MOSL: PERSISTENT SYSTEMS (Buy)-Margin expansion sans revenues from IP drives upgrades
Persistent Systems: Margin expansion sans revenues from IP drives upgrades
(PSYS IN, Mkt Cap USD0.6b, CMP INR565, TP INR800, 42% Upside, Buy)
- Significant GPM expansion drives profit beat: Revenue grew 2.2% QoQ (-1.4% YoY) to USD120.8m in 3QFY19 (in line with our estimate of USD120.5m). EBITDA grew 18.5% QoQ (+23.8% YoY) to INR1.7b (12.5% beat). PAT grew 4.1% QoQ (flat YoY) to INR917m (18% above estimate led by operating profit beat). Services revenue grew 3.1% QoQ (+1.1% YoY) to USD90.64m, above our estimate of USD86.6m, while IP-led revenue was flat QoQ (-8% YoY) at USD30.2m- despite strong 3Q seasonality. EBITDA margin expanded 250bp QoQ to 19.7%, significantly above our estimate of 17.4%, led by higher utilization, better realization, more offshoring, etc. For 9MFY19, USD revenue/EBITDA/PAT were up 26.9%/20%/7.1% YoY.
- Strong margin trajectory to sustain, growth to mend: PSYS is confident that it will be able to continually drive up pricing in high-skilled areas, given robust demand for talent. Also, revenue mix shift in favor of offshore should continue in the foreseeable future. These factors drive our confidence on continued strength in profitability, even after factoring in some necessary investments in S&M. Also, in line with commentary in the last quarter, QoQ performance in Digital improved and YoY growth should get back on track, going forward. IP disappointment during the quarter was led by weak intensity in IoT and some spill-over into the next quarter.
- Announced interim dividend and buyback: PSYS announced buyback of shares worth INR2.25b at a ceiling price of INR750/share through the open market route (this is ~5.2% of market cap). The amount is less than 10% of networth, and thus, would not require the approval of shareholders. We expect this to have ~2pp positive impact on EPS. The company also announced an interim dividend of INR8/share. This is in line with the previous years (INR6/share in FY17, INR7/share in FY18).
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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