Persistent Systems’ (Persistent’s) Q1FY15 result was another soft quarter compared to PLe/Consensus’ expectation. We see weak start to the year and near term headwinds to operating margin to restrict upside.

1.
Persistent Systems
Soft performance, Margin headwinds limit near term upside
July 28, 2014
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Q1FY15 Result Update
Shashi Bhusan
shashibhusan@plindia.com
+91‐22‐66322300
Hussain Kagzi
hussainkagzi@plindia.com
+91‐22‐66322242
Rating Accumlate
Price Rs1,284
Target Price Rs1,285
Implied Upside .1%
Sensex 26,127
Nifty 7,790
(Prices as on July 25, 2014)
Trading data
Market Cap. (Rs bn) 51.4
Shares o/s (m) 40.0
3M Avg. Daily value (Rs m) 222.4
Major shareholders
Promoters 38.96%
Foreign 27.37%
Domestic Inst. 9.82%
Public & Other 23.85%
Stock Performance
(%) 1M 6M 12M
Absolute 16.0 27.4 138.8
Relative 12.8 3.7 106.9
How we differ from Consensus
EPS (Rs) PL Cons. % Diff.
2015 78.6 77.7 1.2
2016 94.2 90.8 3.8
Price Performance (RIC: PERS.BO, BB: PSYS IN)
Source: Bloomberg
0
200
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600
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Jul‐14
(Rs)
Persistent Systems’ (Persistent’s) Q1FY15 result was another soft quarter compared
to PLe/Consensus’ expectation. We see weak start to the year and near term
headwinds to operating margin to restrict upside. Retain “Accumulate”.
 Revenue and margin softer than expected: Persistent’s Q1FY15 result was
softer than expectation. Revenue declined by 2.6% QoQ to Rs4,349.9m (PLe:
Rs4,384m Cons: Rs4,385m) and flattish in USD terms to US$72.66m (PLe:
US$73.4m, Cons: US$73.4m). EBITDA margins eroded by 519bps to 21.8% (PLe:
24%, Cons: 24%) due to higher S&M cost (investment and wage hike ~7%), and
currency appreciation. EPS grew by 2.4% QoQ to Rs17.2 (PLe: Rs17.2, Cons:
Rs16.8) due to forex gain of Rs133m (Q4FY14 loss of Rs87mn).
 IP had better than seasonal quarter, client addition strong: IP revenue for
Q1FY15 tracked better than seasonality expectation. The growth outlook for IP
in FY15 continues to be strong. The investment in sales and marketing has
started showing early traction with 76 new clients’ addition in Q1FY15. The
management continues to hold the view of stronger FY15 than FY14.
 S&M investment and wage hike – Margin headwinds: The management
continues to invest in S&M team expanding their workforce by 52 QoQ (18 new
additions and rest reclassification of account managers as S&M that was earlier
classified in technical) to 202. We believe S&M investment, which will continue
through FY15, is right strategic move as Persistent gears up for enterprise sales.
Moreover, the wage hike for technical workforce would be headwind to the
margin in Q2FY15. However, non‐recurring visa cost, room for higher utilization,
and seasonally strong IP‐revenue would give margin tailwind in FY15.
 Valuation & Recommendation: Persistent has delivered the margin and revenue
performance in FY14, but heightened consensus expectation leave limited scope
for earnings upgrade. However, the constant pursuits to inorganic opportunity
leave room for surprises. Despite, high‐teen revenue performance, margin
headwinds would yield decelerated earnings growth. We Retain ‘Accumulate’
with revised target price of Rs1,285 (Old: Rs1,130).
Key financials (Y/e March) 2013 2014 2015E 2016E
Revenues (Rs m) 12,945 16,692 19,228 22,745
Growth (%) 29.4 28.9 15.2 18.3
EBITDA (Rs m) 3,352 4,303 4,885 5,746
PAT (Rs m) 1,876 2,493 3,144 3,770
EPS (Rs) 46.9 62.3 78.6 94.2
Growth (%) 32.3 32.9 26.1 19.9
Net DPS (Rs) 8.5 11.3 13.2 15.1
Profitability & Valuation 2013 2014 2015E 2016E
EBITDA margin (%) 25.9 25.8 25.4 25.3
RoE (%) 20.2 22.3 23.2 23.0
RoCE (%) 19.4 21.7 22.4 22.4
EV / sales (x) 4.0 3.0 2.6 2.2
EV / EBITDA (x) 15.4 11.8 10.3 8.6
PE (x) 27.4 20.6 16.3 13.6
P / BV (x) 5.0 4.2 3.5 2.9
Net dividend yield (%) 0.7 0.9 1.0 1.2
Source: Company Data; PL Research

2.
July 28, 2014 2
Persistent Systems
Exhibit 1: Revenue and margin lower than expected (Rs m)
Y/e March Q1FY15 Q4FY14 QoQ Q1FY14 YoY Cons PLe Var (Act. Vs Est.)
Sales ($ m) 72.7 72.6 0.0% 63.0 15.3% 73.4 73.4 ‐1.0%
Period Average Rate 59.87 61.50 ‐2.7% 56.7 5.6% 59.7 59.7
Sales 4,349.9 4,467 ‐2.6% 3,572.9 21.7% 4,385.0 4,383.7 ‐0.8%
EBITDA 949.0 1,206.5 ‐21.3% 776.9 22.1% 1,053.0 1,052.1 ‐9.8%
EBITDA Margin 21.8% 27.0% ‐519 bps 21.7% 7 bps 24.0% 24.0% ‐218 bps
PBT 954.2 923.3 3.3% 803.1 18.8% 944.0 947.2 0.7%
Tax 266.1 251.3 5.9% 232.2 14.6% 268.3 255.7 4.1%
Tax Rate 27.9% 27.2% 67 bps 28.9% ‐102 bps 28.4% 27.0% 89 bps
PAT 688.0 672.0 2.4% 571.0 20.5% 675.7 691.5 ‐0.5%
EPS (Rs) 17.2 16.7 2.9% 14.2 21.1% 16.8 17.2 0.0%
Source: Company Data, Bloomberg, PL Research
Exhibit 2: S&M investment continues – Continues ramping‐up the sales team
Q1FY15 Q4FY14 QoQ Q1FY14 YoY
Sales & Business Development 202 150 34.7% 119 69.7%
S&M Expense 389 342 13.9% 319 21.8%
S&M (% of Revs) 8.9% 7.6% 129 bps 8.9% 1 bps
Source: Company Data, PL Research
Exhibit 3: Strong growth in America and Europe
By Geography ($m) Q1FY15 Q4FY14 QoQ Q1FY14 YoY
America 62.4 62.0 0.6% 55.2 13.0%
Europe 4.7 4.4 6.6% 3.0 56.1%
RoW 5.5 6.2 ‐10.6% 4.8 15.3%
% of Total
America 85.9% 85.4% 50 bps 87.6% ‐170 bps
Europe 6.5% 6.1% 40 bps 4.8% 170 bps
Row 7.6% 8.5% ‐90 bps 7.6% 0 bps
Source: Company Data, PL Research

3.
July 28, 2014 3
Persistent Systems
Exhibit 4: Strong growth in Telecom
By Vertical Offering ($ m) Q1FY15 Q4FY14 QoQ Q1FY14 YoY
Telecom 13.4 11.1 20.9% 13.0 3.0%
Infrastructure and BFSI 49.7 52.0 ‐4.4% 43.6 14.1%
Life Sciences & Healthcare 9.5 9.5 0.0% 6.4 48.1%
% of Total
Telecom 18.5% 15.3% 320 bps 20.7% ‐220 bps
Infrastructure and Systems 68.4% 71.6% ‐320 bps 69.1% ‐70 bps
Life Sciences & BFSI 13.1% 13.1% 0 bps 10.2% 290 bps
Source: Company Data, PL Research
Exhibit 5: Pricing likely to remain stable at this level, Yield flattish
Delivery Split Q1FY15 Q4FY14 QoQ Q1FY14 YoY
Onsite 16.8 15.5 8.0% 13.4 25.6%
Offshore 41.3 42.9 ‐3.5% 40.2 3.0%
IP Driven 14.5 14.2 2.1% 9.5 52.7%
Fee Revenue
Onsite 23.1% 21.4% 170 bps 21.2% 190 bps
Offshore 56.9% 59.0% ‐210 bps 63.7% ‐680 bps
IP Driven 20.0% 19.6% 40 bps 15.1% 490 bps
Pricing (USD/ person month)
Onsite 14,905 14,355 3.8% 14,567 2.3%
Offshore 4,219 4,241 ‐0.5% 4,111 2.6%
Yield 3915.0 3927.0 ‐0.3% 3602.0 8.7%
Source: Company Data, PL Research
Exhibit 6: IP‐led revenue strong despite seasonality
By Business Offering ($ m) Q1FY15 Q4FY14 QoQ Q1FY14 YoY
Product Engineering & Platform 58.1 58.4 ‐0.5% 53.5 8.6%
IP Led 14.5 14.2 2.1% 9.5 52.7%
% of Total
Product Engineering & Platform 80.0% 80.4% ‐40 bps 84.9% ‐490 bps
IP Led 20.0% 19.6% 40 bps 15.1% 490 bps
Source: Company Data, PL Research

4.
July 28, 2014 4
Persistent Systems
Exhibit 7: Attrition up in‐line with industry
Manpower details Q1FY15 Q4FY14 QoQ Q1FY14 YoY
Billable 16,139 16,155 ‐0.1% 15,161 6.5%
Billed 10,925 11,183 ‐2.3% 10,607 3.0%
IP Led 2,419 2,343 3.2% 2,335 3.6%
Sales & Business Development 202 150 34.7% 119 69.7%
Support 403 358 12.6% 336 19.9%
Technical 7,271 7,349 ‐1.1% 6,689 8.7%
Total 7,876 7,857 0.2% 7,144 10.2%
DSO 69 63 9.5% 65 6.2%
Attrition (LTM) 14.0% 13.4% 60 bps 14.2% ‐20 bps
Source: Company Data, PL Research
Exhibit 8: Weak growth from top 5 clients
Client Details Q1FY15 Q4FY14 QoQ Q1FY14 YoY
Large > $ 3m 14 15 ‐6.7% 15 ‐6.7%
Medium > $ 1m, < $ 3m 38 36 5.6% 30 26.7%
Prod. Eng. & Platforms 260 261 ‐0.4% 253 2.8%
IP Led 347 358 ‐3.1% 387 ‐10.3%
Top Client 15.1 15.3 ‐1.4% 13.4 13.1%
Top 2‐5 Clients 13.0 13.3 ‐2.2% 9.6 35.8%
Top 5 Clients 28.1 28.6 ‐1.7% 22.9 22.6%
Top 6‐10 Clients 7.5 6.6 13.2% 6.9 8.9%
Top 10 Clients 35.6 35.2 1.1% 29.8 19.4%
Non Top 10 Clients 37.1 37.4 ‐0.9% 33.2 11.6%
% of Total
Top Client 20.8% 21.1% ‐30 bps 21.2% ‐40 bps
Top 5 Clients 38.7% 39.4% ‐70 bps 36.4% 230 bps
Top 10 Clients 49.0% 48.5% 50 bps 47.3% 170 bps
Non Top 10 Clients 51.0% 51.5% ‐50 bps 52.7% ‐170 bps
Revenue from repeat business 63.0 61.9 1.8% 52.3 20.4%
Non‐repeat business 9.7 10.8 ‐10.1% 10.7 ‐9.8%
% of Total
New Business 13.3% 14.8% ‐150 bps 17.0% ‐370 bps
Repeat Business 86.7% 85.2% 150 bps 83.0% 370 bps
Source: Company Data, PL Research

5.
July 28, 2014 5
Persistent Systems
Income Statement (Rs m)
Y/e March 2013 2014 2015E 2016E
Net Revenue 12,945 16,692 19,228 22,745
Raw Material Expenses — — — —
Gross Profit 12,945 16,692 19,228 22,745
Employee Cost 8,888 11,406 13,192 15,679
Other Expenses 705 983 1,151 1,319
EBITDA 3,352 4,303 4,885 5,746
Depr. & Amortization 783 1,026 1,007 1,180
Net Interest — 78 (21) 1
Other Income 61 228 468 529
Profit before Tax 2,630 3,427 4,367 5,094
Total Tax 754 934 1,223 1,324
Profit after Tax 1,876 2,493 3,144 3,770
Ex‐Od items / Min. Int. — — — —
Adj. PAT 1,876 2,493 3,144 3,770
Avg. Shares O/S (m) 40.0 40.0 40.0 40.0
EPS (Rs.) 46.9 62.3 78.6 94.2
Cash Flow Abstract (Rs m)
Y/e March 2013 2014 2015E 2016E
C/F from Operations 2,163 2,808 3,592 4,242
C/F from Investing (1,711) (1,958) (2,307) (2,729)
C/F from Financing (386) (516) (404) (603)
Inc. / Dec. in Cash 66 334 881 910
Opening Cash 433 499 833 1,714
Closing Cash 499 833 1,714 2,624
FCFF 1,352 1,789 1,285 1,513
FCFE 1,928 1,561 1,285 1,513
Key Financial Metrics
Y/e March 2013 2014 2015E 2016E
Growth
Revenue (%) 29.4 28.9 15.2 18.3
EBITDA (%) 44.2 28.4 13.5 17.6
PAT (%) 32.3 32.9 26.1 19.9
EPS (%) 32.3 32.9 26.1 19.9
Profitability
EBITDA Margin (%) 25.9 25.8 25.4 25.3
PAT Margin (%) 14.5 14.9 16.4 16.6
RoCE (%) 19.4 21.7 22.4 22.4
RoE (%) 20.2 22.3 23.2 23.0
Balance Sheet
Net Debt : Equity — — (0.1) (0.1)
Net Wrkng Cap. (days) — — — —
Valuation
PER (x) 27.4 20.6 16.3 13.6
P / B (x) 5.0 4.2 3.5 2.9
EV / EBITDA (x) 15.4 11.8 10.3 8.6
EV / Sales (x) 4.0 3.0 2.6 2.2
Earnings Quality
Eff. Tax Rate 28.7 27.3 28.0 26.0
Other Inc / PBT 2.3 6.7 10.7 10.4
Eff. Depr. Rate (%) 11.3 12.0 9.3 8.7
FCFE / PAT 102.8 62.6 40.9 40.1
Source: Company Data, PL Research.
Balance Sheet Abstract (Rs m)
Y/e March 2013 2014 2015E 2016E
Shareholder's Funds 10,183 12,223 14,840 18,006
Total Debt 653 426 426 426
Other Liabilities — — — —
Total Liabilities 10,836 12,649 15,266 18,432
Net Fixed Assets 4,677 4,362 5,662 7,212
Goodwill 721 620 620 620
Investments 3,289 4,895 4,895 4,895
Net Current Assets 1,959 2,512 3,829 5,445
Cash & Equivalents 561 957 1,714 2,624
Other Current Assets 3,291 4,340 5,151 6,392
Current Liabilities 1,894 2,785 3,037 3,570
Other Assets 190 260 260 260
Total Assets 10,836 12,649 15,266 18,432
Quarterly Financials (Rs m)
Y/e March Q2FY14 Q3FY14 Q4FY14 Q1FY15
Net Revenue 4,324 4,328 4,467 4,350
EBITDA 1,122 1,197 1,207 949
% of revenue 26.0 27.7 27.0 21.8
Depr. & Amortization 263 262 264 228
Net Interest (75) 147 87 (133)
Other Income (100) 77 68 100
Profit before Tax 835 865 923 954
Total Tax 227 223 251 266
Profit after Tax 608 642 672 688
Adj. PAT 608 642 672 688
Key Operating Metrics
Y/e March 2013 2014 2015E 2016E
Volume (persons month) 41,176 44,033 50,638 59,246
Realization (US$ / person month) 3,686 3,847 3,905 3,998
Currency (USDINR) 54.5 60.9 59.8 59.0
SW Devp. Cost (% of sales) 68.7 68.3 68.6 68.9
SG&A (% of sales) 5.4 5.9 6.0 5.8
Revenue (US$ m) 237.8 275.7 321.8 385.5
EBITDA Margin Expansion/(Erosion) (bps) 0.7 (1.4) 75.0 (200.0)
Tax Rate (%) 28.7 27.3 28.0 26.0
Source: Company Data, PL Research.

6.
July 28, 2014 6
Persistent Systems
Prabhudas Lilladher Pvt. Ltd.
3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India
Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209
Rating Distribution of Research Coverage
29.6%
50.9%
19.4%
0.0%
0%
10%
20%
30%
40%
50%
60%
BUY Accumulate Reduce Sell
% of Total Coverage
PL’s Recommendation Nomenclature
BUY : Over 15% Outperformance to Sensex over 12‐months Accumulate : Outperformance to Sensex over 12‐months
Reduce : Underperformance to Sensex over 12‐months Sell : Over 15% underperformance to Sensex over 12‐months
Trading Buy : Over 10% absolute upside in 1‐month Trading Sell : Over 10% absolute decline in 1‐month
Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly
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