MOSL: PERSISTENT SYSTEMS (Buy)-Marginal profitability beat-Digital soft-A play on potential margin expansion
Persistent Systems: Marginal profitability beat; Digital soft; A play on potential margin expansion
(PSYS IN, Mkt Cap USD1.0b, CMP INR782, TP INR900, 15% Upside, Buy)
- Revenue in-line; Digital slightly soft: 3QFY18 revenue grew 3.8% QoQ to USD122.5m, in line with our estimate of USD122m. YoY growth was 12.3% v/s in 2Q. While Digital segment grew 9.2% QoQ, excluding the Parx acquisition, organic growth was 4% QoQ, tepid by its standards. Accelerite was soft too, with revenue down ~17% QoQ. Sustained revenue growth needs replacement of end-of-life products with new solutions – which, however, is some time away, in our view.
- Profitability beat as headcount declines again: EBITDA margin expanded 220bp QoQ to 17.4%, a 120bp beat to our estimate led by a headcount decline for the third straight quarter and also seasonal strength in IBM IoT. PAT increased 11% QoQ to INR917m, above our estimate of INR862m, led by operating beat and a lower effective tax rate of 22% (estimate of 25%).
- Focus on non-linear revenue growth: PSYS has shifted its revenue focus in recent quarters to non-linear segments, and that is reflected in revenue increase, despite a declining trend in overall headcount. In 3Q, onsite/offshore realization increased 1.8/1.7% QoQ. Yield in IP-led segment was up 5% QoQ. The company cited a healthy pipeline in higher-value deals, which justifies its focus on non-linear revenue growth. IBM IoT will turn a profit next fiscal, which, too, will be accretive to margins.
Persistent Systems Limited is engaged in the business of building software products. The Company offers complete product life cycle services. The Company's segments include Infrastructure and Systems, Telecom and Wireless, Life science and Healthcare, and Financial Services. The Company's products include Connected Healthcare, which is an integrated healthcare ecosystem; ShareInsights Platform, which allows organizations to analyze an overlay of enterprise data with public or cloud sources to derive insights; Digital Banking, and Accelerite, which provides cloud solutions, endpoint management and mobility. The Company provides product engineering services, platform-based solutions and Internet protocol (IP)-based software products to its global customers. It has presence in North America, Europe and Rest of the World. Its subsidiaries include Persistent Systems France S.A.S., Persistent Systems Malaysia Sdn. Bhd. and Persistent Systems Pte. Ltd.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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