10 January 2018
Asia Pacific/India
Equity Research
Computer Services & IT Consulting
Rating
Price (09-Jan-18, Rs)
Target price (Rs)
Upside/downside (%)
Mkt cap (Rs/US$ mn)
Enterprise value (Rs mn)
Number of shares (mn)
Free float (%)
52-wk price range (Rs)
ADTO-6M (US$ mn)
OUTPERFORM
741.75
960.00
29.4
59,340 / 932.07
56,282
80.00
69.3
742-563
1.1
Target price is for 12 months.
Research Analysts
Nitin Jain
91 22 6777 3851
nitin.jain.2@credit-suisse.com
Anantha Narayan
91 22 6777 3730
anantha.narayan@credit-suisse.com
Share price performance
Pr i ce (LH S)
Re b ase d Re l (RH S)
900
140
700
115
500
90
Jan - 1 6
Ju l - 1 6
Jan - 1 7
Ju l - 1 7
Jan - 1 8
The price relative chart measures performance against the
S&P BSE SENSEX IDX which closed at 34,443.19 on
09/01/18. On 09/01/18 the spot exchange rate was
Rs63.66/US$1
Performance
Absolute (%)
Relative (%)
1M
14.7
11.1
3M
12.6
4.4
12M
17.0
-11.8
Persistent Systems (PERS.BO / PSYS IN)
INITIATION
An attractive digital play
■ Initiating with an Outperform rating and TP of Rs960. We initiate
coverage on Persistent Systems with an Outperform rating and TP of Rs960
(~30% upside). Its EBITDA growth from FY14-18 has been muted at a 2%
CAGR, and consequently, the stock has underperformed its peers over the
last three years. We expect that to change significantly and estimate 20%+
EBITDA CAGR between FY18-20, helped by solid momentum in the digital
business, synergies from the IBM IoT alliance and resulting margin
expansion.
■ Strong technology credentials position it well as a digital play. From a
product engineering partner for several leading as well as start-up software
companies, Persistent has transformed itself in the last 2-3 years to address
the larger enterprise digital opportunity. Product DNA, partnerships with fast
growing platforms, and IoT are the key differentiators. We estimate its digital
exposure to be at least 40% and non-linear revenue to be 25%+.
■ Expect a strong earnings revival over FY18-20. We believe the company
has been progressing well on transformation. Increasing share of high
growth businesses (digital, IBM IoT, enterprise) should drive overall growth,
which in-turn, would help the margins. We expect a 12% organic revenue
CAGR of FY18-20 (10% growth in FY18 vs <8% FY14-17 CAGR), and 20%+
EBITDA CAGR over FY18-20 (vs a 2% CAGR over FY14-18). We expect
EBITDA margins to recover from below 16% in FY18 to 17.5% by FY20
(Persistent's peak margins were 26% in FY14).
■ Expect 18% EPS CAGR over FY18-20. We believe this would be among the
best in the industry, and the stock is available at reasonable 13x FY20 P/E.
Its midcap peers trade at an average 16x CY19 P/E (a 13% CY17-19
average EPS CAGR). The faster growing global midcap digital native IT
firms—EPAM, Luxoft and Globant trade at 14-24x CY19 P/E (22% average
EPS CAGR). We value Persistent at 17x FY20 P/E. Key risks are high client
concentration, quarterly earnings volatility and significant INR appreciation.
Financial and valuation metrics
Year
Revenue (Rs mn)
EBITDA (Rs mn)
EBIT (Rs mn)
Net profit (Rs mn)
EPS (CS adj.) (Rs)
Change from previous EPS (%)
Consensus EPS (Rs)
EPS growth (%)
P/E (x)
Dividend yield (%)
EV/EBITDA (x)
P/B (x)
ROE (%)
Net debt/equity (%)
3/17A
28,784.4
4,653.5
3,163.3
3,014.6
37.70
n.a.
n.a.
0.4
19.7
1.2
12.4
3.10
17.0
(7.8)
3/18E
30,764.9
4,664.8
3,131.5
3,258.0
40.74
41.57
8.1
18.2
1.3
12.0
2.83
16.3
(16.7)
3/19E
34,731.4
5,746.9
4,175.7
3,785.6
47.33
48.11
16.2
15.7
1.6
9.2
2.50
16.9
(27.4)
3/20E
38,880.9
6,800.7
5,051.1
4,522.2
56.54
55.09
19.5
13.1
1.9
7.2
2.19
17.8
(37.8)
Source: Company data, Thomson Reuters, Credit Suisse estimates
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit
Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decision.
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
10 January 2018
Focus charts
Figure 1: Attractive business mix with at least 40%
digital and 25%+ non-linear exposure
Overall
Atleast 40% Digital
25%+ non-linear
Figure 2: Higher billing rates reflect quality of
projects executed by Persistent
Digital
transformation
21%
Services
44%
IBM Alliance
27%
Billing rate (per employee, annualised, US$)
190,000
170,000
150,000
130,000
110,000
90,000
70,000
50,000
Accelerite
8%
55,000
50,000
45,000
40,000
35,000
30,000
25,000
20,000
Infosys
LTI
Mphasis
Mindtree
Persistent
30% Enterprise
Onsite
40% IoT
Offshore [RHS]
Source: Company data, Credit Suisse estimates
Source: Company data, Credit Suisse estimates
Figure 3: Digital unit is gaining traction ++++ +++
+++
Figure 4: We expect an accelerated growth
trajectory led by Digital and IBM IoT
Approximate number of clients in Digital unit
11.9%
600
250
200
US$1 mn+
client: ~30
150
500
6.8%
400
38
300
200
100
100
50
Organic
CAGR*
Organic growth
700
300
11.4%
9.8%
39
70
43
41
5%
176
135
98
34%
126
135
145
156
7% #
195
205
214
224
4%
FY19
FY20
0
FY17
0
1HFY17
1HFY18
FY18
Services
IBM Alliance
Digital transformation
Accelerite
Source: Company data, Credit Suisse estimates
*FY18-20 #17% CAGR in the IoT portion. Source: Company data, Credit Suisse estimates
Figure 5: Business transformation led to significant
investments and EBITDA margin contraction
Figure 6: We expect margins to expand to 17.5% by
FY20, leading to 20%+ EBITDA CAGR over FY18-20
16.2%
FY17 margins
26%
FY14 margins
Currency
IBM IoT
-3%
Currency
4%
Investments in digital, Accelerite,
Enterprise
16%
0%
5%
10%
15%
20%
25%
IBM IoT
0.9%
Investments*
-0.5%
FY18 margins
15.2%
Operating leverage gains
-10%
FY17 margins
-1.5%
1.1%
IBM IoT
1.2%
FY20 margins
17.5%
0%
30%
5%
10%
15%
20%
Source: Company data, Credit Suisse estimates
Figure 7: The stock trades at three-year average P/E
and well below its peak … …
Figure 8: Given the growth potential, relative
valuations are attractive
22
20
18
16
14
12
10
Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17
12m fwd P/E
3 year avg
FY18-20 EPS CAGR
Source: Company data, Credit Suisse estimates
21%
19%
17%
15%
13%
11%
9%
7%
5%
Mindtree
Persistent
NIIT Tech
LTTS
Mphasis
Cyient
10
12
14
LTI
16
Hexaware
18
20
22
24
FY19 PE
Source: Thomson Reuters
Source: Thomson Reuters
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
2
10 January 2018
An attractive digital play
Strong technology credentials position it well as a
digital play
We expect Persistent's
digital exposure to be
atleast 40% and 25%+
non-linear share
Persistent has strong technology credentials, given its several years of association as a
product engineering vendor with some of the leading ISVs (IBM, Microsoft, Salesforce,
Oracle etc.). It has transformed in the last 2-3 years to address the enterprise digital
opportunity and has been using its product DNA, long standing partnerships with some of
the fast growing platforms (Salesforce, Appian, Oracle, Apigee etc.), its API (application
programming interface) management skills, and IoT as key differentiators in its digital
offerings. Management views digital as a solution-led business and the focus is on
keeping the effort-based pricing component low. While Persistent's digital exposure as per
its stricter definition is 21%, by general industry definition, we expect it to be much higher
(at least 40%). In addition, over 25% of Persistent's revenue is non-linear.
The initial traction in its digital unit has been encouraging. Total number of clients in the
Digital unit has been growing at a rapid pace, and Persistent had close to 30 clients with
annual revenue of US$1+ mn in the digital business in 1H FY18 and this number has been
increasing YoY. Persistent's recent IBM IoT alliance increases its IoT capabilities.
Expect a strong earnings revival over FY18-20 aided
by digital, IBM alliance, and margins
Persistent's revenue grew at below 8% CAGR in organic terms (16% including
acquisitions) over FY14-17 vs ~17% CAGR achieved over FY09-14, due to challenges in
the ISV segment. The EBITDA margins are down from the peak of 26% in FY14 to 16% in
FY17, reflecting the investments in scaling its digital/enterprise business.
We expect 20%+
EBITDA CAGR over
FY18-20 vs. a 2% CAGR
over FY14-18
We believe the company has progressed well on its transformation and is well positioned
to reap the benefits in the medium term. Increasing share of high-growth businesses
(digital, IBM IoT, enterprise) should drive overall growth, which in-turn, would help the
margins. We expect an accelerated growth (a 12% organic revenue CAGR over FY18-20,
10% growth in FY18), and 20%+ EBITDA CAGR over FY18-20 (while FY18 margins may
remain subdued, we expect margin recovery over FY19 and FY20, helped by revenue
growth). We expect a 34% CAGR in digital unit, and a 7% CAGR in IBM alliance (a 17%
CAGR in the IoT part) over FY18-20, that should offset the slower growth in services unit.
Expect 18% EPS CAGR for FY18-20, initiate with Outperform
Persistent's 18% EPS
CAGR over FY18-20
would be among
the best in industry
and the stock is
available at a
reasonable
13x FY20 P/E
We believe Persistent is well-positioned among its India IT peers in the current
environment, and with a likely strong growth momentum, deserves a higher multiple for the
business. Continued solid momentum in the digital business, synergies from the IBM IoT
alliance and resulting margin expansion will be the key triggers for the stock. We expect
Persistent to report a 18% EPS CAGR over FY18-20. We believe this would be among the
best in the industry, and for this growth, the stock is available at 13x FY20 P/E.
Persistent's India IT midcap peers trade at an average CY19 P/E of 16x (range of 12x to
20x), with an average EPS CAGR estimate of 13% over CY17-19. The faster growing
global midcap digital native IT services firms such as EPAM, Luxoft and Globant trade at
14-24x CY19 P/E, with expected average EPS CAGR of 22%. We value Persistent at 17x
FY20 P/E, and initiate with an Outperform rating with TP of Rs960.
The key risks include high client concentration (26% revenue comes from IBM), quarterly
volatility in the business (given higher share of non-linear revenue), significant INR
appreciation, and the risks associated with its products unit.
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
3
10 January 2018
Persistent Systems (PERS.BO / PSYS IN)
Price (09 Jan 2018): Rs741.75; Rating: OUTPERFORM; Target Price: Rs960.00; Analyst: Nitin Jain
Income Statement (Rs mn)
Sales revenue
Cost of goods sold
EBITDA
EBIT
Net interest expense/(inc.)
Recurring PBT
Profit after tax
Reported net profit
Net profit (Credit Suisse)
Balance Sheet (Rs mn)
Cash & cash equivalents
Current receivables
Inventories
Other current assets
Current assets
Property, plant & equip.
Investments
Intangibles
Other non-current assets
Total assets
Current liabilities
Total liabilities
Shareholders' equity
Minority interests
Total liabilities & equity
Cash Flow (Rs mn)
EBIT
Net interest
Tax paid
Working capital
Other cash & non-cash items
Operating cash flow
Capex
Free cash flow to the firm
Investing cash flow
Equity raised
Dividends paid
Financing cash flow
Total cash flow
Adjustments
Net change in cash
Per share
Shares (wtd avg.) (mn)
EPS (Credit Suisse) (Rs)
DPS (Rs)
Operating CFPS (Rs)
Earnings
Growth (%)
Sales revenue
EBIT
EPS
Margins (%)
EBITDA
EBIT
Valuation (x)
P/E
P/B
Dividend yield (%)
EV/sales
EV/EBITDA
EV/EBIT
ROE analysis (%)
ROE
ROIC
Credit ratios
Net debt/equity (%)
Net debt/EBITDA (x)
03/17A
28,784
18,518
4,653
3,163
0
4,121
3,015
3,015
3,015
03/17A
1,510
4,754
0
7,779
14,043
2,768
2,339
2,591
1,722
23,464
4,173
4,471
18,993
0
23,464
03/17A
3,163
0
(1,048)
(1,062)
1,810
2,864
(2,176)
688
(4,395)
0
(480)
(584)
(2,115)
0
(2,115)
03/17A
80
37.70
9.00
35.81
03/17A
03/18E
30,765
20,233
4,665
3,132
0
4,405
3,258
3,258
3,258
03/18E
3,518
5,057
0
8,400
16,975
2,489
2,547
2,629
1,253
25,894
4,510
4,915
20,979
0
25,894
03/18E
3,132
0
(1,401)
(383)
1,533
2,881
(932)
1,949
(1,382)
0
(960)
(1,056)
443
0
443
03/18E
80
40.74
10.00
36.02
03/18E
03/19E
34,731
22,534
5,747
4,176
0
5,116
3,786
3,786
3,786
03/19E
6,530
5,709
0
8,803
21,042
2,209
2,547
2,138
1,253
29,190
5,028
5,433
23,757
0
29,190
03/19E
4,176
0
(1,330)
(537)
1,571
3,880
(600)
3,280
(460)
0
(1,008)
(1,008)
2,412
0
2,412
03/19E
80
47.33
11.50
48.51
03/19E
03/20E
38,881
25,033
6,801
5,051
0
6,111
4,522
4,522
4,522
03/20E
10,264
6,391
0
9,249
25,904
2,049
2,547
1,348
1,253
33,102
5,570
5,975
27,127
0
33,102
03/20E
5,051
0
(1,589)
(586)
1,750
4,626
(600)
4,026
(340)
0
(1,152)
(1,152)
3,134
0
3,134
03/20E
80
56.54
14.00
57.83
03/20E
24.5
(1.3)
0.4
6.9
(1.0)
8.1
12.9
33.3
16.2
11.9
21.0
19.5
16.2
11.0
03/17A
19.7
3.10
1.2
2.0
12.4
18.3
03/17A
17.0
14.8
03/17A
(7.8)
(0.32)
15.2
10.2
03/18E
18.2
2.83
1.3
1.8
12.0
17.8
03/18E
16.3
13.2
03/18E
(16.7)
(0.75)
16.5
12.0
03/19E
15.7
2.50
1.6
1.5
9.2
12.7
03/19E
16.9
17.8
03/19E
(27.4)
(1.13)
17.5
13.0
03/20E
13.1
2.19
1.9
1.3
7.2
9.7
03/20E
17.8
21.9
03/20E
(37.8)
(1.51)
Company Background
Persistent is mid sized Indian IT company with strong technology
credentials (given its historical association with ISVs as product
engineering partner), a reasonable non-linear business and a rapidly
scaling digital practice.
Blue/Grey Sky Scenario
Our Blue Sky Scenario (Rs)
1,100
Digital business scales up faster helped by larger deal wins, higher
sybnergies in IBM alliance unit and stable growth in other business,
leading to about 300 bps margin expansion over FY18-20.
Our Grey Sky Scenario (Rs)
580.00
Weaker momentum in digital, lack of synergistic revenues from IBM
alliance and pressure in the services and Accelerite units, leading to
flat margins over FY18-20.
Share price performance
Pr i ce (LH S)
Reb ased Rel (RH S)
800
150
700
130
600
110
500
Jan - 1 6
90
Ju l - 1 6
Jan - 1 7
Ju l - 1 7
Jan - 1 8
The price relative chart measures performance against the S&P BSE SENSEX
IDX which closed at 34,443.19 on 09-Jan-2018
On 09-Jan-2018 the spot exchange rate was Rs63.66/US$1
Source: Company data, Thomson Reuters, Credit Suisse estimates
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
4
10 January 2018
Strong technology credentials position it
well as a digital play
Persistent has developed strong technology credentials, given its several years of
association as a product engineering vendor with some of the leading ISVs (IBM,
Microsoft, Salesforce, Oracle etc.) and start-ups. Over the years, it has built a portfolio of
end-of-life products (through acquisitions) and has also started offering product
engineering services to the enterprise customers. In the last couple of years, Persistent
has made several changes to address the large enterprise digital opportunity. The most
prominent have been the IBM IoT alliance signed in 2016 and the consequent
reorganisation of the business into four units, global expansion of the business and
beefing up of the leadership team (including sales as well as domain experts).
Persistent has been using its product DNA, long-standing partnerships with some of the
fast growing platforms (such Salesforce, Appian, Oracle, Apigee etc.), its API (application
programming interface) management skills, and IoT as key differentiators in its digital
offerings. Management views digital as a solution-led business and the focus is on
keeping the effort-based pricing component low—this makes Persistent's definition of
digital stricter (digital is a loosely defined term in the industry in general). While
Persistent's digital exposure as per its stricter definition is 21%, by general industry
definition, it is spread across different business units (services, IBM alliance and digital)—
we expect it to be much higher (at least 40%).
The initial traction in its digital unit has been encouraging. Total number of clients in the
Digital unit has been growing at a rapid pace, and Persistent had close to 30 clients worth
US$1 mn in the digital business in 1H FY18 and this number has been increasing YoY.
Persistent's recent IBM IoT alliance increases its IoT capabilities—in terms of talent it has
acquired as part of the deal (some of that have been moved from alliance to service/digital
units) and access to IBM's large IoT clients. This can be very handy for its solutions in the
digital business.
Strong technology credentials; geared to benefit
from the digital opportunity
Strong technology
credentials given its
several years of
association with
leading ISVs as well as
start-ups as product
engineering partner
Persistent Systems has followed a differentiated business model from the very beginning,
and in this process, has developed strong technology credentials. It started as a software
product developer for database product companies in 1990, Persistent Systems emerged
as a leading player in the outsourced product development (OPD) segment working with
some of the leading ISVs (independent software vendors) such as Microsoft, IBM, HP,
Salesforce, Oracle, Adobe etc. as well as several start-ups in the software domain. Its
service offerings ranged from prototyping, designing, developing and maintaining software
systems and solutions, creating new applications and enhancing the functionality.
The fact that such softwares are addressed to a larger client base (unlike customised
solutions offered by the IT services players), the technical and engineering skills, and
process maturity required are much higher compared to a typical custom application
development for an enterprise.
Given its association with the leading ISVs as well as the new age start-ups, Persistent
was early in identifying cloud, mobility, analytics and collaboration as its focus areas, and
also developed expertise in agile methodologies for software development (that is now
becoming a preferred method of software development).
Persistent has a strong
partner ecosystem
In 2011, it started acquiring "end-of-life" products from the leading ISVs and built an "IP
led" business around it (Persistent buys the product licenses, is responsible for further
developments and upgrades of the products, while the sales responsibility remains with
the ISV). This created a non-linear revenue stream for the company and also gave it
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
5
10 January 2018
access to the enterprise customers of the ISVs. More recently (in 2014-15), Persistent
started offering digital solutions to the enterprise customers leveraging its technology
credentials and the work it has historically done in alliance with the leading platforms such
as Salesforce, Appian, Oracle etc. ("Sell with" offerings). Persistent is a platinum partner
for Salesforce in both the US and Europe, was awarded the regional partner of the year in
the US by Appian in 2016, and was also awarded the Oracle security partner of the year
for 2016 for the North America region.
Figure 9: Persistent has evolved from an OPD player to a digital services provider, helped by its strong
technology credentials
2016
2014-15


2010-11

2007

2003

1990


Database and R&D
projects
Product
engineering for
Independent
software vendors
(ISVs).

Sell-with
partnerships with
the ISVs.
Focus on cloud,
analytics,
collaboration and
mobility

IP led business
evolution
Takeover of end of
life products from
ISVs
Enterprise digital
transformation
evolution (building
of products for
enterprises)
IBM IoT alliance
Restructuring of
business into
Digital, IBM
alliance, services
and Accelerite
Source: Company data, Credit Suisse
Persistent outscores its peers on softer aspects (quality of work and
employee perception)
We have got anecdotal evidences that employees perceive the quality of work to be better
at Persistent (given its technology intensive business), and given the more product
oriented nature of the business, the work culture is also different from a typical Indian IT
services company (providing more flexibility to employees).
Persistent commands a
premium in billing
rates, which we believe,
primarily reflects the
nature of work it does
and the business mix
While there is no easy way to quantitatively measure the quality of work delivered by an IT
services company (commoditised vs specialised), billing rates can provide some indication
(specialised services will always command a premium over commoditised services). A
comparison of Persistent System's average billing rates for onsite and offshore work with
that of some of its mid-sized peers and also larger peer, Infosys, indicates that Persistent
commands a premium, which we believe, primarily reflects the nature of work it does and
the business mix.
Persistent ranks
high on employee
perception
Similarly, we believe, Persistent has a differentiated work culture, given its early
association with the product companies. While the employee attrition is in line with the
industry's average, a look at Glassdoor ratings (a website that provides employee ratings
for the companies) indicates that Persistent has a much higher CEO approval compared to
its mid-sized as well as the larger Indian IT peers, and a much higher percentage of
employees (who have reviewed the company on Glassdoor) recommend Persistent to
their friends.
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
6
10 January 2018
Figure 10: Persistent Systems' billing rates are at a
premium to its peers, reflecting the nature of the business
Billing rate (per employee, annualised, US$)
55,000
Wipro
50,000
Hexaware
190,000
170,000
45,000
150,000
Figure 11: Employee approval is also among the
best as reflected in the glassdoor ratings ……… …..
HCL Tech
Mphasis
40,000
130,000
Infosys
35,000
LTI
90,000
30,000
Mindtree
70,000
25,000
50,000
20,000
110,000
Infosys
LTI
Mphasis
Onsite
Mindtree
Persistent
TCS
Persistent
50%
Offshore [RHS]
Source: Company data, Credit Suisse estimates. Note: Billing rate for the linear revenue for
Persistent.
60%
CEO approval
70%
80%
90%
100%
Recommendation to a friend
Source: Glassdoor
Gearing to address the enterprise digital opportunity
In the past 2-3 years,
Persistent has made
several changes to
address the large
enterprise digital
opportunity
It has made onsite
investments, and hired
senior management to
strengthen domain,
digital and IOT
capabilities
In the past 2-3 years, Persistent has made several changes to address the large
enterprise digital opportunity. The most prominent have been the IBM IoT alliance signed
in 2016 and the consequent reorganisation of its business into four units, global expansion
of the business and beefing up of the leadership and delivery teams (including sales as
well as domain experts).
Persistent reorganised its business into four units – (1) Services (the traditional business,
including the product engineering work for enterprise), (2) Digital (solution-led offerings),
(3) IBM alliance (including the traditional product engineering for IBM, end-of-life products,
IoT product—CE/CLM, and services around it), and (4) Accelerite (including end-of-life
telecom and infrastructure products as well new product launches). Each unit has four
independent sales teams, separate leadership team and P&L. Each of the units have
added key individuals on to their sales team and delivery teams to augment the business
in the past 12-18 months.
Persistent traditionally had an offshore heavy business. Over the last few years, the
company has expanded its global presence, through acquisitions and alliances, as well as
organically. For example, post its IBM alliance, Persistent set up development centres in
Ottawa (Canada), Edinburgh (the UK) and in Raleigh, Costa Mesa, Littleton and Hillsboro
in the US, besides the centres in Mexico and Israel.
Persistent has also hired several senior people in the last two years to strengthen its
domain, digital and IoT capabilities. Several employees have also joined Persistent from
the IBM alliance deal, which has also strengthened the leadership team.
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
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10 January 2018
Figure 12: Persistent has been applying its
technology DNA to enterprises—share of
enterprises has increased to 34% in Sep-17 from
22% three years back
100%
70%
28%
26%

22%
34%
28%
60%
50%
Platform based
work
(Salesforce,
Oracle etc)
Persistent’s own
solutions

20%
90%
80%
Figure 13: The business is reorganised into four
different units post the IBM IoT alliance, digital
transformation and IoT hold significant potential
……..
58%
40%
44%

Accelerite
8%

End of life products
(except those of IBM)
New growth products
Digital
transformation
21%
40%
30%
20%
Services
44%
IBM Alliance
27%
10%
0%
Sep-14
Sep-16
ISV
Enterprise
Source: Company data, Credit Suisse estimates
Sep-17
IP/product



CE/CLM (IoT) product alliance,
including IoT solutions
Product engineering
End of life products

Product
engineering
for ISV and
enterprises
Source: Company data, Credit Suisse estimates
Differentiated approach for digital; strong traction in
the business
In industry parlance,
Persistent's digital
exposure is
at least 40%
Product DNA, strong
partner ecosystem, API
management skills,
solutions led approach
and IoT are key
differentiatiors
The recent two deals—
USAA and Partners
healthcare are
examples of the
co-innovation led
approach
Management views digital as a solution-led business and the focus is on keeping the
effort-based pricing component low—this makes Persistent's definition of digital stricter
(digital is a loosely defined term in the industry in general). While Persistent's digital
exposure as per its o stricter definition is 21%, by general industry definition, it is spread
across different business units (services, accelerite, IBM alliance and digital)—we expect it
to be atleast 40%.
Persistent has been using its product DNA, long-standing partnerships with some of the
fast growing platforms, its API (application programming interface) management skills, and
IoT as key differentiators in its digital offerings. Persistent has developed partnerships with
several of the leading next generation platforms such Salesforce, Appian, Oracle, Apigee
etc. In addition, Persistent also has partnership with AWS and Microsoft Azure, and has
recently added Dell Boomi and Google cloud as partners. The recent two deals— USAA
and Partners healthcare are examples of the co-innovation led approach, where it has
been developing solutions in alliance with the enterprises and taking it to other enterprises
in a partnership model.
Persistent typically gets an entry into the customer through its relationships with the above
mentioned software vendors for implementation of platforms such as Salesforce cloud,
health cloud, marketing cloud etc., but it also uses its own solutions, connectors etc. for
implementation. Once the implementation is done, it further penetrates into the customers
offering solutions such as integration of the new platforms with the legacy platform using
API and data integration layers, offerings around IoT and artificial intelligence etc. It not
only leverages the technical skills derived from the product engineering business, it also
leverages the IoT offerings from IBM Watson (from the IBM alliance) and its own pre-built
solutions (such as connected healthcare, loan origination and tools (such as connectors
and platforms).
■ In the USAA deal (USAA is a Fortune 500 financial services provider for the members
Persistent Systems (PERS.BO / PSYS IN)
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10 January 2018
of the US military and their family), it has granted development rights for a number of
patented solutions related to security in financial services. Persistent intended to
extend these solutions and take them to the financial services industry, focusing on
authentication and security solutions based on concepts such as micro-trust, riskaware, contextual etc. Persistent has built a risk-based authentication product—
NEURO and claims to have signed on a few customers as well (including some major
names in the financial services industry). Management claims that USAA's credibility in
the market should help in the product adoption.
■ Partners Healthcare alliance: Persistent will help in digital transformation of clinical
care at Partners Healthcare (an integrated health system founded by Brigham and
Women’s Hospital and Massachusetts General Hospital) and will also develop an open
source platform in alliance with Partners, using its technology credentials and Partners'
domain knowledge. This will be a four-year collaboration. Persistent will develop
solutions/applications on the top of this platform. For example, one such solution is in
the area of congestive heart failure (CHF), being developed in alliance with the top
cardiologists at Partners.
Financial services, healthcare and manufacturing (industrial IoT) are the
focus verticals
Given its limited enterprise exposure historically, Persistent is currently targeting three
verticals—financial services, healthcare, and more recently, manufacturing. Persistent has
traditionally offered product engineering services to clients in the healthcare and financial
services domain and the manufacturing (industrial) practice is largely built on the expertise
and clients acquired from the IBM alliance.
In healthcare, Persistent has offerings for pharma companies and healthcare providers
with capabilities around Salesforce and has also built connected healthcare solutions. In
Financial services, Persistent works with mid-market as well as some of the larger
institutions in the areas of loan origination, wealth management, claims management,
security etc. It has also been doing some work around blockchain (for both healthcare
providers and financial services).
PARX acquisition to help business expand in Europe
PARX acquisition
helps business
expansion in Europe
and manufacturing
domain
Persistent recently acquired PARX in Europe for a total consideration of US$17 mn
(including US$8 mn earn-out). While this is not very significant (US$8 mn revenue runrate) for the overall business, it is material for the digital business. Indeed, this is the first
significant acquisition in the digital domain by Persistent. Firstly, PARX is a platinum
Salesforce partner in Europe—hence, this addition makes Persistent a Salesforce
Platinum partner in both the US and Europe. Secondly, Persistent did not have material
presence in Europe in general and German speaking region in particular—PARX provides
a footing in that market. And lastly, PARX has some expertise in the manufacturing
domain, which is a relatively new vertical for Persistent. PARX' revenue grew at close to a
30% CAGR over CY14-16.
Scalability will be key; the initial traction provides comfort
Persistent had close to
30 clients worth US$1
mn in the digital
business in 1H FY18
and this number has
been increasing YoY
While most of the digital projects start at a small scale (below US$1 mn), Persistent has
been focusing on converting these projects into digital programs. For example, what
typically starts as a project-based engagement (such as salesforce implementation)
moves to a program-based engagement (on developing and deploying solutions on the top
of it, integrating it with the existing systems at the client organisation, or other digital
transformation engagements). Total number of clients in the Digital unit has been growing
at a rapid pace and Persistent had close to 30 clients worth US$1 mn in the digital
business in 1H FY18 and this number has been increasing YoY.
It has won several Also, Persistent's digital offerings are not restricted to only the mid segment. A look at
deals with large global Persistent's announced deal wins over the last five quarters (see Figure 16 below)
players in the financial
Persistent
Systems
/ PSYS IN)
9
services
and(PERS.BO
healthcare
domain
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
10 January 2018
indicate several deals with large global players in the financial services and healthcare
domain.
The digital business has annualised run-rate of close to US$100 mn now and has been
growing at a 40-50% organic rate.
Persistent ranked in leadership zone by Zinnov in Digital Services
Persistent was ranked in the Leadership Zone by Zinnov (a global management and
strategy consulting firm) in the overall "Digital Services" category. In some of the subcategories such as "Digital application engineering", "digital integration services", "data
management and analytics", "digital infrastructure" and "digital workplace", Persistent has
been ranked higher than some of its larger peers in the industry in terms of capability.
“Persistent’s Software 4.0 approach is centric to their digital prowess. The approach helps
them architect, engineer and deliver digital or software driven business solutions with
agility and at scale. Additionally, their digital transformation toolkit offers tools and IP for
data curation and integration, API management and digital experience and is well
accepted amongst their customers. The company also has a strong focus on coinnovation. Moreover, their platform centric approach to digital and industry specific use
cases also helps them command leadership in the industry.” - Praveen Bhadada, Partner
& Practice Head – Digital Transformation, Zinnov
Figure 14: The digital business has decent mix of
own solutions ++++++++++ +++++++ +++++ +++++
+++
Figure 15: Number of clients in the Digital unit has
been growing at a fast pace and there are several
US$1 mn run-rate clients in this unit
Number of clients in Digital unit
Persistent: Digital business composition
300
250
Own solutions
33%
200
US$1 mn+
client: ~30
150
100
Platform led
business
67%
50
0
1HFY17
1HFY18
Total number of clients
Source: Company data, Credit Suisse estimates
Source: Company data, Credit Suisse estimates
Persistent Systems (PERS.BO / PSYS IN)
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10 January 2018
Figure 16: Digital deals are not limited to mid-market; Persistent is also working with some of the larger
clients in financial services and healthcare domain
Deals announced
Quarter
Built new digital experiences for HR and vendor on-boarding, for a multibillion-dollar global multinational in medical devices and pharmaceuticals
A digital payment solution using an API-based framework for a US health technology provider
2QFY17
2QFY17
IP-based win to provide a seamless digital experience for one of the most reputable and innovative, Fortune 500 financial services company
Digital transformation of retail credit origination system for a multibillion-dollar financial services group in the Middle-East, leveraging expertise in financial
services and digital business automation on the Appian platform
Building a Salesforce Service Cloud solution for a Fortune 500 healthcare company, chosen for strong focus on healthcare digital transformation,
deep Salesforce expertise, and pre-built industry-specific accelerators
Selected as a strategic partner for a digital transformation program by a large US based biotech & life sciences customer.
Chosen for digital transformation of franchisee management by a major US fast-food chain on the basis of solutions IP and expertise on the Appian platform
Granted Development Rights by USAA, a FORTUNE 500 financial services provider, to patented innovations related to security in financial services
Teamed with Partners HealthCare on new industrywide digital platform with a goal of bringing digital transformation to clinical care
Building a patient engagement application based on Salesforce for a Fortune 500 healthcare company.
Implementing an API based integration with global financial institutions for a US based business and financial software company.
Leveraging cognitive computing and machine learning to improve efficiency of the trade operations group for a large global bank.
Leveraging artificial intelligence and machine learning to develop a global regulatory science and policy (GRSP) intelligence application based on IBM Watson
that will respond to inquiries using a chatbot service for a pharma company
Building a cognitive chat-bot solution based on IBM Watson to streamline self-service operations for a leading US based hospital conglomerate
Built a Salesforce driven patient portal for a US based healthcare services company to get a 360-degree view of patient interactions for enhanced patient
engagement.
Driving a large, multi-year transformation program to shift from product centric to customer centric strategy, for a leading US based financial
software company.
3QFY17
3QFY17
3QFY17
4QFY17
4QFY17
4QFY17
4QFY17
1QFY18
1QFY18
1QFY18
1QFY18
2QFY18
2QFY18
2QFY18
Source: Company data, Credit Suisse. Note: The deals in "Bold" fonts are those with large clients
Further strengthening of IoT capabilities through IBM
alliance for IoT
The IBM IoT alliance
has three key
components: (a) CECLM product revenue
share, (b) sell-with, (c)
Persistent's own IoT
solutions
Persistent entered into an alliance with IBM in 2016 for its CE/CLM product (continuous
engineering/continuous lifecycle management), which is a key element of IBM's IoT
offerings. As part of the deal, Persistent took over a set of employees who were part of the
IBM IoT business (close to 600) and added some of its own employees to the product. The
deal has three components:
■ Revenue share arrangement: Persistent will be responsible for future product
development, maintenance and support of the CE/CLM product. It gets a certain
revenue share for this for all the existing installed base as well as new installations of
this product. While this is IBM's relatively mature and market leading product, it is not a
typical "end-of-life" product arrangement that Persistent has historically done with IBM.
We understand that this product has an underlying growth of low double digit. The end
customers are large companies in the engineering-oriented industries where IoT and
industrial IoT is relevant. As part of the deal, Persistent has a seat on the product
advisory board of this product at IBM, which takes decision on the future roadmap of
the product. The sales team remains with IBM.
■ Sell-with: Persistent has also started offering implementation and deployment services
around the continuous engineering product. This is a very small business at the moment.
■ Persistent's IoT solutions: Persistent has several IoT solutions that are available on
the IBM portal as well as on its own portal. Persistent can offer these solutions to the
IBM clients that deploy the continuous engineering product for IoT. Management
believes this could be a significant opportunity for Persistent.
Persistent Systems (PERS.BO / PSYS IN)
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10 January 2018
As per management, there were some teething troubles given the large organisation of
IBM and conflict of interest on the services part (given IBM has its own services unit as
well). Persistent has signed a reseller agreement with IBM that allows it to sell this product
directly to its customers as part of its IoT solutions.
This alliance increases
Persistent's IoT
capabilities through
talent and client access
While the continuous engineering product itself is growing and should drive Persistent's
revenue along, we believe this alliances increases Persistent's IoT capabilities in terms of
talent it has acquired as part of the deal (some of that have been moved from alliance to
service/digital units) and have access to IBM's large IoT clients. This can be very handy for its
solutions in the digital business. Also, it further strengthens Persistent's partnership with IBM.
Persistent ranked in the leadership zone by Zinnov in IoT technology services
Overall, Persistent has been ranked by Zinnov in the leadership zone. It has been rated
highly in the "platform and application", "big data management" and "analytics services"
categories, above some of its larger mid-sized IT peers, particularly in terms of its
capabilities.
“With a strong partner ecosystem, IP strategy and unique strengths in key technology
areas, Persistent has established a position among the leading players in IoT Technology
services. Persistent is strongly positioned for the second year in a row because of its
expertise in Cognitive IoT, Machine Learning, Continuous Engineering, IoT monetization
and API management.” - Sidhant Rastogi, Partner & Practice Head, Zinnov
Accelerite: Portfolio of products adding to non-linear
revenue
In the Accelerite unit, Persistent is following a strategy to have a portfolio of related
products—typically these products are industry agnostic and are focused on enterprise
infrastructure (cloud, end-point management and IoT). It has a combination of end-of-life
and new products. End-of-life products have high margins, but the growth rates are not
attractive (generally growth starts tapering-off after a time post product maturity). This
business is run as a separate entity under the leadership of Nara Rajagopalan.
Management believes
that new products such
as Sentient, Rovious
and Share Insights are
promising and have a
large addressable
market
Radia (end-point management product for enterprises) is the largest contributor to revenue
(about 40-50% of revenue). This product has been growing at mid-to-high single digit. The
Citrix Cloud Platform and Aepona are the two other large products with about 20-25%
contribution each. Persistent has revamped the Citrix Cloud Platform as Rovious Cloud,
adding some new features. Similarly, it has launched a new product Sentient in the endpoint security, which is complementary to Radia. Aepona is a more mature product with
stable revenue flow. Besides these, Persistent has two other new products—Share
Insights for Big data and analytics (already launched with some initial sales) and Concert
(IoT application development framework).
Management believes that products such as Sentient, Rovious and Share Insights are
promising and have a large addressable market (though the competition is also tough).
Persistent typically targets the existing clients first for the new products as it is relatively
easier to sell to them.
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
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10 January 2018
Figure 17: Accelerite's product portfolio
Product
Application
Remarks
Major revenue contributors
Radia
End point management
This is a growing product and is the largest product in the Accelerite unit. It is not a typical end-of-life product
and growing at mid-to-high single digits.
Citrix cloud platform
Cloud platform
Aepona
Telecom API
Location product (Openwave)
Mobile operators
This was acquired from Citrix in 2016. This product has an existing customer base and Persistent has
revamped this product in the last one year and taking this to market as Rovious Cloud.
This is a mature product and is sold to the telecom operators. The revenue is stable and deal size is typically
larger.
This is end-of-life product. The revenue has been declining for the last two years and it is now very small in
terms of revenue contribution.
New/revamped products
Share Insights
Big data analytics
Rovious Cloud
Hybrid cloud platform
Sentient
Endpoint detection and
response
Concert
IoT application development
framework
Persistent has launched Share Insights 2.0. It enables Rapid data preparation, processing and visualization
over millions of rows and terabytes of data. It has already started selling this in the market and management
has indicated reasonable traction.
It is built on the cloud product purchased from Citrix. Accelerite has added new features such as easy cloud
set up, integration with public cloud and made it relevant for smaller enterprises. Rovius Cloud builds fully
managed enterprise cloud using existing IT infrastructure that is ready to consume within minutes. Rovius
Cloud is easy to install, upgrades with zero downtime and enables user to consume public cloud resources
with unlimited capacity. Gartner added Accelerite as a vendor to watch in hybrid cloud space. The market is
large (US$90 bn+ and growing at over a 20% CAGR).
This is built on Radia. Real-time telemetry, security and remediation for all devices. Persistent believes that
remediation is differentiator for this product. The company is trying to sell this product to customers who use
Radia. This was launched only 2-3 months back.
Persistent is investing in R&D and looking to go after new customers.
Source: Company data, Credit Suisse
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
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10 January 2018
Expect a strong earnings revival over FY18-20
aided by digital, IBM alliance, and margins
Persistent has been transforming its business for the last few years—its traditional product
engineering business (particularly the ISV part) is getting impacted due to ongoing challenges
faced by the end clients (pre-internet era ISVs) and declining efforts to develop new product.
Persistent invested in scaling its enterprise business and digital offerings, which included
investment in domain experts (including investment in teams developing proof of concepts),
sales team and onsite delivery, and also entered into the IBM IoT alliance.
Persistent's revenue grew at below 8% CAGR in organic terms (16% including
acquisitions) over the last three years (FY14-17) vs close to a 17% CAGR achieved over
FY09-14. EBITDA CAGR was disappointing at 2.6% (FY14-17) vs 19% CAGR achieved
during FY09-14. The EBITDA margins are down from the peak of 26% in FY14 to 16% in
FY17, reflecting the above mentioned investments.
We believe the company has progressed well on its transformation and is well positioned
to reap the benefits in the medium term. Increasing share of high growth businesses
(digital, IBM IoT, enterprise) should drive the overall growth, which in-turn, would help the
margins. We expect an accelerated growth (a 12% revenue CAGR of FY18-20, a 10%
growth in FY18), and over a 20% EBITDA CAGR over FY18-20 (while FY18 margins may
remain subdued, we expect margin recovery over FY19 and FY20, helped by revenue
growth). We expect a 34% CAGR in digital unit, and a 7% CAGR in IBM alliance (a 17%
CAGR in the IoT part) over FY18-20, that should offset for slower growth in services unit.
Account mining, strong
traction in the partner
ecosystem, geography
and industry expansion
to be the key drivers
in digital
Digital business can sustain its accelerated growth
trajectory; expect a 34% CAGR over FY18-20
Persistent's digital unit has been growing at about 40% YoY organic rate for the last two
quarters (50% YoY growth in 2Q FY18, including PARX acquisition). We believe that
management's target of sustaining the similar growth rates in this business for the next 2-3
years is achievable, based on the below four drivers:
■ Mining of the accounts, most of which are currently sub-scale, through wider
portfolio of offerings: As highlighted in the earlier section, Persistent has managed to
penetrate into a reasonably large number of clients, and some of them are fairly large
organisations. While most of Persistent's digital deals start with a small project (as
small as US$200k), Persistent has managed to convert many of them into larger
programs (US$1-5 mn) by offering its own solutions and services. Persistent has been
widening the portfolio of its domain specific solutions (the recent Partners Healthcare
and USAA deals are good examples) and has also built several domain specific proof
of concepts—these should help it in mining the clients better. While these accounts
may not scale to US$30-50 mn (annual) in medium term, management is hopeful of
growing some of the accounts into US$10-20 mn relationships in the next 2-3 years.
The digital business in general is gaining scale as indicated by the larger IT services
players (Accenture, TCS etc.) in recent times.
■ Strong traction in the partner ecosystem should keep the project flow robust:
Persistent has a strong partner ecosystem (Salesforce, Oracle, Appian), and it has
been continuously expanding this (for example, added AWS, Google Cloud). These
platforms themselves are witnessing a strong traction—for example, Salesforce's
subscription revenue growth has been 25-30% over the last three years. Similarly,
Appian's subscription revenue has been growing at 30-40%.
■ Geographical and industry expansion: Persistent's current offerings in the digital unit are
largely focused on two verticals—financial services and healthcare. With the addition of
industrial capabilities through IBM IoT alliance and manufacturing exposure of PARX, this
would be a new client universe. Additionally, PARX acquisition also increases Persistent's
exposure to Europe, which has so far been a smaller market for the company.
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
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10 January 2018
■ Potential M&As: While Persistent has historically done only a few acquisitions in the
services business (most of the acquisitions have been on the IP side, many of them
being end of life), we believe this should be a key focus area going forward. Any
acquisition that expands the geographic presence and or adds new capabilities (new
solutions) could potentially complement the digital business.
We expect 34% CAGR
in digital over FY18-20.
Much larger players
growing at 25-30% YoY
Persistent's larger peers such as Accenture, TCS and Capgemini, with digital revenue runrate of US$4-16 bn have been growing this business at 25-30% YoY. At US$100 mn
scale, and above mentioned drivers, we believe, Persistent should manage to grow at a
34% CAGR over FY18-20. FY18 has inorganic contribution of the PARX acquisition.
Revenue has grown at 46% YoY in 1H FY18 (including PARX or 40% organic), and we
expect full-year revenue to grow at 40% (31% organic).
Figure 18: The new age platforms are growing at a
rapid pace, and expected to sustain this momentum
50%
Figure 19: The digital business of Persistent's larger IT
services peers is also on an accelerated growth trajectory
35%
31%
45%
30%
40%
26%
25%
35%
30%
23%
20%
25%
15%
20%
15%
10%
10%
5%
5%
0%
0%
2015
2016
Salesforce
9MCY17
Appian
Source: Company data, Credit Suisse
Accenture
TCS
Capgemini
Digital growth (YoY)
Note: 2Q FY17 for TCS, 1HFY17 for Capgemini and FY17 for Accenture. Source: Company
data, Credit Suisse estimates.
IBM business to be driven by the IoT alliance; expect
7% CAGR
IBM IoT alliance will
drive growth in this
business
Persistent's IBM alliance unit has four components: (1) product engineering for IBM's
products—over 40% of revenue, (2) CE-CLM product—about 40% of revenue (from the
recent IoT alliance) , (3) IoT services—low-single digit as of now (services around the CECLM product), and (4) other products—below 20% of unit's revenue (various end-of-life
products acquired from IBM and connectors built by Persistent).
Similar to the other ISV customers (discussed in more details in the following paragraphs),
the product engineering part of IBM alliance is likely to grow at a moderate rate, and endof-life products (including connectors) by nature may remain stagnant or decline slightly.
Expect 17% CAGR in
IBM IoT. Its share in
IBM alliance to increase
to 45% by FY20.
The key growth drivers would be the CE-CLM product (Persistent gets its revenue share)
and the services around it. We understand that the underlying product itself is growing at
low double digit (given increasing IoT adoption) and that should translate into Persistent's
revenue growth. In addition, the services component (implementation, Persistent's own IoT
solutions) could offer a very high growth, given its current low base, a significantly large
addressable market and Persistent's technical capabilities to offer innovative solutions. We
expect the IoT parts of the IBM alliance unit to record a 17% CAGR over FY18-20 and to
constitute over 45% of the IBM alliance unit's revenue by FY20.
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
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Expect 7% growth in
overall IBM alliance;
conservative estimates
for non IoT business.
10 January 2018
Overall, we expect a 7% CAGR in the IBM alliance unit's revenue over FY18-20. We
expect 7% growth for FY18 as well. 3Q is typically a seasonally strong quarter for IBM
business, and hence, 3Q FY18 revenue would be important to achieve this annual growth
—we estimate over 10% QoQ growth (or incremental US$4 mn QoQ revenue addition) in
3Q for the IBM alliance unit, similar to the trajectory in the earlier years.
Figure 20: Traditional product engineering and CECLM (IoT) are the two largest components of the
IBM alliance unit
IBM alliance unit break-up
Product
engineering
43%
Figure 21: The IoT alliance would drive the overall
revenue growth; expect stable revenue in other
components of the IBM alliance unit
180
IBM alliance unit: Revenue growth projections
FY18-20
CAGR
160
CE-CLM (IoT)
product
38%
140
120
100
59
58
55
80
60
24
24
2
47
51
24
6
40
20
59
Flat
24
Flat
10
>100% CAGR
63 11% CAGR
57
0
IoT services
1%
Other products
18%
Source: Company data, Credit Suisse estimates
FY17
CE-CLM (IoT) product
FY18
FY19
FY20
Other products
Product engineering
IoT services
Source: Company data, Credit Suisse estimates
Some challenges in traditional ISV segment should
lead to moderate growth in services business
Some challenges in the ISV business
Shrinking software
development cycle and
clients' own challenges
are key headwind in the
ISV business
Persistent's services unit has two components—ISVs (~70% share) and enterprises (~30%
share). For a very long time, Persistent has been offering product engineering for several
large ISVs (including Microsoft, Cisco, Oracle, Salesforce, Adobe, Agilent etc.). It does
similar work for IBM as well but that gets counted under the IBM alliance unit post the
restructuring. While historically, this was a bread and butter business for the company, it has
been under pressure for the past few years—its share has come down from 60% in Jun2014 to 40% in Sep-2017. The primary reasons for weakness in this business has been
shrinking period for development for the new software products and smaller resources
required for product development. A significant share of Persistent's ISV revenue comes
from the pre-internet era product companies (i.e. pre-1993), which have struggled in the
recent years due to competition from SaaS vendors and that has led these companies to
reposition their business. In a cloud environment, the number of people required is less as
per Persistent and that has impacted Persistent's business volumes to some extent.
We expect the revenue
in the ISV portion of the
services unit to be flat
over FY18-20.
To deal with these challenges, Persistent has been developing deeper relationships with
the strategic accounts to be part of the strategic changes in their business (so that it can
participate in the growing parts of the businesses). At the same time, Persistent has also
been working with several cloud era (post 2007) software companies—many of them are
start-ups, and have an element of risk, that are growing at a rapid pace. The share of such
companies would be 10-12% of the ISV business.
Persistent restructured this business in FY17—it let go some of the non-strategic accounts
(had a 3% impact in 2Q FY17 and some further impact in 3Q FY17). While the
restructuring is over, this business remains unpredictable, and we expect the revenue to
remain flat over FY18-20.
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
16
10 January 2018
Offset by strong momentum in the enterprise business
Enterprise business
has a stronger
momentum.
We expect 14% CAGR
over FY18-20
Persistent has been doing some innovative work on the enterprise side of this business.
For example, its work around IoT, artificial intelligence, digital solutions and platform.
Given its stricter definition of digital for classification into the digital unit, lot of digital
related work that Persistent does for the enterprises ends up being classified into services
unit. The arguments of declining effort requirements apply to the product engineering work
for the enterprises as well; hence, we conservatively model a 14% revenue CAGR in this
business over FY18-20.
Overall, we expect the services unit to grow at a 4% CAGR over FY18-20. FY18 has been
decent with 5% and 2.7% QoQ growth in 1Q and 2Q, respectively, and assuming no major
sequential growth in the 2H (to be conservative), this unit may report 5% growth in FY18.
Figure 22: ISVs account for a significant chunk of
revenue in the services unit +++++ +++++ +++++
+++++
Figure 23: We expect ISV business to remain
stagnant, while a decent traction in the enterprise
business should drive the unit's growth
Services unit: Revenue growth projections
Services unit: Revenue break-up
FY18-20
CAGR
250
200
Enterprise
30%
53
70
62
80
14% CAGR
150
142
144
144
144
100
Flat
50
ISV (excluding
IBM)
70%
0
FY17
FY18
FY19
ISV (excluding IBM)
Source: Company data, Credit Suisse estimates
FY20
Enterprise
Source: Company data, Credit Suisse estimates
Accelerite: Volatile business, we model conservative
estimates, but could surprise positively
Accelerite could be
unpredicable.
Conservatively model
5% CAGR over FY18-20
Accelerite unit largely comprises of matured products acquired by Persistent over years
from different ISVs (about 90-95% of revenue). These products have a low-to-stable
growth trajectory. On the other hand, there are several new or revamped products—such
as Sentient, Rovious and Share Insights. These are still very small, but the company
believes these are promising and have a large addressable market (though the
competition is also typically high). Management has set targets to achieve US$10 mn in
sales from products such as Sentient and Share Insights by 2020. The business has a
revenue run-rate of close to US$40 mn and if these products scale-up as planned, that
could lead to significant growth. However, given the unpredictability in this business, and
stagnation in the existing mature products, we estimate a moderate 5% CAGR in this
business over FY18-20. The revenue has grown at 6% YoY in 1H FY18, and we have
modeled in 3% YoY growth for the full-year FY18.
We expect a 12% organic revenue CAGR over FY1820, helped by digital and IBM IoT alliance
Expect 12% organic We expect revenue growth to accelerate over FY18-20, helped by the digital business and
CAGR over FY18-20, IBM IoT alliance. Persistent's revenue grew at about 7% (in organic terms) in FY17,
helped by digital and
Persistent Systems (PERS.BO
/ PSYS IN)
17
IoT alliance
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
10 January 2018
impacted by the softness in the ISV business. We expect an accelerated growth trajectory
going forward—the ISV segment has stabilised and may not be a significant drag. On the
other hand, the increasing share of faster growing digital business and IBM IoT alliance
should drive the growth. We expect 9.8% organic growth in FY18, which should further
accelerate to 11.4% in FY19 and close to 12% in FY20.
Figure 24: We expect close to 13% revenue CAGR over FY18-20, after about 11% organic growth in FY18
Organic growth
700
6.8%
9.8%
Organic CAGR
(FY18-20)
11.4%
11.9%
600
41
500
176
39
400
5%
43
38
135
34%
98
70
300
156
7%
214
224
4%
FY19
FY20
126
135
145
195
205
FY17
FY18
200
100
0
Services
IBM Alliance
Digital transformation
Accelerite
Source: Company data, Credit Suisse estimates
Investment in business
tranformation (digital,
enterprise) and IoT
alliance have taken
margins down from
26% in FY14 to 16%
in FY17
Margins at depressed levels; ample scope for
expansion and growth would be key
Margins have come down significantly over the last three years
Persistent's EBITDA margins have deteriorated over the years from 26% in FY14 (which
was also the peak level for the company) to just above 16% in FY17. The margin
contraction has been consistent over the years, and we believe this reflects the
transformation the company has gone through.
Currency would have been a tailwind during FY13-17, and we estimate that it would have
added about 4% to the margins. Investment in IBM IoT alliance (in 2016) had slightly over
300 bp headwind. The most significant investment has gone into digital, Accelerite and
enterprise business, in our view. Persistent has invested in beefing up its onsite team,
added global centers, increased its sales and marketing investments, and also invested in
developing the new capabilities (hiring of domain experts as well as delivery managers for
the enterprise business). It also invested in building new products in Accelerite, which can
support future growth (these products take time to build and ramp-up).
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
18
10 January 2018
Figure 25: EBITDA margins came down from 26% in
FY14 to slightly over 16% in FY17
30%
Figure 26: IBM IoT alliance and investments in
digital, Accelerite and IoT were key reasons
EBITDA margins
26%
26%
FY14 margins
26%
IBM IoT
-3%
15%
Currency
4%
10%
Investments in digital, Accelerite,
Enterprise
-10%
25%
21%
20%
18%
16%
5%
FY17 margins
16%
0%
FY13
FY14
FY15
Source: Company data, Credit Suisse estimates
FY16
FY17
0%
5%
10%
15%
20%
25%
30%
Source: Company data, Credit Suisse estimates
Operating leverage in digital and IBM IoT (along with cost adjustments)
can lead to over 200 bp EBITDA margin expansion over FY18-20
Overall, while margins
may contract in FY18
(largely due to the
currency headwind), we
expect EBITDA margins
to expand by over 200
bp over FY18-20,
assuming a broadly flat
INR/USD
The IBM IoT business (CE-CLM) could contribute to the margins in two ways—(1) through
cost adjustment, and (2) given most of the business is currently non-linear, any growth in
revenue would naturally help margins. When acquired, the IBM IoT business had a cost
base much higher than Persistent's revenue share—the employees were mostly located
onsite (high cost as well as medium-cost geographies), and the terms of the agreement
restricted Persistent from any employee restructuring for one year. In the recent quarters,
Persistent has initiated the cost adjustment process. This may not necessarily mean
headcount reduction—Persistent has been moving some of the staff located in the highcost locations to low-cost locations and also absorbing some of the staff with expertise in
IBM Watson and IoT to digital/services unit. While we expect the cost to increase in this
business, it may be much below the revenue growth—besides the underlying growth in the
CE-CLM product, we expect the services business around it to grow at a fast pace from a
low base. Overall, we expect the IBM IoT alliance to make some losses at the EBITDA
level in FY18, and turn EBITDA positive in FY19 and improve profits going forward.
On the digital/enterprise business, we believe the strong growth momentum should offer
operating leverage benefits. Similarly, while Persistent will continue to invest in the
Accelerite products, Share Insights has already started generating revenue, and others will
also start contributing to the revenue in the next two years.
Overall, while margins may contract in FY18 (largely due to the currency headwind), we
expect EBITDA margins to expand by over 200 bp over FY18-20, assuming a broadly flat
INR/USD.
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
19
10 January 2018
Figure 27: We expect margins to contract in FY18
due to the currency headwind
FY17 margins
16.2%
Currency
-1.5%
IBM IoT
0.9%
Investments in digital, Enterprise,
Accelerite
-0.5%
FY18 margins
15.2%
0%
5%
Source: Company data, Credit Suisse estimates
10%
15%
Figure 28: However, over FY18-20, we expect
margins to expand by over 200 bp
15.2%
FY18 margins
Tailwind from digital, Enterprise,
Accelerite
1.1%
IBM IoT
1.2%
FY20 margins
17.5%
20%
0%
5%
10%
15%
20%
Source: Credit Suisse estimates
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
20
10 January 2018
Expect 18% EPS CAGR over FY18-20,
initiate with Outperform
We like Persistent's business, given its strong technology credentials, lack of significant
legacy business (though the product engineering business is under pressure due to cloud
and declining effort requirements, it is entirely legacy, as a lot of work Persistent does
there involves emerging technologies), and differentiated solution-led approach for its
digital offerings (supported by a strong partner network). Persistent would also be
relatively less impacted by any adverse developments on the H-1B/L-1 front—about half of
its employee base in the US comprises of local staff (many of them have been added
through several acquisitions) and average salary levels are also not very low (as per the
company's estimates, the potential headwind would be limited to US$1.5-2 mn per year in
case the minimum wage is increased to US$100k for the H-1B/L-1 employees).
We believe 20%+
EBITDA and 18% EPS
CAGR would be among
the best in the industry,
and the stock is
available at reasonable
13x FY20 P/E
With solid traction in the digital business, significant scope for synergistic revenue
generation in the IBM IoT alliance, which could have higher margins as well (as it will
involve Persistent's own solutions), relative stability in the other parts of the business, and
multiple levers for margin expansion, we expect Persistent to report a 18% EPS CAGR
over FY18-20.
We believe this would be among the best in the industry, and for this growth, the stock is
available at 13x FY20 P/E. In addition, assuming that the 30% dividend payout is
maintained in the medium term, the stock offers a dividend yield of 2%. We find the current
multiples very attractive. The stock has traded at average over 15x 12m forward P/E
multiple for the last three years, with the peak multiple of over 20x in early 2015.
Value the stock at 16x FY20 P/E
We believe Persistent is well positioned among the Indian IT peers in the current
environment, and with a likely strong growth momentum, deserves a higher multiple for the
business. Continued solid momentum in the digital business, synergies from the IBM IoT
alliance and resulting margin expansion will be the key triggers for the stock. In addition,
given the seasonality in the IBM business, we expect a relatively stronger 2H.
In our note "Decoupling of mid caps from large caps" dated 29 November 2017, we made
a case for decoupling of mid-cap and large-cap IT companies' growth and earnings
multiple. The traditional correlation between mid-cap and large-cap growth has broken.
When growth is relatively low, top client behaviour matters more (mid-caps have higher
concentration) and the legacy business proportion which faces deflation may be lower for
some of the mid-cap stocks (which is the case for Persistent). Also, Persistent is currently
operating at several year low margins, given its investments in the recent years and
revenue growth will have multiplier impact as it will support margins.
We value the stock at
17x FY20 P/E. Indian
midcap IT peers trade
at average 16x CY19
P/E (13% EPS CAGR
over CY17-19)
Persistent's peers in the Indian midcap universe trade at an average CY19 P/E of 16x
(range of 12x to 20x), with an average EPS CAGR estimate of 13% over CY17-19. The
larger-cap peers trade in the range of 13x to 17x, with an expected average EPS CAGR of
8% over CY17-19. The faster growing global midcap digital native IT services firms such
as EPAM, Luxoft and Globant trade at 14-24x CY19 P/E, with an expected average EPS
CAGR of 22%.
With expect 18% EPS CAGR over FY18-20, we value Persistent at 17x FY20 P/E
(benchmarking it against the faster growing midcap IT peers), with a 12-month forward TP
of Rs960.
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
21
10 January 2018
Figure 29: Persistent is trading close to its threeyear average P/E and much below its last three
years peak
Figure 30: Persistent Systems is in a sweet spot;
offers attractive growth at reasonable multiples .. .. .
.
22
21%
Mindtree
19%
20
Persistent
17%
FY18-20 EPS CAGR
18
16
14
NIIT Tech
15%
LTTS
13%
Mphasis
11%
Cyient
9%
12
LTI
Hexaware
7%
10
Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17
12m fwd P/E
3 year avg
Source: Thomson Reuters
5%
10
12
14
16
18
20
22
24
FY19 PE
Source: Thomson Reuters, Credit Suisse estimates
EPAM case study
Persistent's business and its evolution is often compared to EPAM, an Eastern European
company, that has also transformed itself from a product engineering player for ISVs and
technology firms to a much diversified entity with domain expertise in certain verticals.
EPAM has managed to build some large client relationships over the years (with clients
such as UBS) and its business has grown at much higher pace than the offshore IT
players (27% CAGR over FY12-17 vs 14% organic CAGR for the top-six offshore IT firms).
One of the reasons for this stronger growth has been absence of any significant legacy
business, unlike the Indian IT peers who are going through the transition.
While both Persistent and EPAM started at around the same time, Persistent was late in
getting into the enterprise customers and it has been following a slightly different strategy
(more solution focus vs a largely service driven business of EPAM). However, given its
technology credentials, business mix and the traction in the digital business, we believe
Persistent can also grow ahead of the offshore IT players in the medium-to-longer term.
Given its historical growth track record, EPAM trades at 22x CY19 P/E, at a significant
premium to TCS (17x CY19 P/E).
Implied DCF assumptions are very reasonable for a
TP of Rs960
While we value the stock using a P/E multiple, we also use a DCF model as a sanity
check. The implied DCF assumptions to get to Rs960 per share fair value (12 months
forward) are very reasonable. With a WACC of 12.25%, terminal growth rate of 5%, 10%
revenue CAGR over FY18-25 and FY25 EBITDA margin of 17% (vs our estimate of 17.5%
in FY20 and FY15 margins of 21%), we get to the fair value of Rs960 per share.
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
22
10 January 2018
Figure 31: For a Rs960 fair value, the implied DCF assumptions are very reasonable
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25
Revenue growth
EBITDA margin
Tax rate
6.9%
15.2%
24.1%
12.9%
16.5%
26.0%
11.9%
17.5%
26.0%
10.0%
17.5%
26.0%
10.0%
17.3%
26.0%
8.0%
17.3%
26.0%
8.0%
17.3%
26.0%
6.0%
17.0%
26.0%
Net working capital (% of revenue)
Capex (as % of revenue)
Other variables
Cost of capital
Long term growth
15.0%
3.0%
14.8%
1.7%
14.8%
1.5%
14.8%
2.6%
14.8%
2.6%
14.8%
2.6%
14.8%
2.6%
14.8%
2.6%
12.3%
5.0%
Source: Credit Suisse estimates
Figure 32: Persistent trades at a reasonable discount to its peers, with a solid expected EPS CAGR
Company
Mcap
Sales
Sales
(US$
(US$
CAGR
mn)
EV/Sales
EBITDA EBITDA
EV/EBITDA
CAGR margin
mn)
CY17-
CY17
19
CY18
CY19
CY1719
EPS
P/E
ROE
Price performance
CAGR
CY17
CY17CY18
CY19
19
CY18
CY19
CY17
CY18
1Y
3Y
5Y
Indian IT services (midcap)
LTI
2,983
1,071
12%
2.3
2.0
12%
18%
12.6
11.4
9%
16.6
15.2
33
29
63%
NA
NA
Mphasis
2,160
933
9%
1.7
1.5
12%
16%
10.4
9.3
12%
15.7
14.1
14
15
34%
86%
79%
L&T Technology services
1,739
491
12%
2.9
2.6
14%
17%
17.1
14.7
14%
22.6
20.0
35
26
35%
NA
NA
Mindtree*
1,612
782
12%
1.7
1.6
20%
13%
12.6
10.5
19%
19.2
15.9
18
19
29%
0%
244%
Hexaware*
1,682
606
8%
2.1
2.0
11%
15%
14.2
12.7
10%
20.1
17.9
26
25
79%
73%
306%
Cyient*
1,033
534
12%
1.4
1.3
15%
14%
9.9
8.7
9%
15.3
13.9
18
18
19%
11%
222%
Persistent*
932
420
12%
1.6
1.4
18%
15%
10.0
8.4
16%
16.2
13.7
17
17
17%
-18%
177%
NIIT Tech
666
425
8%
1.2
1.2
9%
17%
7.5
6.9
13%
13.8
12.3
15
16
60%
92%
151%
Indian IT services (large cap)
Infosys*
35,721 10,277
9%
2.6
2.4
9%
27%
9.8
8.9
9%
15.3
13.9
21
21
7%
0%
54%
TCS*
81,438 17,744
10%
4.0
3.6
10%
27%
14.7
13.3
10%
18.6
16.8
31
30
17%
8%
111%
Wipro*
22,565
8,358
6%
2.2
2.1
7%
21%
10.7
9.9
9%
16.7
15.2
17
16
33%
15%
72%
HCL Tech*
19,587
6,406
10%
2.4
2.2
11%
22%
9.8
8.9
7%
14.5
13.6
26
24
7%
16%
180%
Tech Mahindra*
8,172
4,370
8%
1.4
1.3
14%
15%
9.1
8.0
8%
14.2
12.9
18
17
12%
-20%
117%
Global peers with digital heavy business
5,835
EPAM*
1,160
21%
3.0
2.5
22%
18%
16.8
13.9
24%
26.0
20.9
20
20
66%
130%
450%
Luxoft*
1,939
618
18%
2.1
1.7
20%
19%
11.2
9.0
18%
16.9
14.0
30
22
-3%
51%
NA
Globant
1,653
323
20%
3.3
2.7
25%
16%
19.3
15.5
23%
30.0
24.4
21
20
49%
234%
NA
Note: Priced as of 9 January 2018.
Source: Company data, Thomson Reuters estimates for Not covered companies, * Credit Suisse estimates for covered companies
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
23
10 January 2018
Risks
High client concentration
IBM accounts for 26%
of Persistent's revenue.
Top-5 and top-10
clients account
for 44% and 54%
Persistent derives 26% of its revenue from the top client (IBM) and 44% and 54% of its
revenue from the top-5 and top-10 accounts. Such a high client concentration can create
volatility in the financial performance (any client specific headwind can have significant
bearing on the overall financials). While such High client concentration is common with
nearly all the Indian Midcap IT Services companies, e.g., likes of Hexaware, Cyient and
Mphasis have client exposure similar to Persistent, Persistent's exposure to the top client
(i.e. IBM) is the highest among its peers. Given that IBM is a large organisation,
Persistent's exposure is diversified across multiple units or product divisions.
Figure 33: Similar to its mid-sized Indian IT peers, Persistent has a high client
concentration
60%
Client concentration
50%
40%
30%
20%
10%
0%
Hexaware
Cyient
Persistent
Top
Mphasis
Top-5
LTI
NIIT Tech
Mindtree
Top-10
Source: Company data
Quarterly volatility in the business
Given a significant chunk of Persistent's revenue is non-linear (relative to its IT services
peers), there is higher quarterly volatility in the results. For example, the IBM products
typically have a seasonally strong December quarter. Also, many of the deals in the digital
unit are project based in the initial stages, which can also create quarterly volatility.
Significant INR appreciation
Over 80% of Persistent's revenue comes from the US, and we believe the exposure to the
USD would be close to 85%. Also, given its significant presence in product engineering
and the IP based business, the offshore component is higher relative to the other Indian IT
firms. That makes Persistent highly sensitive to the INR/USD movements relative to its
peers. It hedges its projected net export earnings on 12-months rolling basis through plain
vanilla forwards.
Risks associated with the products business
Persistent has launched a couple of new products in the Accelerite unit. While the share of
such products in Persistent's revenue is not significant, as the case with any other product
company, there is a risk associated with the failure (or lack of client interest) of the
product.
Persistent Systems (PERS.BO / PSYS IN)
anas@monterosagroup.net Anas Khodabux 04/15/22 10:30:35 AM Anarosa Asset Management Ltd
24
10 January 2018
HOLT valuation
HOLT® is not part of Equity Research. Materials in this section are not prepared by Equity
Research.
The HOLT methodology uses a proprietary performance measure known as Cash Flow
Return on Investment (CFROI®). This is an approximation of the economic return, or an
estimate of the average real internal rate of return, earned by a firm on the portfolio of
projects that constitute its operating assets. A firm's CFROI can be directly compared
against its real cost of capital (the investors' real discount rate) to see if the firm is creating
economic wealth. By removing accounting and inflations distortions the CFROI allows for
global comparability across sectors, regions and time, and is also a more comprehensive
metric than the traditional ROIC and ROE.
Persistent Systems (PERS) has consistently been a strong cash flow generator. The
company has delivered double-digit CFROI in most years apart from 2011, with economic
returns averaging 12.5% across its twelve year history. Underpinning its strong CFROI
track record has been its high revenue growth, which has averaged over 27% in the past
decade. As a result of its stronger top-line growth, Persistent Systems has been able to
offset declining margins with higher asset turns in recent years.
Compared to peers, although Persistent Systems does not earn the highest CFROI within
the group, its profile is considered to be relatively stable while implied CFROI is also the
most undemanding as seen in Figure 34 below.
Figure 34: CFROI benchmarking of Indian IT service provider peers
Source: Credit Suisse HOLT
From a valuation standpoint, Persistent System trades at a HOLT P/E of 20x, below the
peer group median of 22x and at a steep discount to peers such as L&T Technologies and
Hexaware Technologies, which trade northwards of 30x.
Figure 35: HOLT P/E peer benchmarking
Source: Credit Suisse HOLT
Figure 36 reflects CS analyst estimates for sales growth, margins and asset turns. For the
period FY17-24E, CS analyst estimates suggest a top-line CAGR of 10% coupled with
EBITDA margins expanding from 15% to 17%. These forecasts imply CFROI rising from
9% to 11% over the same period, maintaining its double-digit CFROI track record.
Beyond the explicit forecast period, HOLT uses a fade-DCF model to arrive at a warranted
price, assuming CFROI and discount rate gradually fade to 6% in the long haul, while
asset growth fades to 2.5% - incorporating the economic reality of competitive pressures
which cause returns and growth rates to regress to the mean.
Persistent Systems (PERS.BO / PSYS IN)
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10 January 2018
The resulting HOLT valuation using CS Analyst estimates along with a five-year median
discount rate of 2.2% suggests a warranted price of Rs992 per share (34% upside to the
latest market price).
Figure 36: Scenario using CS Analyst estimates implies a warranted price of
Rs992/share
Source: Credit Suisse HOLT
Persistent Systems (PERS.BO / PSYS IN)
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Appendix
Company background
Figure 37: Management and Board profile
Designation
Background
Board of Directors
Dr Anand Deshpande
Founder, MD, Chairman
Kiran Umrootkar
Independent Director
He holds a B. Tech. (Hons.) in Computer Science and Engineering from the Indian Institute of Technology (IIT),
Kharagpur, and a M.S. and Ph.D. in Computer Science from Indiana University, Bloomington, Indiana, USA.
He has been on Persistent's Board since 2010. He holds a Bachelor’s degrees in Commerce (Honors) and Law. He is a
Fellow of the Indian Institute of Banking and Finance and is a Member of the Chartered Institute of Personnel and
Pradeep Bhargava
Independent Director
Development, UK.
He has been on Persistent's Board since 2012. He holds a Bachelor’s degree in Science (Honors), B.E. in Electronics
and Communication and MBA (from IIM, Ahmedabad. He is on the Board of several companies including Cummins India
Prakash Telang
Independent Director
and Torrent Pharmaceuticals.
He has been on Persistent's Board since 2010. Prakash holds a Bachelor’s degree in Mechanical Engineering and a
Master’s degree in Business Administration from IIM, Ahmedabad. He led Tata Motors as the Managing Director (India
Roshini Bakshi
Independent Director
operations) for four decades till 2012.
He has been on Persistent's Board since 2014. Roshini holds a Bachelor’s degree in Economics and is an MBA from IIM,
Ahmedabad. She is the Managing Director (Private Equity) at Everstone Capital Asia Pte., based in Singapore and India.
Sanjay Bhattacharyya
Independent Director
She was the Vice President and Managing Director for the Walt Disney Company’s consumer business for South Asia.
He has been on Persistent's Board since 2011. He holds a BA in Economics (Honors) from the Delhi University and is a
Certified Associate of the Indian Institute of Bankers. He has previously been Managing Director and Chief Credit & Risk
Thomas Kendra
Non-Executive NonIndependent Director
Officer of State Bank of India and CEO of State Bank of Bikaner & Jaipur.
"He has been on Persistent's Board since 2016. He holds a Bachelor’s degree in Arts in Business Administration from
the Indiana University in Bloomington, Indiana, USA. Tom was Vice President and General Manager of the Systems
Management business with Dell’s Software group, from where he retired recently. Previously, Tom served in various
senior positions at CA Technologies , Symantec Corporation, and IBM."
Key management personnel
Sudhir Kulkarni
President, Digital
Col. Jitendra Gokhale
Jacqueline White
President, IBM Alliance
Chief Customer Officer
Dr. Siddhartha Chatterjee Chief Technology Officer
Tom Klein
General Counsel and
Senior Vice President of
Sunil Sapre
Corporate Development
CFO
Samir Bendre
Chief People Officer
Atul Khadilkar
President, Corporate
Operations
He holds an MBA from IIM, Calcutta and a Bachelor’s Degree from Bombay University. He won the prestigious Gurukul
Chevening Scholarship at the London School of Economics. During his first stint with Persistent from 2006 to 2011, he
held Sales leadership roles as VP and SVP of Sales and GM of an acquired product unit. On rejoining Persistent in 2013
he held Global Sales Operations and Marketing responsibilities in addition to hi-tech Sales.
He has been with Persistent since 2003. He has more than 30 years of experience in the industry and has also served as
a colonel in the Indian Army where he managed the telecommunications network. He holds a Bachelor’s Degree in
Physics from the University of Pune and a Bachelor’s Degree in Electronics and Telecommunications from JNU, New
Delhi.
She joined Persistent in 2016, and brings over 25 years of experience of consulting services, and enterprise software
experience. Most recently she served as SAP’s SVP of Global Financial Services Consulting and was a Managing
Director at Accenture leading a national team across 17 sub industries.
He joined Persistent in 2015. Prior to Persistent, he was with IBM for 13 years during which, he held multiple technical,
strategic, managerial, and executive positions across IBM Research, IBM Systems & Technology Group, and IBM Global
Technology Services. He holds a B. Tech. (Honors) degree in Electronics and Electrical Communications Engineering
from IIT, Kharagpur and a Ph.D. in Computer science from Carnegie Mellon University, Pittsburgh, the US.
He joined Persistent in 2014 bringing with him more than 25 years of experience in technology law including an extensive
focus on start-up and venture capital transactions, mergers and acquisitions as well as domestic and international
intellectual property transactions. He is a graduate of Swarthmore College and the University of Chicago School of Law.
Prior to joining Persistent in June 2015, Sunil has had over 25 years of experience in the areas of corporate finance,
international and domestic taxation and management accounting. He has worked with L&T Group in various functions.
He has over 20 years of experience in technology, finance and operations. He holds a Bachelor’s degree in Electronics
Engineering from Nagpur University and has attended executive management programs at IIM Ahmedabad.
As a President of Corporate Operations, Atul Khadilkar heads corporate functions such as Corporate CTO, HR, Training
and Learning, IT, ISMS, Delivery and Operational Excellence. He has over 25 years of experience.
Source: Company data, Credit Suisse estimates
Persistent Systems (PERS.BO / PSYS IN)
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10 January 2018
Figure 38: Shareholding pattern
Sep-14
Sep-16
Sep-17
Promoters
FII
DII
39%
28%
11%
38%
22%
14%
31%
23%
21%
Others
23%
25%
26%
Source: NSE, Credit Suisse
Persistent Systems (PERS.BO / PSYS IN)
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Figure 39: Persistent Systems—key operating metrics
Revenue by project type (%)
Services
IP-driven
Revenue by project type (%) #2
ISV
Enterprise
IP led
Revenue by Geography (%)
North America
Europe
Asia- Pacific
Revenue by verticals (%)
Services
Digital
Alliance
Accelerite
Clients
No. of active customers
Services
IP led
Client count
Large (Annualised Revenue> $3 M)
Medium (Annualised Revenue $1 to $3 M)
Client concentration
Top client
Top client (US$, mn)
Top 5 (%)
Top 5 (US$, mn)
Top 10 (%)
Top 10 (US$ mn)
Linear revenue per billed PM (US$/PPM)
Onsite
Offshore
Employees
Technical
Sales & Business Development
Rest
Grand Total
Net addition/(reduction)
Attrition rate (TTM)
Utilisation (%)
Linear (Blended)
Global Delivery centres
India
Client Contribution
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
82%
18%
84%
16%
80%
20%
72%
28%
72%
28%
72%
28%
72%
28%
72%
28%
73%
27%
74%
26%
57%
25%
18.4%
57%
27%
16%
51%
29%
20%
46%
26%
28%
45%
26%
28.2%
44%
28%
28%
43%
29%
28%
42%
31%
28%
41%
32%
27%
40%
34%
26%
84%
6%
9.3%
86%
7%
7%
85%
6%
8%
86%
7%
7%
87%
5%
7.8%
85%
6%
9%
87%
5%
8%
87%
5%
8%
86%
6%
9%
83%
9%
8%
48%
14%
30%
8%
47%
15%
29%
9%
44%
17%
31%
9%
44%
19%
28%
10%
45%
18%
29%
8%
44%
21%
27%
8%
277
310
311
299
337
291
319
353
340
338
314
335
315
339
313
308
303
306
419
277
15
52
17
46
19
44
18
42
15
50
15
51
15
50
15
55
18
52
19
49
18%
14.2
36%
28.3
46%
35.8
18%
14.6
35%
29.4
45%
37.1
17%
15.6
34%
30.7
44%
39.5
25%
25.5
41%
41.0
50%
49.8
29%
30.4
45%
46.8
53%
55.2
28%
29.9
44%
46.6
53%
55.5
30%
32.5
46%
50.6
55%
60.1
27%
28.9
43%
47.2
52%
57.1
28%
31.5
46%
51.6
55%
62.4
26%
30.6
44%
51.7
54%
63.2
15,321
4,146
15,075
4,251
14,717
4,217
14,574
4,275
15,437
4,325
16,101
4,288
15,704
4,257
15,917
4,244
16,037
4,212
16,023
4,148
7,810
216
428
8,454
(52)
16.4%
7,905
208
432
8,545
91
17.1%
8,334
203
429
8,966
421
17.1%
8,618
201
445
9,264
298
16.4%
8,698
204
487
9,389
125
16.7%
8,612
207
486
9,305
(84)
15.9%
8,562
200
467
9,229
(76)
15.8%
8,808
193
459
9,460
231
15.7%
8,744
210
447
9,401
(59)
15.5%
8,599
208
439
9,246
(155)
15.5%
73%
85%
72%
76%
87%
75%
75%
87%
73%
75%
86%
74%
75%
84%
74%
74%
84%
73%
79%
89%
78%
78%
85%
77%
77%
87%
76%
79%
87%
77%
Source: Company data
Persistent Systems (PERS.BO / PSYS IN)
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10 January 2018
Financials
Figure 40: Income statement
FY15
FY16
FY17
FY18E
FY19E
Revenue (US$ mn)
309
352
429
478
534
FY20E
598
Growth
Revenue
EBITDA
EBITDA margin
EBIT
EBIT margin
Other income
PBT
Tax rate
PAT
EPS (Rs)
DPS (Rs)
13%
18,913
3,906
21%
2,967
16%
936
3,903
25%
2,909
36.4
10.0
14%
23,123
4,171
18%
3,206
14%
780
3,986
25%
3,003
37.6
8.0
22%
28,784
4,653
16%
3,163
11%
958
4,121
24%
3,015
39.1
9.0
11%
30,765
4,665
15%
3,132
10%
1,274
4,405
26%
3,258
40.7
10.0
12%
34,731
5,747
17%
4,176
12%
940
5,116
26%
3,786
47.3
11.5
12%
38,881
6,801
17%
5,051
13%
1,060
6,111
26%
4,522
56.5
14.0
Source: Company data, Credit Suisse estimates
Figure 41: Balance sheet
FY15
FY16
FY17
FY18E
FY19E
FY20E
Shareholders' funds
Non current liabilities
Trade payables
Other current liabilities
Short term provisions
14,055
29
529
1,265
1,871
16,393
151
1,651
1,647
1,224
18,993
298
1,209
1,572
1,391
20,979
406
1,557
1,436
1,517
23,757
406
1,758
1,557
1,713
27,127
406
1,968
1,685
1,917
Total liabilities
17,749
21,065
23,464
25,894
29,190
33,102
Tangible assets
Intangible assets
Goodwill
Other non-current assets
Total non-current assets
Receivables
Cash, bank balance, investments
Other current assets
Total current assets
4,053
40
24
2,444
6,561
3,586
6,036
1,566
11,188
3,031
1,422
175
3,302
7,930
4,275
6,260
2,600
13,135
2,817
2,756
76
3,772
9,421
4,754
6,009
3,280
14,043
2,518
2,710
77
3,614
8,919
5,057
8,329
3,589
16,975
2,238
2,019
77
3,614
7,948
5,709
11,541
3,992
21,242
2,078
1,029
77
3,614
6,798
6,391
15,475
4,438
26,304
Total assets
17,749
21,065
23,464
25,894
29,190
33,102
Source: Company data, Credit Suisse estimates
Persistent Systems (PERS.BO / PSYS IN)
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10 January 2018
Figure 42: Cash flow Statement
FY15
FY16
FY17
FY18E
FY19E
FY20E
PBT
Adjustment for:
Depreciation
3,900
3,697
4,007
4,405
5,116
6,111
939
991
1,491
1,533
1,571
1,750
Other non-cash/non-operating items
Working capital changes:
Receivables
Payables
Others
Tax
-445
-278
-524
-1,274
-940
-1,060
-576
202
98
-1,001
-645
924
-1,136
-1,012
-689
-302
-71
-1,048
-97
348
-635
-1,401
-887
201
149
-1,330
-927
210
131
-1,589
Cashflow from operations
3,116
2,541
2,864
2,881
3,880
4,626
Capex
Acquisitions
Others
-957
0
-1,347
-1,659
-307
1,105
-2,176
0
-43
-932
-359
842
-600
-200
940
-600
-200
1,060
Cashflow from investing
-2,304
-861
-2,219
-450
140
260
Dividend
Others
-560
-97
-1,040
-227
-480
-104
-960
-96
-1,008
0
-1,152
0
Cashflow from Financing
-657
-1,266
-584
-1,056
-1,008
-1,152
Source: Company data, Credit Suisse estimates
Persistent Systems (PERS.BO / PSYS IN)
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10 January 2018
Companies Mentioned (Price as of 09-Jan-2018)
Appian (APPN.OQ, $31.87)
Cisco Systems Inc. (CSCO.OQ, $39.69)
Cyient Limited (CYIE.BO, Rs584.1)
EPAM Systems, Inc. (EPAM.N, $111.1)
Globant (GLOB.N, $46.8)
HCL Technologies (HCLT.BO, Rs895.75)
Hexaware Technologies (HEXT.BO, Rs360.95)
Infosys Limited (INFY.BO, Rs1041.3)
International Business Machines Corp. (IBM.N, $163.83)
L&T Infotech (LRTI.NS, Rs1109.05)
L&T Technology (LTEH.NS, Rs1082.65)
Luxoft Holding, Inc. (LXFT.N, $57.75)
Microsoft (MSFT.OQ, $88.22)
Mindtree Ltd (MINT.BO, Rs625.95)
Mphasis Ltd (MBFL.BO, Rs712.05)
NIIT Technologies (NITT.NS, Rs689.9)
Oracle Corporation (ORCL.N, $49.06)
Persistent Systems (PERS.BO, Rs741.75, OUTPERFORM, TP Rs960.0)
Salesforce.com (CRM.N, $109.15)
Tata Consultancy Services (TCS.BO, Rs2708.45)
Tech Mahindra Limited (TEML.BO, Rs531.4)
Wells Fargo & Company (WFC.N, $62.26)
Wipro Ltd. (WIPR.BO, Rs317.6)
Disclosure Appendix
Analyst Certification
Nitin Jain and Anantha Narayan each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in
this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation
was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's
total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which
consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and
Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total
return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the
most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and Asia stocks (excluding Japan
and Australia), ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark (India - S&P BSE Sensex
Index); prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative
attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR)
calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR
less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that
puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds
between 15% and 7.5%, which was in operation from 7 July 2011.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications,
including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other
circumstances.
Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the
company at this time.
Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment
view on the equity security of the company or related products.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24
months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or
valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Persistent Systems (PERS.BO / PSYS IN)
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10 January 2018
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating
Versus universe (%)
Of which banking clients (%)
Outperform/Buy*
45%
(65% banking clients)
Neutral/Hold*
40%
(61% banking clients)
Underperform/Sell*
13%
(55% banking clients)
Restricted
2%
*For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely
correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to
definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
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Target Price and Rating
Valuation Methodology and Risks: (12 months) for Persistent Systems (PERS.BO)
Method: Our target price of Rs960 is based on 17x FY20 P/E multiple (slight premium over TCS, and benchmarked against the fast growing
midcap IT firms). We believe Persistent has technology credentials that can help it leverage the digital opportunity. Scale-up of digital and
IoT component of the IBM alliance should support growth in the medium to long term. We believe higher growth rates can support higher
multiples. We have an OUTPERFORM rating on the stock as we find it an attractive digital play, with likely healthy earnings growth
momentum in the medium term.
Risk:
The key risks to our target price of Rs960 and OUTPERFORM rating include: (1) any negative developments in the top accounts
(particularly IBM), (2) lack of growth impacting margins, and (3) significant INR appreciation against USD.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations
typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): ORCL.N, CRM.N, WFC.N, MSFT.OQ,
HEXT.BO, INFY.BO, HCLT.BO, TCS.BO, WIPR.BO, TEML.BO, EPAM.N
Credit Suisse provided investment banking services to the subject company (ORCL.N, WFC.N, MSFT.OQ, HEXT.BO, HCLT.BO, EPAM.N) within
the past 12 months.
Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non-investmentbanking, securities-related: WFC.N, MSFT.OQ, TCS.BO, WIPR.BO, TEML.BO
Credit Suisse has managed or co-managed a public offering of securities for the subject company (WFC.N, MSFT.OQ) within the past 12 months.
Within the past 12 months, Credit Suisse has received compensation for investment banking services from the following issuer(s): ORCL.N, WFC.N,
MSFT.OQ, HEXT.BO, HCLT.BO, EPAM.N
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (ORCL.N, CRM.N, WFC.N,
MSFT.OQ, MINT.BO, HEXT.BO, NITT.NS, INFY.BO, HCLT.BO, TCS.BO, WIPR.BO, TEML.BO, EPAM.N) within the next 3 months.
Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s):
WFC.N, MSFT.OQ, TCS.BO, WIPR.BO, TEML.BO
Credit Suisse makes a market in the securities of the following subject issuer(s): (MSFT.OQ).
Credit Suisse or a member of the Credit Suisse Group is a market maker or liquidity provider in the securities of the following subject issuer(s):
CYIE.BO, EPAM.N, HCLT.BO, HEXT.BO, INFY.BO, LXFT.N, MSFT.OQ, MINT.BO, NITT.NS, ORCL.N, PERS.BO, CRM.N, TCS.BO, TEML.BO,
WFC.N, WIPR.BO
A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of
Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (PERS.BO, ORCL.N, CRM.N, WFC.N,
MSFT.OQ, MINT.BO, HEXT.BO, CYIE.BO, NITT.NS, HCLT.BO, TCS.BO, WIPR.BO, TEML.BO, EPAM.N, LXFT.N) within the past 12 months.
Persistent Systems (PERS.BO / PSYS IN)
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10 January 2018
Credit Suisse has a material conflict of interest with the subject company (ORCL.N) . Credit Suisse is acting as financial advisor to Aconex in relation
to the proposed sale of the company to Oracle
As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject
company (WFC.N). Analyst Susan Katzke holds a long position in the equity securities of Wells Fargo & Company (WFC).
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This research report is authored by:
Credit Suisse Securities (India) Private Limited.........................................................................................................Nitin Jain ; Anantha Narayan
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Credit Suisse Securities (India) Private Limited.........................................................................................................Nitin Jain ; Anantha Narayan
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Persistent Systems (PERS.BO / PSYS IN)
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10 January 2018
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Persistent Systems (PERS.BO / PSYS IN)
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