Persistent Systems – a Well Managed Company

Latest results

(in Cr.)
Sep-11
Jun-11
FY10-11
Revenue
184.47
171.31
610.13
Net Profit
31.74
29.14
133.59
EPS
8.3
7.64
35.41
Cash EPS
--
10.15
43.27
OPM %
30.1
30.78
29.97
NPM %
17.21
17.01
21.89

Share price movement

 
 
 
Weekly H/L
317.95
307.6
Monthly H/L
332.7
301.55
52 Weeks H/L
467.15
280.8
 
( 4 Jan 11 )
( 29 Aug 11 )
Delivery / Var+ELM %
68.82
12.5
Ex Date
 
 

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Share Price Movement

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Q2 results are average

Persistent Systems has reported average results for the quarter ended 30.09.11 as compared to the quarter ended 30.06.11. Revenue has increased from Rs.171.31 crore to Rs.184.47 crore. Revenue for the whole year 2010-11 was at Rs.610.13 crore. Net profit increased from Rs.29.14 crore to Rs.31.74 crore. Net profit for the whole year 2010-11 was at Rs.133.59 crore. Operating profit margin was marginally down from 30.78% to 30.10%. Net profit margin was marginally up from 17.01% to 17.21%. The company is operating in consulting and software sectors. The shares of Persistent Systems are traded in the Indian stock markets at Rs.316.95 now (15.11.11). The highest price recorded by the shares of the company in the last one year is at Rs.467.15 (04.01.11) and the lowest price was at Rs.280.80 (29.08.11). In other words, the present share price is close to its lowest price in the past one year. This gives a temptation to the investors to buy the shares of the company at the current price level. Is this feeling justified? Let us analyse.

Pioneer in new technologies

Persistent Systems is a pioneer in new technologies like analytic, cloud computing, enterprise mobility and collaboration. The next stage of growth for the company will come from IP-led revenue where it will be sharing revenue and risks by following pay per user concept. The company is targeting revenue of $220 million and nearly 30% growth for the financial year 2012. Despite tax increase from 7% in 2011 to 31% in 2012, the company hopes to keep its net profit in tact. The company is in the field of offshore product development. In 2010-11, the company’s net profit was affected by a one time provision for bad debt. The niche areas forayed by the company will contribute around 45% of the revenue in 2012. The company is operating from Pune, the new software hub of India after Bangalore.

Acquisition of Infospectrum helps the company to spread its markets

Persistent Systems offers solutions to companies in life science & healthcare, telecom wireless and infrastructure & systems. The company is also acquiring intellectual property (IP) from the clients and shares the revenue inflow and risk from the same with the clients. Last year the company acquired Infospectrum Inc’s and its subsidiary Infospectrum India Pvt Ltd’s product development business. This resulted in increased number of employees by 200 and hence its operational expenses increased. Net profit was also impacted to the tune of 8.6% to Rs.33 crore. But at the same time, acquisition of Infospectrum’s business has enabled Persistent Systems to further tap the European markets and provide services to clients from verticals like defence, aerospace, transportation, maritime, satellite imaging, logistics and geographic information systems. The company effected a mid term salary raise of 10% to its employees in January. This salary hike reduced attribution rate for the company by 3% to 19% for the quarter ended 31.03.11. Salary increases put pressure on margins of the company, but it cannot be avoided if the company wants to retain skilled employees.

Exit of Intel Capital

Intel Capital has exited from Persistent Systems recently. Intel Capital first invested in the company a decade back in April 2000. The shares sold by Intel (2.29% of the company’s share capital) were acquired by Reliance Capital Equity Opportunities fund for Rs.36 crore. Number of shares sold was 916746. Persistent Systems was started by Anand Deshpande in 1990. The company provides outsourced software product development services to its customers. Apart from Intel which has exited now, two other venture capital firms have also invested in Persistent Systems. They are Norwest Venture Partners FVCI Mauritius with 5404581 shares forming 13.5% of the share capital of Persistent Systems and Gabriel Venture Partners II Mauritius holding 1943716 shares that form 4.8% of the equity stake of Persistent Systems.

Joint venture with Sprint of USA

US telecom major Sprint Nextel Corporation has formed a joint venture with Persistent Systems, thereby entering into enterprise communication area. The joint venture company has been named as Sprint Telecom India. Persistent Systems will have 26% stake in the joint venture company. The joint venture will provide international long distance, national long distance, managed network services and internet services in India. Already several multinational companies have entered into the booming enterprise communication space in India. Some of these companies are Singtel, AT & T, Verizon, BT and Cable & Wireless. For Persistent Systems, this is a perfect opportunity to lure telecom operators to its cream of services. Persistent Systems is confidant of attracting Spring to its development services. If it happens in a big way, then Persistent Systems can attract other telecom players also to its fold. Persistent Systems is confident of its ability to fulfil the software needs of global carriers.

A quarter of revenue from telecom

Persistent Systems obtains 24% of its revenues from the telecom sector. Majority of its clients are telecom-specific software suppliers and handset companies. Joint venture with Sprint will catalyse its attracting these clients to its fold. Spring has more than 50 million clients. Details of the joint venture and the investment are not known fully. Persistent Systems has signed an agreement to acquire the software marketing and development business of Agilent Technologies, a French company from Grenoble.

Record oversubscription

Persistent Systems went public in 2010. Its Rs.167 crore issue was oversubscribed by a record 93 times – a record in IPO. The issue price was Rs.310. It listed in the stock markets with a premium of Rs.90 over the issue price i.e. at a price of Rs.400 per share with a face value of Rs.10. Immediately on listing, the share price shot up to Rs.448 and rewarded the investors. It is now part of the BSE-500 Index. Persistent Systems has nearly 5500 employees and 300 clients. It has delivered more than 3000 software products to its clients in the last five years. Persistent Systems’s skills can be gauged by the fact that it developed an enterprise-grade electronic medical records (EMR) system that can be used during operative procedures in hospitals.

Overseas subsidiaries and branches

In the telecom sector, Persistent Systems is concentrating on three things. The first one is unified messaging and communications similar to VoIP (Voice over Internet Protocol) and multi channel contacts. The second is mobility including handsets applications across every platform and also server-side components to support all these things. The third thing is operating systems and business support systems. Almost all the equipment manufacturers in telecom industry are sourcing the software applications and products from outside. This gives a golden chance for companies like Persistent Systems to make money. Persistent Systems has offices set up in Tokyo, Edinburgh, Rotterdam, Vancouver, Ottawa and Quebec. It has subsidiaries in US and Singapore.

No competition

Persistent Systems has no competitors in the outsourced product development (OPD) space. The Bangalore-based Mindtree was competing against the company, but now it has withdrawn from this area almost. Moreover, lot of executive resignations have upset Mindtree.

Invest for medium and long term

At the current price of Rs.316, one can enter into this counter and buy the shares for medium and long term holding for decent returns because of the following reasons:

  • The share price is close to its yearly low
  • The company is a well established company
  • The management is very efficient
  • There is almost no competition in the company’s niche activity
  • The company has over 300 clients

It is scouting for further opportunities

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