Edelweiss Securities has given a buy rating to Persistent Systems with a target price of Rs 644.

Persistent Systems delivered better-than-expected fourth quarter FY20 results — revenues down 1.8 per cent quarter on quarter versus our estimate of a 2.5 per cent year on year decline and EBITDA margin of 13.8 per cent versus our estimate of 12.8 per cent. The 4.2 per cent quarter on quarter increase in services business was largely offset by the 24 per cent plunge in the IP-led business. A revamped leadership continues to deliver on revenue growth, and while the IP-led business remains muted, efficient client mining and revenue growth in services are promising. The margin surprise is largely due to a 50bps year on year expansion in gross margin, which is quite positive given the fallout of the Covid-19 in the quarter.

The brokerage’s thesis of a growth turnaround at Persistent led by a revitalised sales engine is now beginning to show up in numbers. That said, the Covid-19 effect prompts a 20 per cent cut each in our estimates for FY21 and FY22 building in lower deal signings and near-term cost pressure. The stock is trading at an attractive 11.5 times FY21E EPS. The target price has been revised to Rs 644 (Rs 804 earlier) rolling over the valuation to Q2FY22E.
The share price moved down by -0.22 per cent from its previous close of Rs 526.65. The last traded stock price is Rs 525.50. Incorporated in 1990, Persistent Systems has a market cap of Rs 4033.33 crore.

Investment Rationale

Persistent has done a remarkable job of reviving its services leg by revamping the leadership team and sales engine. The key challenge remains its weak IP-led business (20 per cent of revenue), which exacted a heavy toll on both growth and margins. While seasonality and Covid-19 exaggerated the weakness in the current quarter, the brokerage believes the company needs to fix this part of business quickly.

Covid-19 has hurt the business environment, effecting a massive disruption. The brokerage believes the negative impact is inescapable in the short term, but notes that Persistent has largely addressed its problems, and should be able to revive growth and margins going ahead.

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 926.36 crore, up .39 per cent from last quarter sales of Rs 922.73 crore and up 11.36 per cent from last years same quarter sales of Rs 831.85 crore. The company reported net profit after tax of Rs 83.82 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 31.44 per cent stake in the company as of March 31, 2020 while FIIs held 19.97 per cent, DIIs 24.62 per cent and public and others 23.80 per cent.

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