De-growth in its intellectual property division coupled with a challenging market caused revenues to steady down and the company has been put on Hold by SBI Cap Securities

SBI Cap Securities has recommended its clients to put Persistent Systems on hold after valuing the company at Rs600 per share. The report said, “Considering challenging demand environment, the management’s commentary remains upbeat, backed up by strong growth in IP business, healthy pipeline and strong client additions. We have fine tuned our EPS estimate for the March 2014 fiscal after factoring in FY13 results, higher ETR and recent acquisitions. We maintain a Hold recommendation with a target price of Rs600.”
 

The company’s latest results were found to be disappointing, with its intellectual property (IP) business declining, on a quarter-on-quarter (q-o-q) basis. The chief result was a 1.7% q-o-q de-growth in its IP business. It contributed to 17.5% of the revenues in the March 2013 quarter compared to 18.2% for the previous quarter. The management expects IP-led business to drive growth in F14 and targets it to grow to 25% of overall revenues over the next two years, however, it expects quarterly volatility in revenues, the report said.
 

Persistent’s revenues increased 23.4% y-o-y in rupee terms, from Rs270.6 crore to Rs334 crore. On the other hand, its revenues increased only 14.6% y-o-y in dollar terms, from $54.2 million to $62.1 million. Net profit increased 25.9% y-o-y from Rs41.2 crore to Rs51.9 crore.
 

In its bid to boost IP revenues, the company acquired NovaQuest which contributed $1.07 million in the March 2013 quarter. The acquisition also added 40 clients to Persistent’s roster, out of which 10 clients are ‘large’ clients. According to the report, growth was driven by top client that grew at 4.7% QoQ and other than top 10 clients also grew 5.3% QoQ.
 

Other developments included a tie up with Hewlett-Packard for an automation software, which will supposedly buffet the income stream more. The report said, “During 4QF13, the company acquired licensing agreement with Hewlett Packard for HP Client Automation (HPCA) software. The acquisition further strengthens its offerings in PC Lifecycle Management (PCLCM), Virtual Desktop Infrastructure (VDI) and Mobile Device Management (MDM). The revenues from the acquisition would start accruing from 1QF14. The management expects gradual uptick in revenues as the customer agreements are transferred to Persistent Systems as and when deals come up for renewal”.
 

The company has even made a splash into the venture capital space and set up a separate division to be an angel investor to certain startups. The report said, “Persistent Ventures will focus on innovations and new technologies and invest in early stage ventures building intellectual property relating to platform solutions. The board has earmarked an investment of Rs350-500mn for the initiative”.
 

The company operates three divisions: telecom & wireless, life sciences & healthcare and infrastructure & systems. The majority contributor of revenues is infrastructure & systems, which showed Rs222.1 crore (a 21.3% y-o-y increase over corresponding period last year) of gross revenues out of the total gross revenue of Rs334 crore. Much of their revenues (85.1%) of their fourth quarterly revenues come from North America while 5.7% comes from Europe and the remainder comes from Asia Pacific.