idirect persistentsystems ic

7/28/2019 IDirect PersistentSystems IC

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April 9, 2013

nitiating Coverage

ICICI Securities Ltd|Retail Equity Research

Long haul!Persistent Systems (PSL) continues to grow rapidly in the evolvingoutsourced product development (OPD) space. Concerted efforts to stayrelevant and in sync with its customers sales strategy continue to feed itsnon-linear IP-led acquisition strategy as well as generate downstreamOPD revenues. Technology investments, ahead-of-time, have led to a 2xgrowth in IP revenue contribution in the last five quarters while quarterlyrevenue CQGR of 4.4%, during Q1FY11-Q3FY13, 38% faster thanemployee growth, demonstrates considerable success of this strategy.We expect IP contribution to rise to ~26% in FY15E, led by recent dealwins, which could be gross and EBITDA (peer leading by now and tier-Icomparable) margin accretive. Healthy balance sheet metric and 19% EPSCAGR over FY12-15E merit premium valuation. However, 65% stock priceappreciation in TTM demands cautious accumulation given valuations at10.6x FY14E EPS look full and consensus earnings expectation are notlow as they factor 15% growth. We initiate coverage on PSL with BUY.Stay relevant stay hungryPersistent unveiled the 4 x 4 x 4 matrix to become more relevant to theclients, increase focus on emerging verticals and define the concentrationof operating verticals. In addition to traditional Sell-To (OPD) model, PSLlaunched two more market positioning or how to sell strategies: 1) Sell-with selling to customers customer, and 2) IP led partner/co-createIPs along with customers. PSL has successfully opened 20+ new logosadding business worth $15 million in FY12. We believe PSL stays relevant

and in sync with its customers sales strategy which in turn helps to 1)generate downstream OPD revenues and 2) identify and acquire non-strategic customer products, feeding its IP acquisition strategy.

OPD exports could grow 3.8x in the next seven yearsHaving grown 17% YoY to reach $1.4 billion in FY13E, OPD exportscontinue to evolve rapidly and now account for 12.5% of ER&D exportsvs. 11.8% in FY12. Assuming ER&D market potential in 2020 ($42 billion)and similar contribution suggests OPD exports could be a $5.3-billionopportunity, 3.8x it current size.

Long horizon betWe are modelling revenue, PAT CAGR of 18.3%, 19.2% respectively,during FY12-15E. Though EBITDA margins could decline 154 bps in

FY14E led by investments in new deal wins, we expect average 24.4%margins during FY13-15E. We value the stock at | 600 i.e. at 10.4x CY14EEPS estimate of | 57.8.

Exhibit 1:Key financialsFY11 FY12 FY13E FY14E FY15E

Net Sales (| crore) 776 1000 1298 1445 1654

EBITDA (| crore) 158 229 334 350 409

Net profit (| crore) 140 142 185 204 240

EPS (|) - diluted 34.9 35.4 46.2 51.1 60.0

PE (x) 15.5 15.2 11.7 10.6 9.0

EV to EBITDA(x)10.7 7.4 5.1 4.9 4.2

Price to book (x) 2.9 2.6 2.2 1.9 1.6

RoNW (%) 19.9 17.8 20.2 19.2 19.5

ROCE(%) 17.4 20.3 19.8 20.0 20.0[

Source: Company, ICICIdirect.com Research

Persistent Systems (PERSYS)| 540

ng : Buyget : | 600get Period : 12monthsential Upside : 11%

FY12 FY13E FY14E FY15E

t Sales 28.9 29.8 11.3 14.5

TDA 44.8 45.8 4.7 16.9

t Profit 1.6 30.3 10.7 17.4

FY12 FY13E FY14E FY15E

(x) 15.2 11.7 10.6 9.0

to EBITDA(x) 7.4 5.1 4.9 4.2

ce to book (x) 2.6 2.2 1.9 1.6get PE 16.9 13.0 11.7 10.0

get EV/EBITDA 8.4 5.8 5.5 4.7

get P/BV 2.9 2.4 2.1 1.8

omberg/Reuters Code PSYS IN Equity/PERS.NS

nsex 18226

erage Volumes (yearly) 20673

rket cap (| crore) | 2085 crore

bt (Dec-12) | 0 crore

sh (Dec-12) | 387 crore

week H/L (|) 591/319

ity capital | 39 crore

e value 10

Holding (%) 22.2

Holding (%) 11.7

urns (%) 1M 3M 6M 12M

sistent (6.4) 0.7 25.5 62.4

otech Ent. (2.1) (6.5) (11.6) 5.7

T Cummins (11.3) (12.2) (21.2) 24.1

ndtree (2.8) 20.2 29.8 69.6

0

50

00

50

00

Feb-11

May-11

Aug-11

Nov-11

Feb-12

May-12

Aug-12

Nov-12

Feb-13

Nifty Persistent

ishek Shindadkar

[email protected]

hwariya [email protected]


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Page 2ICICI Securities Ltd|Retail Equity Research

Company backgroundPersistent Systems Ltd (PSL), founded in 1990 (IPO in 2010) andheadquartered in Pune, is a global company specialising in softwareproduct & technology solutions and provides the same to customers intechnology, telecommunication, life science, healthcare, banking and

consumer product sectors across North America, Europe and Asia. Thecompany has deep domain expertise on next-generation cloud, businessintelligence & analytics, collaboration as well as mobility-based computing

platforms. PSL has ~6,700 associates with overseas offices spread in theUS, UK, Canada, Netherlands, Singapore, Malaysia, etc.

Business descriptionPSLs business model and solution positioning concentrates on 1)outsourced product development (OPD, ~70% of Q3FY13 revenues) traditional product engineering services (PES) business, intellectualproperty (IP, ~18%) and platforms (~12%). Segregating IP revenuesyields royalty revenues (34% of IP), license (13%), annual maintenancecharges (18%) and others (35%). From an offering perspective, PSLfocuses on key technology growth areas of cloud computing (~11.4%),enterprise collaboration (12.9%), analytics (8.4%) and mobility (12.9%).Together, they contributed ~$80 million or 45.8% of Q3FY13 revenues.The company serves industry verticals like life sciences (11% of Q3revenues), infrastructure and systems (63%) and telecom & wireless(26%). Total 73% of revenues (excluding IP) are time & material basedwhile 8% are fixed bids. Generally, fixed bid billings are PES projectswhile platform billings are time and material based but with higher billrates than the traditional business.

Exhibit 2:Revenues grow at 24% CAGR during FY07-12

424

.9

593

.8

601

.2

775

.8

1000

.3

39.8

29.1 28.9

1.2

0

300

600

900

1200

FY08 FY09 FY10 FY11 FY12

|crore

0

10

20

30

40

50

%

Revenue % growth


Exhibit 3:while it operated at a healthy 23.9% (avg) EBITDA margin

91

.3

178

.8

146

.4

158

.3

229

.3

21.5

30.1

20.422.9

24.3

0

50

100

150

200

250


|crore

0

10

20

30

40

%

EBITDA % margins


Shareholding pattern (Q3FY13)

Shareholder Holding (%)

Promoters 39.0

FII 11.7

DII 22.2

Others 27.2

FII & DII holding trend (%)

39.0

39.0

39.0

39.0

39.0

32.8

33.0

33.6

34.7

33.9

24

30

36

42

Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13

%

Promoters FII & DII


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Exhibit 4:Telecom & life sciences grow at 8.1% and 5.1% CQGR, faster than company average of 4.4%% FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 FY12 Q1FY13 Q2FY13 Q3FY13

Telecom & wireless 23.1 18.5 20.0 23.0 20.5 20.5 22.2 22.0 20.4 21.0 21.4 24.2 28.0 26.1

Infrastructure & systems 65.7 71.7 69.4 65.4 68.3 68.7 67.9 67.4 67.1 67.6 67.5 64.3 62.4 63.4

Life Sciences & healthcare 11.3 9.8 10.6 11.6 11.2 10.8 9.9 10.6 12.5 11.4 11.1 11.5 9.6 10.5

$ million FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 FY12 Q1FY13 Q2FY13 Q3FY13Telecom & wireless 28.8 7.3 8.1 9.9 9.7 35.0 11.1 11.3 10.5 11.4 44.4 13.3 16.8 15.9

Infrastructure & systems 83.1 28.3 28.1 28.3 32.1 116.8 34.0 34.7 34.7 36.6 140.0 35.3 37.5 38.5

Life Sciences & healthcare 14.0 3.9 4.3 5.0 5.2 18.4 5.0 5.5 6.5 6.2 23.0 6.3 5.8 6.4

Growth, QoQ FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 FY12 Q1FY13 Q2FY13 Q3FY13

Telecom & wireless -2.4 10.9 22.7 -2.9 15.0 2.1 -7.0 8.2 16.5 26.4 -5.6

Infrastructure & systems 10.2 -0.7 0.5 13.7 5.7 2.3 -0.2 5.6 -3.6 6.1 2.8

Life Sciences & healthcare 5.0 11.0 16.7 4.7 -5.7 10.3 18.2 -4.3 2.2 -8.7 10.6


Exhibit 5:New technology vs. old technology revenue break-up

22.6 14.7 20.4 20.7 97.3

12.98.4

11.4 12.9

54.5

0

40

80

120

Social Analytics Cloud Mobility Old technology

$million

0

10

20

30

40

50

60

%

YTDFY13 revenues (US$) %


Exhibit 6:Revenue break-up by contract type81.3 81.1 78.6

74.279.8 80.4 79.0 79.8 78.6

73.2 73.3

9.8 10.713.9 15.5 14.1 12.0 11.8

8.1 7.5 7.9 8.5

0

15

30

45

60

75

90

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Q3FY13

%

Time & material Fixed priced projects



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Persistent derives 18% of its revenues from IP solutions. IP revenues

grew ~120% YoY on TTM basis. IPs include:

Exhibit 7:IP revenue breakup

3.1

1.1

1.81.5

4.8

3.1

1.4

2.2

3.8

1.4

2.0

3.9

0

1

2

3

4

5

6

Royalty License fees AMC Others

$million

Q1FY13 Q2FY13 Q3FY13

Source: Company, ICICIdirect.com Research[

Exhibit 8:Overview of owned and acquired IPsIP Description

Paxpro cloud based and mobile enabled BPM solution for CPG brands

TLALOC cloud based tools for managing and delivering consistent Quality of Service (QoS) for internet-scale web applications

Device Monitoring System application for monitoring network infrastructure operations

Radia Client Automation Software manageability tool for highly complex, distributed devices and applications

ChemLMS solution for tracking of samples; automates routine laboratory tasks

ViewMOR Mail delivery system add-on context-based search tool for email search

e2G Migrator tool to migrate user accounts from Microsoft Exchange server to organisations provisioned account on Google Apps

DriverCentral portal for driver purchases and support

CLAP cloud infrastructure to load-test applications, websites, web-services and cloud applications

eMee gamification platform enabling online engagements

Exploriments mobile science learning apps enhancing overall experience

Enterprise Community Portal solution that leverages internally and externally stored information

Enterprise search tool for overcoming challenges related to accessing information witihin enterprise

Enterprise search Exalead a platform for Search Based Applications

Skype on Embedded System solution to bring Skype voice and video calling feature to embedded devices

Cloud Assessment Tool addresses common cloud enablement related challenges


From a geographic perspective, US contributed 85% of Q3FY13 revenues

and grew at 26.6% CAGR during FY10-12. Europe contributed 6.1% in Q3

vs. 8.9% in Q4FY09 and grew at 21% CAGR during FY10-12. The Asia-

Pacific contribution has risen steadily to 8.8% vs. 4.1% in Q4FY09 and

grew at 54.7% CAGR during FY10-12.


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Exhibit 9:North America, Asia-Pac grow 4.4% and 4.9% CQGR, respectively, faster than company average of 4.4%% FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 FY12 Q1FY13 Q2FY13 Q3FY13

North America 84.8 85.1 85.5 85.4 86.3 85.6 82.8 82.0 82.9 82.4 82.5 84.4 84.6 85.1

Europe 8.4 6.5 6.0 5.3 5.8 5.9 7.4 7.8 7.2 6.8 7.3 6.9 7.4 6.1

Asia-Pacific 6.9 8.4 8.5 9.3 7.9 8.5 9.8 10.2 9.9 10.8 10.2 8.7 8.0 8.8

$ million FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 FY12 Q1FY13 Q2FY13 Q3FY13

North America 106.7 33.6 34.6 36.9 40.6 145.7 41.4 42.3 42.8 44.7 171.2 46.3 50.8 51.7

Europe 10.3 2.6 2.4 2.3 2.7 10.0 3.7 4.0 3.7 3.7 15.1 3.8 4.4 3.7

Asia-Pacific 8.8 3.3 3.4 4.0 3.7 14.5 4.9 5.2 5.1 5.9 21.1 4.8 4.8 5.3

Growth, QoQ FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 FY12 Q1FY13 Q2FY13 Q3FY13

Telecom & wireless NM 4.8 3.1 6.5 10.0 NM 2.0 2.1 1.3 4.3 NM 3.8 9.6 1.8

Infrastructure & systems NM 8.8 -5.3 -5.8 19.5 NM 35.2 8.9 -7.7 -0.9 NM 2.8 17.3 -16.6

Life Sciences & healthcare NM 36.3 3.8 16.7 -7.8 NM 32.3 6.8 -2.3 14.5 NM -18.4 0.6 11.3



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Management ProfileDr Anand Deshpande Chairman, Managing Director & CEO: DrDeshpande founded Persistent Systems in 1990 and is responsible foroverall leadership & management of the company and drives the salesand technology efforts. He is also a member of the Association ofComputing Machinery (ACM), Institute of Electrical and ElectronicsEngineers (IEEE), Institution of Engineers (India) and Computer Society ofIndia. He is a member of the Executive Committee of Nasscom and serveson the Deans Advisory Council of the School of Informatics of IndianaUniversity. In recognition of his contribution to the informationtechnology sector he was awarded the Entrepreneur Award at the BrihanMaharashtra Mandal Convention held in Atlanta, US, 2005. He is therecipient of the CSI Fellowship Award in 2007 for outstandingachievement in the field of information technology. He was awarded thecareer achievement award of the School of Informatics at IndianaUniversity, Bloomington in 2009. Dr Deshpande holds a B Tech (1984) inComputer Science and Engineering from IIT Kharagpur and a Masters(1986) & PhD (1989) in Computer Science from Indiana University,

Bloomington (US).

Hari Haran, President: Mr Haran is responsible for global sales, marketingand business development efforts. He also heads the Persistent USsubsidiary. He has over 22 years of experience primarily in the telecom,wireless, broadband, convergence and professional services. Prior toPersistent, he was the SVP of Worldwide Field Operations at OpenwaveSystems heading the global sales, services and support. He also servedas the President and CEO of Longboard, SVP of Global Sales andMarketing for Littlefeet, and CEO of Penbase. He has worked with LucentTechnologies where he was the Vice President and Manager of the EMEAregion. He attended the executive management programme at the

Wharton School of the University of Pennsylvania. He holds an MS inComputer Science from the Illinois Institute of Technology. He also holdsan MBA from the University of Louisiana, Monroe and a BS in Engineeringfrom the Indian Institute of Technology, Kharagpur.

Nitin Kulkarni, Executive Director & Chief Operating Officer:With over 20years of experience, Mr Kulkarni is the Chief Operations Officer andExecutive Director on the board of Persistent. He held a variety of seniorpositions including CXO roles, heading offshore development centres,driving integration of companies post M&A, strategic accountmanagement and heading quality process teams in organisation such asInfosys, Siemens Information Systems Ltd, and Nelco (a Tata company).He earned a Bachelor's Degree in Engineering in Electronics from Mumbai

University in 1988 and a Master's Degree in Engineering in Electronicsfrom VNIT, Nagpur University in 1991.

Rohit Kamat, Chief Finance Officer: As CFO, Mr Kamat is responsible fortreasury, financial reporting, taxation and internal controls at PersistentSystems. He has been with Persistent since 2001 and has held variousimportant positions in the finance and internal audit departments. He hasaround 30 years of experience in the areas of corporate finance, accounts,international and domestic taxation and management accounting and hasworked with leading Indian and multinational IT companies such as TataUnisys Ltd, L&T Infotech Ltd and Syntel Software. Mr Kamat is anassociate member of the Institute of Chartered Accountants of India as

well as the Institute of Company Secretaries of India. He is a B Com(Honours) from the University of Mumbai and a qualified cost and worksaccountant.


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Sameer Bendre,Chief People Officer: Mr Bendre is responsible for PSL'sGlobal HR practices, People Engagement, Talent Acquisition andDevelopment initiatives. He joined Persistent in August 2003 and bringswith him over 20 years of experience in a variety of roles in technology,finance and operations. He was responsible for setting up the Nagpur andHyderabad centres and was the Head of Operations for Nagpur before

taking over as the Chief People Officer. Prior to Persistent, he was anentrepreneur running his own industry Nagpur Motors Pvt Ltd,manufacturing electric motors. He holds a Bachelors degree in ElectronicEngineering from Nagpur University and has attended executivemanagement programmes at IIM Ahmedabad. He is also a certified ISOlead auditor.

Dr R Venkateswaranawan, Chief Technology Officer: As the CTO ofPersistent Systems, Mr Venkateswaranawan is responsible for thetechnology roadmap of the company, covering high-end technologyconsulting business, innovation, learning and competency developmentand IP-related investments. He joined Persistent in 2002 and has

undertaken various roles over the years, including that of Head ofTelecom Business and Strategic Initiatives around BI/analytics, cloudcomputing, enterprise collaboration and mobility & embedded systems.Prior to Persistent, he worked for seven years as a researcher at BellLaboratories and also as the CTO office at Lucent Technologies. MrVenkateswaranawan has earned his B Tech (1988) and M Tech (1992) inComputer Science from IIT Bombay and has a PhD in Computer Sciencefrom Washington State University (1997).

Dr Sridhar Jagannathan, Chief Innovation Officer: Dr Jagannathan isresponsible for leading products, solutions and services advancement atPSL. Based in Santa Clara, California, he brings with him over 17 years ofexperience in software engineering, strategy and technology ventures

from Intuit, Symantec, Softbank and Oracle. Prior to Persistent, he servedas Vice President, CTO Office at Intuit, Inc, where he was responsible forleading Intuit's technology strategy, global engineering and technologyM&A diligence. Other leading positions held include Managing Directorfor Symantec's India Development Centre for consumer products, VicePresident of Technology for Softbank Emerging Markets and TechnicalDirector for Internet & e-commerce at Oracle Corporation.


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Investment Rationale

Persistent continues to grow rapidly in the evolving outsourced productdevelopment (OPD) space. Concerted efforts to stay relevant and in syncwith its customers sales strategy continue to feed its non-linear IP-ledacquisition strategy as well as generate downstream OPD revenues.Technology investments, ahead-of-time, have led to 2x growth in IPrevenue contribution in the last five quarters while quarterly revenueCQGR of 4.4%, during Q1FY11-Q3FY13, 38% faster than employeegrowth, demonstrates considerable success of this strategy. We expect IPcontribution to rise to ~26% in FY15E, led by recent deal wins, whichcould be gross and EBITDA (peer leading by now and tier-I comparable)margin accretive. On the Mcap/sales metric, the stock is trading at 1.4xand 1.2x its FY14E and FY15E sales, modestly higher than peer groupaverage of 1.2x and 1.1x, respectively. That said, the EV/EBITDA metric islower at 4.7x and 3.9x its FY14E and FY15E EBITDA vs. peer groupaverage of 4.9x and 4.3x, respectively. Finally, though FY14E and FY15EP/E (10.1x and 8.6x) is modestly expensive relative to peer group average(8.3x and 7.4x), a healthy balance sheet metric and 19% EPS CAGR overFY12-15E merits premium valuation. We are initiating coverage with aBUY rating and | 600 target price.OPD exports may grow 3.8x in the next seven yearsPersistent is a niche player in the outsourced product development (OPD)space, which is a sub-segment of engineering R&D (ER&D) exports. OPDexports could reach $1.4 billion in FY13E, YoY growth of 17%, accountingfor 12.5% of ER&D exports vs. 11.8% in FY12. As a reminder, ER&Dexports could reach ~$42 billion in 2020 vs. $11.2 billion in 2013,representing a CAGR of 20.8% during 2013-20. Assuming similarcontribution suggests OPD could be a $5.3-billion market in 2020, 3.8x itscurrent size.

Exhibit 10:Indian ER&D may reach $42 billion in 2020

Source: Nasscom estimates, ICICIdirect.com Research

Exhibit 11:while OPD exports could grow 3.8x in seven years

Source: Nasscom estimates, ICICIdirect.com Research

Differentiated acquisition strategy to help achieve $500 mn in FY16E revenuesLike its peers, even Persistent has been acquisitive. However, itsacquisition strategy is unusual as it acquires non-strategic, but withperceptible prospects, products hived off by its customers. Note,Persistent over time has developed in excess of 5,000 products. Suchacquisitions are not only fruitful but inexpensive as well. The rationale isthat a majority of these acquisitions involve only transition relatedexpenses and royalties with minimal or no up-front payments.Concurrently, rising contribution of IP (non-linear) revenues helps cushion

With zero debt and | 380 crore of cash, PSL could continue

its IP-led acquisition strategy, which could help increase

non-linear revenue contribution

0.9

1.1

1.2

1.4

5.3

0.6 0

.7

0.0

1.1

2.2

3.4

4.5

5.6

FY07 FY08 FY10 FY11 FY12 FY13E FY2020E

$billion

OPD exports

>3x the currentsize

9.0

11

.2

42

.05.2 7

.0

7.9

10

.2

0

10

20

30

40

50


$billion

ER&D exports

CAGR

:

20.8%

9.0

11.2

42.0

10.2

7.9

7.0

5.2

0

10

20

30

40

50


$billion

ER&D exports

CAGR : 20.8%


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EBITDA margin headwinds. Finally, having co-developed along withcustomer and implemented the acquired platforms, we believe,Persistent 1) has deep domain understanding of the same, 2) has accessto rich clientele and 3) comprehends the scalability of the platform inentirety.

Exhibit 12:Select acquisitions over time

Oct. 2009:Paxpro

Description-IP Packaging &Branding Solution

Client MeadWestvaco Corp.

March 2011:Infospectrum India, OPD business

Description- ProductDevelopment

Client Infospectrum.

April 2011:JV (26%) with Sprint Nextel CorpDescription: Telecom services forIndian CustomersClient Sprint Nextel

May 2011:Software & Marketing business

Client Agilent Corp., France.

Oct. 2012:R-cloudDescription: IP Cloud basedsolutionClient Doyenz

Jan 2013:NovaQuest

Description - 3D experienceand PLM ApplicationsClient Dassault Systemes.

Feb 2012:Location ServiceDescription: IP LocationIdentification service

Client Openwave

Feb 2013:HP Client Automation

Description Lifecyclemanagement solutionClient HP


Case Study: Acquired lifecycle management IP could be a significant opportunityand help sustain revenue growth momentumRecall, Persistent recently acquired the lifecycle management solution from a technology giant in the US which helps large enterprisesautomate routine client management tasks such as operating systemdeployments and upgrades. PSL is working on the roadmap to enhancethe current desktop/laptop compatible offering and to provide Macsupport and mobile device management (MDM). Noticeably, the solutionwould be marketed by the personal computer maker under Persistentsbrand. Currently, the platform has 400 customers across maturedgeographies while incremental revenues could accrue from 1) new dealwins, 2) cross-selling, 3) product customisation, and 4) exclusive rights to

upgrade, maintain and support the product. Though transition relatedcosts could create EBITDA margin headwinds in the near term non-linearrevenue contribution could accelerate over time, which could be gross-margin accretive in the long run.

Case study 2: Acquired Openwaves location business IP tracking ahead ofestimatesIn February 2012, PSL acquired the location business unit (LBU) fromOpenwave Systems Inc. The LBU provides commercial and emergencylocation based services infrastructure to wireless operators. PSL wouldwork on product roadmap and maintain the same over longer horizon.The company acquired the product at 1x TTM sales. Discussions suggestthe company has already achieved 150% of the yearly targeted revenues

in the first year after acquiring LBU.


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Market sizing of location based services revenuesRising adoption of GPS based handsets and smart phones in the US andEurope has been an enabler of location based services and could lead todemand uptick for downstream services such as location basedadvertising, secure authentication and analytics. Estimates suggest thesmart phone installed base has surpassed 55% and 45% of the total

handsets in the US and Europe, respectively. Note, 40% of all mobileusers in Europe and 50% in the US access LBS for local search, socialnetworking and navigation services. Noticeably, ~30-35% of worldwidemobile operators have some basic form of LBS platforms installed butthat is set to rise as government mandates could drive incrementaldeployments and upgrades. This could lead to LBS revenues in the USreaching $1,295 million in 2017 vs. $ 835 million in 2012, growing at 9.2%CAGR while those in Europe could reach 825 million in 2017 vs. 325million in 2012, growing at 20.5% CAGR.

Sales strategy in sync with that of customers to help achieve revenue growthPersistent unveiled the 4 x 4 x 4 matrix to become more relevant toclients, increase focus on emerging verticals and define the concentrationof operating verticals. In addition to the traditional Sell-To (OPD) model,PSL launched two more market positioning or how to sell strategies: 1)Sell-with selling to customers customer, and 2) IP led partner/co-create IP along with customers. PSL has successfully opened 20+ newlogos selling technology solutions to enterprises on its customersproduct platforms while its new selling strategy added business worth$15 million in FY12. Further, the company has 12 high-end (mostly PhDs)technology consultants helping customers around next generationplatform based solutions and delivered as a Cloud service, integratinganalytics and mobility solutions. We believe PSL stays relevant and insync with its customers sales strategy. This, in-turn, helps the companyto 1) generate downstream OPD revenues and 2) identify and acquire

non-strategic customer products, feeding its IP acquisition strategy.

Exhibit 13:PSLs selling strategy

IP Led Business

Technology Consulting

Sell with partnerships

Product Engineering

OPD

Enterprise Mobility

Enterprise Collaboration

Analytics

Cloud computing

Banking & Finance

Infrastructure & Systems

Life sciences

Telecom

Service offeringBusiness Model Vertical

Concentration



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Exhibit 14:Snippets related to technology focus areas of PSLs


Improvement in client mining, average revenue/customer to yield revenue growthPSLs revenue growth continues to be driven by mining of top 1 and non-top 10 clients. During FY07-13E, top and non top-10 client revenues couldgrow at 40.2% and 22.3% CAGR, respectively, vs. company average of22.6%. During the same period, top 2-5 client revenues could grow at15.3% while those for top 6-10 could grow at 15.9%. Further, the numberof customers contributing annual revenues in excess of $1 million hasrisen to 43 in Q3FY13 vs. 26 in Q4FY09 and implies client mining isimproving. That said, there is room to grow given, 1) Persistentsrevenue/client and revenue/employee metric are the lowest relative to itspeers, 2) annualised 9M average revenue/top 10 customers was a modest$11 million and annualised 9M average revenue/customer was a meagre$758,000 despite PSL working with all top-50 independent softwarevendors (ISV) with revenues in excess of $1 billion.

Cloud Computing

BI & Analytics

Mobility

Enterprise Collaboration

Enterprise Data is expected to increase 650% over next 5 years. GartnerMarket for Big data Technology is expected to reach $ 16.9 billion by 2015 IDC.42% of IT leaders spend in Big Data or plan to do within a year - Gartner, March 2013.BI only in Middle East & N.Africa to reach $ 182 million by 2013 Gartner.

Cloud and CRM to drive spending in 2013 and 2014 with worldwide Public Cloud Servicemarket to grow 18.5% in 2013 to $ 131 billion Gartner.Global spending on hosted private cloud based information technology services isexpected to top $ 24 billion in 2016, (i.e. CAGR > 50% in FY2012-2016) IDC72% sees Open source as key to cloud.

Mobility is reshaping consumer gadget spending and behaviour with movement from PCsand laptops to smart phones Gartner.Worldwide Mobile revenue to reach $ 11.4 billion in 2013 and $ 24.5 billion in 2016 from $9.6 billion in 2012 Gartner.1/3rd of consumer brands will integrate payment into their branded mobile apps - Gartner

40% of large enterprises will have corporate social network by 2015


12/26


Exhibit 17:Annualised 9M average revenue/top 10 customers at modest $11 million

6.2

2.2

8.4

4.9

2.5

11

.9

5.5

3.0

14

.3

7.1

2.9

27

.3

9.6

3.8

33

.3

11

.1

4.7

46

.7

9.3

5.4

3.9

0

5

10

15

20

25

30

3540

45

50

Top 1 Top 2-5 Top 6-10

Averagerevenue

/client

($m

illion

)

FY07 FY08 FY09 FY10 FY11 FY12 FY13E


Exhibit 15:Growth continues to be driven by top 1, 2-5 and non-top 10 clients


Exhibit 16:Improvement in average rev/customer from current $758k to aid revenue growth

26.9 40.3 36.6 37.0 39.0 38.3 41.3

476.0

645.5

743.4 720.1758.2

566.0615.2

0

9

18

27

36

45

FY07 FY08 FY09 FY10 FY11 FY12 FY13E

$million

0

200

400

600

800

$('000)

Revenue/non-top 10 clients Revenue/customer ( '000)


6.2

15.8

11.2

36.9

8.4

19.5

12.6

65.2

11.9

22.0

15.0

79.0

14.3

28.5

14.7

68.4

27.3

38.6

19.0

85.4

33.3

44.3

23.3

106.4

0

30

60

90

120

Top 1 Top 2-5 Top 6-10 Non-top 10 clients

$million

FY07 FY08 FY09 FY10 FY11 FY12

CAGR : 15.3%

CAGR : 15.9%

CAGR : 25.7%

CAGR : 40.2%


13/26


Exhibit 18:Comparable revenue/client metricFY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 FY12 Q1FY13 Q2FY13 Q3FY13

Top ClientPersistent 14.3 5.4 6.6 6.2 9.1 27.3 7.6 8.2 8.2 9.3 33.3 9.8 12.4 12.8

Infotech Enterprises NA NA NA NA NA NA NA NA NA NA NA NA NA NA

KPIT Cummins* 46.4 11.0 11.7 14.5 13.9 51.1 14.5 15.9 17.6 18.6 66.5 20.2 20.4 19.8

Mindtree 19.9 5.4 5.6 5.9 6.0 22.9 6.5 7.1 8.5 7.9 30.0 8.0 8.7 9.0

Top 5 ClientsPersistent 42.8 15.1 15.4 15.9 19.5 65.9 18.8 19.9 19.1 19.8 77.6 18.4 21.8 22.7

Infotech Enterprises 78.9 19.8 21.9 22.9 23.0 87.7 22.9 24.4 25.7 27.2 100.2 29.1 29.8 29.7

KPIT Cummins* NA NA NA 25.3 28.1 94.9 26.7 27.3 27.5 31.5 108.3 35.5 36.4 38.1

Mindtree 74.7 20.7 21.6 21.8 21.3 85.4 23.0 28.4 31.8 33.0 116.2 35.3 36.2 37.0

Top 10 ClientsPersistent 57.5 19.4 19.8 20.7 24.8 84.8 24.1 25.5 25.0 26.4 101.0 24.9 28.2 30.0


KPIT Cummins* 89.3 24.7 27.9 30.9 34.8 116.7 34.5 33.9 34.6 40.3 134.9 43.2 45.2 46.8

Mindtree 108.7 30.9 32.9 34.3 33.2 131.3 36.5 42.6 45.6 47.9 172.5 49.7 50.2 51.8

OthersPersistent 68.4 20.1 20.7 22.5 22.2 85.4 25.9 26.1 26.7 27.8 106.4 30.0 31.8 30.7Infotech Enterprises 80.5 22.2 26.5 30.9 31.4 111.0 34.2 37.7 39.0 37.2 148.0 37.7 42.0 42.4

KPIT Cummins* 64.5 20.3 22.9 29.5 33.2 107.4 35.6 36.5 38.9 55.1 174.4 54.9 58.2 56.7

Mindtree 163.6 46.0 49.5 51.0 53.0 199.6 56.1 58.8 58.1 57.1 230.1 55.8 57.1 58.1


Exhibit 19:Revenue/employee metric lowest among peers$ ('000) FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 FY12 Q1FY13 Q2FY13 Q3FY13

Revenue/EmployeePersistent 27.0 8.0 7.7 7.9 7.4 26.8 7.6 7.5 7.7 8.2 31.3 8.4 9.4 9.0


KPIT Cummins* 34.3 9.2 9.3 10.5 11.3 37.4 11.6 11.7 11.9 13.5 43.7 13.6 13.9 13.6

Mindtree 36.5 10.6 11.6 12.5 11.6 42.4 12.1 12.1 11.7 11.7 45.4 11.9 12.1 11.1

Source: Company, ICICIdirect.com Research, * includes acquisitions

Exhibit 20:and so it cost/employee but yield better margins| ('000) FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 FY12 Q1FY13 Q2FY13 Q3FY13

Cost/EmployeePersistent 791.0 248.1 225.5 232.6 227.0 805.5 229.4 236.5 245.1 243.4 966.7 270.0 295.0 303.2


KPIT Cummins* 913.5 266.7 275.8 312.5 331.7 1100.3 350.3 354.3 403.5 450.5 1405.0 485.7 497.2 486.6

Mindtree 1043.3 271.3 287.8 288.4 308.5 1144.8 308.2 307.7 315.7 307.7 1181.7 334.7 354.1 363.6

Source: Company, ICICIdirect.com Research * includes acquisitions

Growth could be driven by rising IP contributionWe expect overall revenues to grow 13.4% CAGR during FY12-15E led byIP revenues. We expect IP revenue contribution to rise to 25.7% in FY15Evs. ~18% in FY13E led by acquired IPs. Further, we estimate, grossmargins could be the highest for IP (~55%) followed by platforms (50%)while traditional PES business could be lower than platforms. Finally,rising contribution of non-linear revenues and rationalisation of employeepyramid could help offset margin headwinds.

Rising IP contribution to mitigate EBITDA margin headwindsThe EBITDA margin declined 563 bps to 17.4% in Q1FY12 vs. 23.0% inQ2FY11 as it gave three consecutive wage hikes in April, December 2010and July 2011 to contain attrition. However, margins bounced backsharply to 25.7% in Q3FY12 as average rupee depreciated ~12% while IPrevenue contribution rose ~100 bps to 9.2% of total revenues vs. 8.1% inQ2FY11. Further, IP revenues grew at 7.7% CQGR during the same


14/26


period, faster than revenue CQGR of 5.0%. We expect IP revenuescontribution to top 25% in FY15E vs. ~18% in Q3FY13 and continue to bethe principal driver for sustaining EBITDA margins in the targeted 23-25%range.

Exhibit 21:Margins have improved over time with increasing IP contribution

22.3

19.0

23.0 21.9

17.9 17.418.7

25.728.4

26.8 27.224.7 24.3

20.923.7

25.2

9.1

6.1 5.7

8.9 7.8 8.9 8.1 7.510.3

6.17.6

9.212.1

13.918.218.9

0

5

10

15

20

25

30

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Q3FY13

%

EBITDA margins (%) IP contribution (%)


Exhibit 22:EBITDA margins significantly higher than peers and comparable to tier-I vendors

18.7 18.019.5

16.915.4

22.2

14.9 14.516.9

9.9

18.9

11.8

15.3

30.1

24.322.9

25.7

20.7

22.1

20.4

5

10

15

20

25

30

35


%

NIIT Tech KPIT Cummins Mindtree Persistent


EV/EBITDA, Mcap/CFO (+), Mcap/revenue (=), P/E, PE/G (-)On the Mcap/sales metric, the stock is trading at 1.4x and 1.2x its FY14Eand FY15E sales, modestly higher than peer group average of 1.2x and1.1x, respectively. That said, the EV/EBITDA metric was lower at 4.7x and3.9x its FY14E and FY15E EBITDA vs. peer group average of 4.9x and4.3x, respectively. On Mcap/operating cash flow basis, PSL is trading at13.1x multiple vs. peer group average of 15.9x. Finally, though FY14E andFY15E P/E (10.1x and 8.6x) are modestly expensive relative to peer groupaverage (8.3x and 7.4x), FY15E PE/G at 0.5x is inexpensive. This coupledwith a healthy balance sheet metric and 19% EPS CAGR over FY12-15Emerits premium valuation.


15/26


Exhibit 23:Peer valuationName Price (|)

FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY14E FY15E FY13E FY14E FY15E

Mindtree Ltd 858 86.6 94.7 11.1 9.9 9.1 6.5 5.9 5.3 0.8 1.0 1.5 1.3 1.2

Hexaware Technologies Ltd* 92 9.1 10.9 10.0 8.4 7.6 9.2 5.8 5.2 0.4 0.7 1.9 1.3 1.1

KPIT Cummins Infosystems Ltd 97 12.0 13.9 9.0 8.1 7.0 4.7 4.1 3.6 0.8 0.4 0.8 0.7 0.6

Eclerx Services Ltd 630 72.2 82.1 10.8 8.7 7.7 6.5 5.8 5.1 0.4 0.6 2.8 2.5 2.2

NIIT Tech Ltd 284 41.0 46.0 7.8 6.9 6.2 4.4 3.9 3.4 0.6 0.5 0.8 0.8 0.7

Infotech Enterprises Ltd 170 21.4 24.0 8.4 7.9 7.1 3.9 3.6 3.2 1.4 0.6 1.0 0.9 0.8

Average 9.5 8.3 7.4 5.9 4.9 4.3 0.7 0.6 1.5 1.2 1.1Persistent Systems 540 51.1 60.0 11.2 10.1 8.6 4.8 4.7 3.9 0.9 0.5 1.5 1.4 1.2

Mcap/Rev (x)Dil. EPS (|) P/E (x) EV/EBIDTA (x) PEG (x)

Source: Company, ICICIdirect.com Research,*consensus estimates

Exhibit 24:Trading at 0.9x PEG based on FY14E estimate; above peer group average of 0.7x

0.8

0.4

0.8

0.4

0.6

1.4

0.9

0.0

1.0

2.0

Mindtree Ltd Hexaware

Technologies

Ltd

Kpit Cummins

Infosystems

Ltd

Eclerx

Services Ltd

Niit Tech Ltd Infotech

Enterprises

Ltd

Persisten

Systems



16/26


Key Financials

Modelling FY14E, FY15E | revenues to grow 11.3%, 14.5%, respectivelyWe expect FY14E and FY15E rupee revenues to grow 11.3% and 14.5%YoY to | 1445.4 crore and | 1654.4 crore, assuming average |/$ rate of| 52.9 and | 52, respectively. Revenues are expected to be drivenprimarily by IP that is expected to grow 40.2% YoY & 36.2% YoY, inFY14E and FY15E, respectively.

Exhibit 25:Revenues may grow at 18.3% CAGR during FY12-15E

424.9

593.8

601.2

775.8

1000.3

1298.2

1445.5

1654.4

39.8

29.1 28.9 29.8

11.314.5

1.2

0

300

600

900

1200

1500

1800

FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

|crore

0

10

20

30

40

50

%

Revenue % growth

[


Modelling average 24.9% EBITDA margins during FY13-15EFor FY14E, we expect EBITDA margins to decline 152 bps led by 1)transition cost related to the recently acquired lifecycle management (LM)

IP and 2) likely appreciating rupee. For FY15E, we expect EBITDA marginsto increase 50 bps led by steady state revenue contribution of LM IP,which could led to non-linear revenue contributing ~26% of overallrevenues vs. ~18% now. That said, an appreciating rupee remains aconcern as every 100 bps movement in the rupee impacts margins by 60bps. Higher sensitivity is to account for offshore effort, which is ~95%.Significant appreciation or depreciation of the rupee could lead toestimate revisions.

Exhibit 26:EBITDA margins could decline 152 bps in FY14E but may rise 50 bps in FY15E

91.3

178.8

146.4

158.3

229.3

334.2

349.9

408.8

21.5

30.1

20.422.9 25.7 24.2 24.7

24.3

0

100

200

300

400

500


|crore

0

10

20

30

40

%

EBITDA % margins

[


Modelling FY14E and FY15E dollar revenue growth of 15%

and 16.3% YoY to $ 273.5 million and $ 318.2 million,

respectively


17/26


Modelling average 14.3% PAT margins during FY13-15EWe are modelling average 14.3% PAT margins during FY13-15E period,which translates to 19.2% PAT CAGR during FY12-15E period. PATmargins are lower than the preceding three year average of 17.1% asaverage tax rates could rise to 28.9% in FY13-15E vs. average 14.2%

during FY10-FY12. We expect average 19.7% RoE during FY13-FY15E vs.average 18.5% during FY10-FY12.

Exhibit 27:Modelling PAT margins of 14.1% and 14.5%, respectively, in FY14E and FY15E

90

.2

69

.0

115.0

139.6

141.8

184.8

204.5

240.2

21.2

11.6

18.0

14.2 14.2 14.1 14.5

19.1

0

50

100

150

200

250

300


|crore

0

10

20

30

%

PAT % margins


Exhibit 28:Expect stable RoE going in FY14E

19.9

17.8

20.2

19.219.5

16

17

18

19

20

21

FY11 FY12 FY13E FY14E FY15E

%

ROE


Healthy balance sheet metricsAt Q3FY13 end, Persistent had cash & cash equivalents of ~| 380 crore,higher compared to peers, despite consistent IP acquisitions over time.Though days sales outstanding (DSO) have deteriorated to 68 days inQ1FY13, they are lower compared to peers and comparable to tier-I.Further, though Average Receivables (A/R) has grown faster than revenuegrowth (28.5% vs. 23.9% CAGR), at 12% CAGR, unbilled have grownslower. Note, RoCE and RoE have been higher than peers backed bystronger EBITDA margins. The company has been paying consistentdividends since listing and had a payout of 17% (| 6/ share) in FY12. Thatsaid, the company paid an interim dividend of | 6/share in FY13E. This


18/26


validates management talk that dividends could gradually rise towardsPSLs 30% payout policy and address the low yield concerns.

Exhibit 29:At 28.5% CAGR, A/R growth has been faster than revenue growth

38.8 31.8 16.1 28.539.8 29.1 28.91.2

136.3158.2

203.3

103.4

0

50

100

150

200

250

FY09 FY10 FY11 FY12

|crore

0

9

18

27

36

45

%

A/R growth, YoY Revenue growth, YoY Accounts receivables


Exhibit 30:That said, unbilled was rescuer, growing slower than revenue growth

44.4

-6.8 -12.8

34.329.1 28.939.8 1.2

12.0

10.5

14.112.9

0

4

8

12

16

FY09 FY10 FY11 FY12

|crore

-20

-10

0

10

20

30

40

50

%

Unbilled growth, YoY Revenue growth, YoY Unbilled revenues


Exhibit 31:Debtor days better than peers and comparable to tier-I

61 60 67 62 63 66 68 65 68 64 6754

60

66

72

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Q3FY13

DSO



19/26


Exhibit 32:Dividends gradually could rise towards PSLs 30% payout policy

2.0

5.5 6.0

9.0

12.5

16.0

8.5

15.816.9

22.123.6

25.7

0

7

14

21

28

FY10 FY11 FY12 FY13E FY14E FY15E

DPS Dividend Payout (%)


Cash flow generation generally healthy but FCF volatileAnalysing data since FY08 suggests PSL converted an average 71.5% ofits EBITDA to cash flow from operations higher than any of its peers suchas KPIT (54.2%), NIIT Tech (62.9%) and Infotech (59.5%) but lower thanMindTree (81.5%). That said, FCF conversion has been volatile while FY12FCF was impacted by acquisition.

Exhibit 33:FCF conversion could improveCFO/EBITDA FY09 FY10 FY11 FY12 Average

Persistent 39.1 84.6 99.5 62.6 71.5

Infotech Enterprises 86.2 60.5 56.7 46.1 62.4

NIIT Tech 85.2 78.1 23.0 61.7 62.0

KPIT Cummins 68.4 66.6 42.3 46.1 55.8

Mindtree 147.3 92.5 24.4 70.6 83.7

FCFF/EBITDA FY09 FY10 FY11 FY12 Average

Persistent 11.7 52.1 38.1 -3.1 24.7

Infotech Enterprises 33.7 43.8 20.7 46.5 36.1

NIIT Tech 19.8 52.9 2.5 26.9 25.5

KPIT Cummins 40.2 52.0 14.7 18.4 31.3

Mindtree 117.1 73.3 -22.7 54.0 55.4



20/26


Valuations

At current levels, on the Mcap/sales metric, the stock is trading at 1.4xand 1.2x its FY14E and FY15E sales, respectively, modestly higher thanpeer group average of 1.2x and 1.1x, respectively. That said, theEV/EBITDA metric is lower at 4.7x and 3.9x its FY14E and FY15E EBITDAvs. peer group average of 4.9x and 4.3x, respectively. Finally, thoughFY14E and FY15E P/E (10.1x and 8.6x) is modestly expensive relative topeer group average (8.3x and 7.4x), healthy balance sheet metric and19% EPS CAGR over FY12-15E merits premium valuation. We areinitiating coverage on the stock with a BUY rating and target price of |600.Exhibit 34:One year forward PE(x) chart

0

300

600

900

1200

Apr-10

Jul-10

Oct-10

Jan-1

1

Apr-11

Jul-11

Oct-11

Jan-1

2

Apr-12

Jul-12

Oct-12

Jan-1

3

Apr-13

|

Price 20 16 12 8 4


Exhibit 35:Trading at 14.7x TTM EPS above its historical average of 10.9x

5

10

15

20

Apr-10

Sep-1

0

Feb-1

1

Jul-11

Dec-1

1

May-1

2

Oct-12

Mar-13

x

P/E average max min


At current levels, PSL is trading at 10.1x and 8.6x our

FY14E and FY15E diluted EPS estimate of | 51.1 and | 60,

respectively


21/26


Risk & concernsCompetition from ChinaR&D outsourcing, testing and product development has been a successfor Chinese outsourcing vendors. They continue to offer comparableservices at relatively cheaper prices. Majority of companies (both from the

US, Europe and Japan) outsource these services to China.

Exhibit 36:Global corporate ER&D spend

1626

23

3429

37 32

30

30

60

90

120

2011 2020

%

China Europe US Other


MNC captives could capture incremental market share if rupee continues todepreciateMNC captives continue to be an important source of Indian ER&D exportsaccounting for >50% of the market. Though captive cost structures are

higher than third-party OPD service providers, the business model hasturned attractive post the sharp depreciation in the rupee.

Large start-up client base leads to revenue fluctuation

Of the total 309 billed clients, 86% or 266 clients account for


22/26


Rising S&M costs may exert EBITDA margin pressurePSL currently spends < 8% of its revenues as sales and marketingexpenses, lower than peers, which could increase over time. The productacquisition strategy generally entails capex spends related to employeetakeover while higher visa rejection could lead to elevated onsite costs.

Utilisation and offshore shift margin levers peaking outAt 79.5%, utilisation is at its historical (Q2FY07-Q3FY13) peak while9MFY13 average utilisation (77.1%) is ~400 bps higher FY12 average of73.1%. Further, PSL delivers 95% of its effort offshore resulting in highersensitivity to rupee fluctuations. Every 1 percentage point change in rupeeimpacts EBITDA margins by 60 bps vs. average 30-40 bps for peers.

Significant currency volatility may impact operating marginsThe average rupee depreciated ~13.5% in FY13YTD vs. FY12 and couldhave created margin tailwinds of ~400 bps assuming 30 bps relief forevery 100 bps change in rupee. That said, similar tailwinds may not beavailable, going forward, while significant currency volatility from currentlevels could have a material impact on operating margins.

Rise in attrition may lead to higher-than-industry-average wage inflationAt 16%, PSLs attrition is better than MindTree and KPIT but higher thanNIIT Tech, which has the lowest among peers. A significant rise in attritioncould necessitate higher than industry average wage inflation to retaindomain experts.

Exhibit 38:Attrition better than peers but not best

18.4

17.7

17.4

18.3

18.9

16.9

16.0

19.0

18.1

19

17.5

14.3

15.2

15.5

22.5

20.0

17.2

17.2

17.1

20.5

17.2

25.6

21.7

19.4

18.2

17.0

16.3

16.3

15.8

13.4

12.5

12.1

12.4

12.7

12.5

0

5

10

15

20

25

30

Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13

%

Persistent Infotech Enterprises KPIT Mindtree NIIT Tech


Higher dependence on US geographyPSL derives ~85% of its revenues from the US. A significant slowdowncould impact the product development spending, generally discretionary,capability of its clients.


23/26


Tables and ratios

Exhibit 39:Profit & loss account(|crore) FY11 FY12 FY13E FY14E FY15E

Total Revenues 776 1,000 1,298 1,445 1,654

Growth (%) 29.1 28.9 29.8 11.3 14.5

Employee & Subcontracting costs 512 641 775 877 1,003

Total Operating Expenditure 618 771 964 1,096 1,246

EBITDA 158 229 334 350 409

Growth (%) 8.2 44.8 45.8 4.7 16.9

Depreciation & Amortization 42 61 79 98 116

Other Income 34 29 5 36 46

Interest - - 0 0 0

PBT before Exceptional Items 150 197 260 288 338

Growth (%) 21.2 30.9 32.0 10.8 17.4

Tax 11 55 75 84 98

PAT before Exceptional Items 140 142 185 204 240

Exeptional items - - - - -

PAT before MI 140 142 185 204 240

Minority Int & Pft. from associates - - - - -

PAT 140 142 185 204 240

Growth (%) 21.3 1.6 30.3 10.7 17.4

EPS 34.9 35.4 46.2 51.1 60.0

EPS (Growth %) 8.8 1.6 30.3 10.7 17.4

Source: Company, ICICIdirect.com Research,

Exhibit 40:Balance sheet(|crore) FY11 FY12 FY13E FY14E FY15E

Equity 40 40 40 40 40

Reserves & Surplus 717 801 944 1,101 1,279

Networth 757 841 984 1,141 1,319

Minority Interest - - - - -

Long term Liabilties & provisions 146 77 77 77 77

Source of funds 903 918 1,062 1,218 1,396

Net fixed assets 221 300 314 334 355Net intangible assets 57 72 129 191 255

Goodwill - - - - -

Other non current assets 44 26 26 26 26

Investments 251 204 204 204 204

Debtors 158 203 258 272 317

Cash & Cash equivalents 89 137 206 280 340

Other current assets 100 71 92 104 121

Current liabilities 75 88 136 150 167

Provisions 74 78 101 113 122

Application of funds 903 918 1,062 1,218 1,396Source: Company, ICICIdirect.com Research


24/26


Exhibit 41:Cash flow statementFY11 FY12 FY13E FY14E FY15E

PAT 140 142 185 204 240

Depreciation & Amortization 42 61 79 98 116

WC changes 5 (60) (4) 0 (35)

Other non cash adju. (6) (16) (5) (36) (45)

CF from operations 158 144 255 267 276

Capital expenditure (97) (150) (150) (180) (200)

in investments (168) 29 - - -

Other investing cash flow 12 22 5 36 46

CF from investing Activities (253) (99) (145) (144) (155)

Issue of equity (42) - - - -

in debt funds - 1 - - -

Dividends paid (28) (23) (41) (48) (62)

Other financing cash flow (2) (2) (0) (0) (0)

CF from Financial Activities (71) (24) (41) (48) (62)

in cash and cash bank balance (167) 20 69 74 60

Effect of exchange rate changes (0) (0) - - -

Opening cash 190 23 137 206 280

Other deposits 66 94

Cash c/f to balance sheet 89 137 206 280 340



25/26


Exhibit 42:Key ratios(|crore) FY11 FY12 FY13E FY14E FY15E

Per Share Data (|)

EPS-diluted 34.9 35.4 46.2 51.1 60.0

Cash per share 2.2 3.4 5.2 7.0 8.5

BV 189.1 210.1 246.1 285.2 329.8

Operating profit per share 5.0 7.3 10.3 11.2 13.1

Operating Ratios (%)

EBITDA/Total Revenues 20.4 22.9 25.7 24.2 24.7

PBT/Total Revenues 19.4 19.7 20.0 19.9 20.4

PAT/ Total Revenues 18.0 14.2 14.2 14.1 14.5

Return Ratios (%)

RoNW 19.9 17.8 20.2 19.2 19.5

RoCE 17.4 20.3 19.8 20.0 20.0

RoIC 28.3 33.5 45.1 42.7 44.5

Valuation Ratios (x times)

P/E 15.5 15.2 11.7 10.6 9.0

EV / EBITDA 10.7 7.4 5.1 4.9 4.2

Price to Book Value 2.9 2.6 2.2 1.9 1.6

EV/Total Revenues 2.2 1.7 1.3 1.2 1.0

MCap/Total Revenues 2.7 2.1 1.6 1.4 1.3

Total Revenues/ Equity 1.0 1.2 1.3 1.3 1.3

Turnover Ratios (x times)

Debtor days 69.3 66.0 64.0 66.0 64.0

Creditor days 16.9 12.7 12.0 15.0 14.0

Fixed Asset Turnover ratio 3.6 3.8 4.2 4.5 4.8

Solvency Ratios (x times)

Debt / Equity - - - - -

Current Ratio 4.6 4.7 4.1 4.4 4.6

Quick Ratio 4.6 4.7 4.1 4.4 4.6

Debt / EBITDA - - - - -



26/26

RATING RATIONALE

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ratings to its stocks according to their notional target price vs. current market price and then categorises them

as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional

arget price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: > 10%/ 15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head Research [email protected]

ICICIdirect.com Research Desk,ICICI Securities Limited,1st Floor, Akruti Trade Centre,Road No. 7, MIDC,Andheri (East)

Mumbai 400 093

[email protected]

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