MOSL: PERSISTENT SYSTEMS (Buy)-Weak performance, but a transitional phase
PERSISTENT SYSTEMS: Weak performance, but a transitional phase
(PSYS IN, Mkt Cap USD0.7b, CMP INR565, TP INR750, 33% Upside, Buy)
- Revenue growth remains elusive: 1QFY20 revenues declined 3.2% YoY to USD119.6m (v/s est. of 1.3% decline), EBIT declined 8% YoY to INR0.9b (v/s est. of 1% decline), while PAT declined 5.6% YoY to INR825m (v/s est. of 7.4% growth). Services revenue grew 1.2% QoQ to USD93.9m (v/s est. of USD93.2m). IP-led revenues were flat QoQ at USD25.8m (v/s est. of USD28.9m). The quarter included costs of 240bp (travel costs: 50bp; provision towards IL&FS: 100bp; and purchases/royalty: 90bp), which could reverse / discontinue in 2Q.
- Growth driven by the Alliance segment: Revenue growth during the quarter was boosted by the Alliance segment (28% of revenues), which grew 13% QoQ (USD3m incremental revenues). Services (46% of revenues) too grew 3.8% QoQ. However, the Digital segment disappointed, declining 6% QoQ. Geography-wise, while India saw a sharp 19% QoQ sequential decline, North America and EMEA grew +3.1%/+8.8% QoQ. The top 6-10 client bucket witnessed a sharp 21% QoQ decline in revenue.
- Valuation and view: In the wake of a soft start to the year and management comments, we have cut our FY20/FY21 revenue estimates by 2.8%/4.5% and EPS estimates by 15%/6%. As cited in the last quarter, we believe the new management will take some time to monetize its turnaround efforts; there is bound to be a gestation period before results from new strategies unfold. In this backdrop, implications of a soft quarter are less significant. However, with the new regime in place, one would wish to see gradual improvement rather than deterioration. Hence, continued softness will be detrimental to the hopes of a gradual and eventual revival. Our revised price target of INR750 discounts forward earnings by 13x. Maintain Buy.
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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