MOSL: PERSISTENT SYSTEMS (Buy)-Marching upward on profitability

​Persistent Systems: Marching upward on profitability

(PSYS IN, Mkt Cap USD0.8b, CMP INR663, TP INR780, 18%Upside, Buy)

• Top client weakness offset by Parx: PSYS’ 2QFY18 revenue of USD118m (+4.5% QoQ, in-line) was a function of weakness in the top client (-3% QoQ) being offset by incremental revenue from the integration of Parx (USD1.9m; 1.7pp) and strength in Europe (22% QoQ organic growth). While weakness in the top customer was attributed to seasonality in IP (taking away any worries beyond this quarter), a return to double-digit organic growth in Digital (12% QoQ) was an encouraging sign.
• In-line profitability despite onsite centricity: Incremental growth contribution from onsite (11.5% QoQ) and lower-margin Parx was detrimental to profitability during the quarter. However, 140bp improvement in utilization and 120bp optimization of G&A expenses drove EBITDA margin expansion of 90bp to 15.2%, ultimately meeting expectations of 15.4%. Higher-than-expected PAT growth of 12.4%, despite in-line operational performance, was led by higher other income.
• Addition of new opportunities: Barring the impact of seasonality, PSYS’ growth drivers of Digital and IP associated with IBM continue to be significant contributors. Additionally, new avenues of growth like (i) geographies of Europe and Australia, (ii) products in the areas of IoT, Cloud, Analytics and Security and (iii) partnerships with the likes of USAA and Partners HealthCare provide new opportunities to capitalize on, driving expectations of 10.4% USD revenue growth over FY17-20.