
Beta 0.7
For 1QFY2012, Persistent Systems (Persistent) reported numbers that were almost 52 Week High / Low 504/337
in-line with the expectations on the revenue front, though its performance was
Avg. Daily Volume 35,272
marginally disappointing on the operating front. Management has maintained its
Face Value (`) 10
revenue guidance of US$220mn, i.e. 29% yoy growth for FY2012, and is
confident of maintaining PAT at least flat yoy, despite the surge in tax rates to 31% BSE Sensex 18,507
from 7% in FY2011. The company is into pure-play offshore product development Nifty 5,567
(OPD) and has been recording a 6% CQGR since 1QFY2011 on the back of Reuters Code PERS.BO
comeback in R&D spending by product companies. We recommend Accumulate Bloomberg Code PSYS@IN
on the stock.
Quarterly highlights: For 1QFY2012, Persistent reported revenue of US$50.0mn,
Shareholding Pattern (%)
up 6.3% qoq, led by volume growth coupled with increased billing rates.
Promoters 38.9
In rupee terms, revenue came in at `223.8cr, up 5.2% qoq. Despite strong
volume growth, EBITDA margin remained stable qoq at 17.9% because of a MF / Banks / Indian Fls 25.1
decline in IP-led revenue as well as promotions given during the quarter. FII / NRIs / OCBs 6.5
PAT came in at `27.6cr, aided by higher forex gain of `6.4cr as against `2.9cr in Indian Public / Others 29.6
4QFY2011 on the back of ITM hedges of US$86.25mn with average contract rate
of 47.39INR/USD.
Abs. (%) 3m 1yr 3yr
Outlook and valuation: Persistent, due to its niche focus on OPD, is expected to
Sensex (3.1) 3.1 35.7
witness a scorching revenue CAGR of 26.3% (in USD) over FY2011–13E,
outperforming tier-I IT companies’ growth. Also, on the back of adequate margin Persistent (4.9) (23.2) -
Note: Listed on April 6, 2010
levers, the tailwinds mentioned above are expected to overplay the headwinds
such as 1) rupee appreciation and 2) competitive wage hikes in the medium term,
thereby helping the margins to rebound to 18.4% and 19.5% in FY2012 and
FY2013, respectively. At the CMP of `373, the stock is trading at 9.7x FY2013E
EPS of `38.5. We value the stock at 11x FY2013 EPS, i.e. 45% discount to Infosys,
and recommend an Accumulate rating on the stock with a target price of `424.
Key financials (Indian GAAP, Consolidated)
Y/E March (` cr) FY2010 FY2011 FY2012E FY2013E
Net sales 601 776 984 1,195
% chg 1.2 29.1 26.8 21.4
Net profit 115 140 137 154
% chg 74.0 21.5 (2.1) 12.7
EBITDA margin (%) 24.3 20.4 18.4 19.5
EPS (`) 32.1 34.9 34.2 38.5
Srishti Anand
P/E (x) 11.6 10.7 10.9 9.7 +91 22 39357800 Ext: 6820
P/BV (x) 2.1 2.0 1.7 1.5 srishti.anand@angelbroking.com
RoE (%) 18.0 18.7 15.8 15.4
RoCE (%) 17.5 15.5 14.6 16.6 Ankita Somani
EV/Sales (x) 1.9 1.5 1.2 0.9 +91 22 39357800 Ext: 6819
EV/EBITDA (x) 7.8 7.2 6.4 4.8 ankita.somani@angelbroking.com
Source: Company, Angel Research
Please refer to important disclosures at the end of this report 1
2. Persistent | 1QFY2012 Result Update
Exhibit 1: 1QFY2012 performance (Indian GAAP, Consolidated)
Y/E March (` cr) 1QFY12 4QFY11 % chg (qoq) 1QFY11 % chg (yoy) FY2011 FY2010 % chg (yoy)
Net revenue 224 213 5.2 181 23.6 776 601 29.1
Cost of revenue 140 133 5.3 112 25.0 472 337 40.1
Gross profit 83 80 4.8 69 21.3 304 264 15.0
S&M expenses 18 16 7.7 14 23.8 62 46 33.5
G&A expenses 26 25 2.3 20 27.5 83 71 17.1
EBITDA 40 38 5.3 34 16.6 158 146 8.2
Depreciation 13 12 6.0 10 29.6 42 34 26.4
EBIT 27 26 5.0 25 11.4 116 113 2.7
Other income 6 6 3 17 8
Forex gain/(loss) 6 3 9 17 3
PBT 40 35 14.9 37 7.9 150 124 21.2
Income tax 12 2 628.2 3 382.6 11 9 17.3
PAT 28 33 (16.8) 35 (20.2) 140 115 21.5
EPS 6.9 8.3 (16.8) 8.6 (19.8) 34.9 32.1 8.8
Gross margin (%) 37.3 37.4 (11)bp 38.0 (71)bp 39.1 43.9 (478)bp
EBITDA margin (%) 17.9 17.9 3bp 19.0 (108)bp 20.4 24.3 (394)bp
EBIT margin (%) 12.3 12.3 (2)bp 13.6 (134)bp 14.9 18.8 (383)bp
PAT margin (%) 11.7 15.0 (329)bp 17.8 (618)bp 17.2 18.8 (154)bp
Source: Company, Angel Research
Revenue momentum continues
For 1QFY2012, Persistent reported revenue of US$50.0mn, up 6.3% qoq,
primarily led by volume growth. Also, the company’s billing rates, onsite as well as
offshore, improved by 2.3% and 1.3% qoq to US$13,033 per person per month
(ppm) and US$3,770 ppm, respectively. The improvement in billing rates during
the quarter was due to selling of high-end services like technology consulting,
mobility and analytics.
In rupee terms, revenue came in `223.8cr, up 5.2% qoq – lower growth as against
dollar revenue due to 1.0% qoq INR appreciation against USD in 1QFY2012.
Exhibit 2: Trend in revenue growth (qoq)
55 10
8.8 9
50
50.0 8
45 47.0 7
(US$ mn)
6.7
6.3
6
(%)
5.8 43.2
40 5
40.5
39.5
4
35
3
2.6
30 2
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Revenue (US$mn) qoq growth (%)
Source: Company, Angel Research
July 18, 2011 2
3. Persistent | 1QFY2012 Result Update
Exhibit 3: Trend in billing rates (qoq)
14,000 12,896 12,746 13,033
12,414 12,470
12,000
10,000
(US$/ppm)
8,000
6,000
3,600 3,601 3,661 3,723 3,770
4,000
2,000
-
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Onsite Offshore
Source: Company, Angel Research
Industry wise, the company’s growth was led by the telecom and wireless segment
(contributing 22.2% to revenue), which grew by 15.1% qoq, majorly led by
European clients. The anchor industry segment – infrastructure and systems
(contributed 67.9% to revenue) – continued its revenue traction and grew by 5.7%
qoq. In absolute terms, revenue contribution from the lifesciences and healthcare
segment stood modest; however, on a qoq basis, revenue declined by 6.0% due to
base effect, as higher growth was reported in this segment in 2HFY2011.
Exhibit 4: Growth trend in industry segments
% to revenue % chg (qoq) % chg (yoy)
Infrastructure and systems 67.9 5.7 19.9
Telecom and wireless 22.2 15.1 51.9
Lifesciences and healthcare 9.9 (6.0) 27.9
Source: Company, Angel Research
Geography wise, growth was led by Europe, revenue from which grew by 35.7%
qoq – whopping growth due to low base effect and ramp-up in revenue from few
European clients. North America continued to grow during this quarter as well
at 2.0% qoq.
Exhibit 5: Growth trend in geographies
% to revenue % chg (qoq) % chg (yoy)
North America 82.8 2.0 23.2
Europe 7.4 35.7 44.1
Asia-Pacific 9.8 31.9 47.7
Source: Company, Angel Research
Revenue contribution from IP-led services declined in 1QFY2012 to 6.1% from
10.3% in 4QFY2012 because of lower revenue from the company’s top customer
that contributes almost 60% to the company’s IP-led revenue. Management has
indicated that it is a one-time issue and revenue from the top customer is expected
to scale up again in the coming quarters. IP-led revenue seems low also because
of higher base in 4QFY2011, which was due to higher product sale from the top
customer’s end in 3QFY2011, the royalty revenue of which got reflected in
July 18, 2011 3
4. Persistent | 1QFY2012 Result Update
Persistent’s account in 4QFY2011. The company expects IP-led revenue to touch
US$25mn by the end of FY2012, i.e. whopping 68% yoy growth.
Hiring and utilisation
Persistent continued its modest hiring trend and added 260 net employees during
the quarter. Gross addition during the quarter was 545. In the technical employee
base of the company, 228 net employees were added. Attrition rate (LTM basis)
declined significantly in 1QFY2012 to 18.4% from 19.6% in 4QFY2011, as the
company gave wage hikes in 4QFY2011 to control attrition and, as a result,
quarterly attrition rate in 1QFY2012 stood merely at 3.2% (quarterly annualised at
12.8%), leading to an overall decline in attrition rates on an LTM basis.
Exhibit 6: Employee metrics
Particulars 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Technical 4,554 4,907 5,070 5,950 6,178
Sales 79 87 94 108 119
Rest 278 287 296 302 323
Total 4,911 5,281 5,460 6,360 6,620
Net addition 249 370 179 900 260
Attrition – LTM (%) 16.3 18.6 21.5 19.6 18.4
Source: Company, Angel Research
For FY2012, management has a gross hiring target of 2,300 employees (1,000
freshers and 1,200–1,300 laterals) and a net hiring target of ~1,500 employees.
Net utilisation (excluding resources in IP-led work) increased by 170bp qoq to
72.7%. However, in 2QFY2012, we expect utilisation to dip due to intake of
freshers into the system. Management expects utilisation to inch up and reach
75–77% over the next 3–4 quarters.
Exhibit 7: Utilisation trend
80
78.5
78
76
74.2
(%)
74 72.7
71.7
72 71.0
70
68
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Utilisation (%)
Source: Company, Angel Research
July 18, 2011 4
5. Persistent | 1QFY2012 Result Update
Margin profile
In 1QFY2012, the company’s EBITDA and EBIT margins remained almost stable
qoq at 17.9% and 12.3%, respectively, despite higher revenue growth due to
higher costs incurred on account of promotions given in 1QFY2012 and drop in
IP-led revenue.
Going ahead, for 2QFY2012, the company has announced wage hikes — 7–8%
for offshore employees and 4% for onsite employees, effective from July 1, 2011.
This is expected to negatively affect the company’s operating margins by
200–220bp qoq in the next quarter. However, for the full year, the company
expects margins to remain stable at FY2011 levels.
Exhibit 8: Margin profile
45
40
42.2
35 38.0 39.1
37.4 37.3
30
23.0 21.9
25
(%)
19.0 17.9 17.9
20
15 17.6 16.5
10 13.6
12.3 12.3
5
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Gross margin EBITDA margin EBIT margin
Source: Company, Angel Research
Client pyramid
The client metrics of the company saw a qualitative movement with six new clients
in the US$1mn–3mn revenue bracket. Also, four clients were added in the
<US$1mn revenue bracket.
In 1QFY2012, Persistent added 32 new clients, out of which eight were from the
company’s partners. The total active client base of the company increased to 239
from 229 in 4QFY2011.
Exhibit 9: Client metrics
Particulars 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Customers billed 196 201 207 229 239
<US$1mn 165 171 169 194 198
US$1mn-3mn 22 21 29 26 32
>US$3mn 9 9 9 9 9
Source: Company, Angel Research
July 18, 2011 5
6. Persistent | 1QFY2012 Result Update
Investment rationale
Established footprint in the resurging OPD market
Persistent has a dominant market share of ~16% (in CY2010) in the Indian OPD
market. The company is witnessing a robust uptick in the deal pipeline as clients
are flocking to generate new products in shorter time to market to capture market
share. This is driving many ISVs and wireless equipment manufacturers to spend
on R&D and engineering services. As per IDC, out of the global size of US$40bn in
2010 for R&D and product engineering, the Indian OPD market is just
worth ~US$1bn. The global OPD market is expected to grow at a 14% CAGR to
US$65.7bn by 2014. The offshore segment of the global OPD market in
2010 crossed the US$10bn mark and is expected to grow at a 19% CAGR to
US$16bn by 2014.
Exhibit 10: Worldwide R&D/PES spending (US$ mn)
70,000 25
60,000 18.2 19.1 20
17.9 16.3
50,000 13.2 15
(US$ mn)
(%)
9.7 10.2
40,000 10
30,000 5
3.9
20,000 0
CY2006 CY2007 CY2008 CY2009 CY2010 CY2011 CY2012 CY2013
IT spending (US$ mn) yoy growth (%)
Source: IDC, Angel Research
Exhibit 11: Worldwide R&D/PES offshore spending (US$ mn)
18,000 23.5 25
21.7
16,000 19.4
20
14,000 17.9
15
(US$ mn)
12,000 11.8
(%)
9.7
10,000 10
8,000
5
6,000 3.9
3.8
4,000 0
CY2006 CY2007 CY2008 CY2009 CY2010 CY2011 CY2012 CY2013
IT spending (US$ mn) yoy growth (%)
Source: IDC, Angel Research
July 18, 2011 6
7. Persistent | 1QFY2012 Result Update
Non-linear services already a sizeable part of the portfolio
Persistent has a sizeable portfolio coming in from IP-led revenue, which was ~9%
in FY2011. The company expects it to scale up to ~11% in FY2012 and reach
~20% by FY2015. The company has been investing in the areas of 1) cloud,
2) analytics, 3) collaboration and 4) mobility, which are towards consulting. With
the expected increase in contribution from IP revenue, the company is likely to
benefit at the margin front because of its non-linear nature.
Exhibit 12: IP-led revenue as a % of total revenue
12 11.4
11
10.2
10
8.8
9
8
(%)
7.2
7
6 5.2
5
4
FY2009 FY2010 FY2011 FY2012E FY2013E
IP driven revenue (as % of sales)
Source: Company, Angel Research
Marquee clientele
Out of its active clients, 37 have revenue of more than US$1bn and dedicated
annual R&D budgets of 6–20% of revenue to drive product innovation.
The company has marquee clients (with R&D budgets) including MNCs like IBM
(~6.0%), Google (~12.8%), Microsoft (~13.9%), Oracle (~12.8%), Intel
(~15.1%), Cisco (~13.2%), Nokia (~14%), Samsung, Yahoo (~17%) and eBay.
In addition, the company’s client mining is strong as the company manages to get
~11% of its revenue from new clients vis-à-vis peers who get mere 3–5%.
Exhibit 13: Revenue (CY2010/FY2010) and R&D budget as a % of sales
120
99.9
100
80
62.5
60
43.6 40.0
40 29.3
20 13.9 15.1 13.2 13.8 12.8
12.5 6.0
0
Microsoft Intel Cisco SAP Google IBM
Revenue (US$ mn) R&D as % of sales
Source: Company, Angel Research
July 18, 2011 7
8. Persistent | 1QFY2012 Result Update
Robust revenue growth with gradual improvement in margins
Persistent is expected to report a robust revenue CAGR of 26.3% over FY2011–13E
on the back of return in demand for OPD services. In fact the company has
indicated net hiring to be 1,500 plus for FY2012E on the back of a strong deal
pipeline. On the operating front, we expect margins to rebound in 2HFY2012 from
17.9% in 1QFY2012 to 18.4% in FY2012 and 19.5% in FY2013. We expect this
margin improvement because of margin levers such as 1) employee pyramid
rationalisation (indicated to hire 700 freshers out of 1,500 net people in FY2012);
2) higher revenue productivity due to the expected increase in IP-led revenue
contribution; 3) gradual increase in utilisations to 74.7% in FY2013 from 72% in
1QFY2012 and 4) stable G&A in absolute terms even with higher growth.
On the PAT front, we expect factors like 1) improvement in profitability and 2) forex
gains due to In-the-Money (with average contract rate of 47.39INR/USD) hedges
worth US$86.25mn to counter the headwinds due to higher tax rate of 31%
compared to 7% in FY2011.
Exhibit 14: Revenue expectations
300
250 28.8% 271.7
CAGR
200 221.4
(US$ mn)
150 170.2
127.9 127.3
100
50
FY2009 FY2010 FY2011 FY2012E FY2013E
Revenue (US$ mn)
Source: Company, Angel Research
Exhibit 15: Margin expectations
31 30.1
29
27
24.3
25
(%)
23
20.4
21 19.5
18.4
19
17
FY2009 FY2010 FY2011 FY2012E FY2013E
EBITDA margin (%)
Source: Company, Angel Research
July 18, 2011 8
9. Persistent | 1QFY2012 Result Update
Outlook and valuation
Persistent, due to its niche focus on OPD, is expected to record a scorching
revenue CAGR of 26.3% (in USD) over FY2011–13E, outperforming tier-I IT
companies’ growth. Also, on the back of adequate margin levers, the tailwinds
mentioned above are expected to overplay the headwinds such as 1) rupee
appreciation and 2) competitive wage hikes in the medium term and help the
margins to rebound to 18.4% and 19.5% in FY2012 and FY2013, respectively.
At the CMP of `373, the stock is trading at 9.7x FY2013E EPS of `38.5. We value
the stock at 11x FY2013 EPS, i.e. 45% discount to Infosys, and recommend an
Accumulate rating on the stock with a target price of `424.
Exhibit 16: Key assumptions
FY2012 FY2013
Revenue growth – USD terms (%) 30.1 22.7
USD-INR rate 44.5 44.0
Revenue growth – INR terms (%) 26.8 21.4
EBITDA margin (%) 18.4 19.5
Tax rate (%) 31.0 31.0
EPS growth (%) (2.0) 12.7
Source: Company, Angel Research
Exhibit 17: One-year forward PE(x) chart
700
600
500
(` )
400
300
200
Dec-10
Apr-10
Jul-10
Aug-10
Apr-11
Jul-11
Mar-11
Oct-10
Sep-10
Nov-10
Feb-11
May-10
May-11
Jun-10
Jun-11
Jan-11
Price 16 14 12 10 8
Source: Company, Angel Research
July 18, 2011 9
15. Persistent | 1QFY2012 Result Update
Research Team Tel: 022 - 3935 7800 E-mail: research@angelbroking.com Website: www.angelbroking.com
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Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)
July 18, 2011 15