About the Company

Persistent Systems Limited provides computer programming, consultancy, and related services. It operates through three segments: Technology Services, Alliance, and Accelerite (Products). The company engages in the provision of software products, services, and technology innovation in telecom and product lifecycle management domains, and digital practice; software development, professional, and marketing services; and telecommunication API gateway for defining, exposing, controlling, and monetizing telecom services to partners and application developers, as well as an Internet of Things service creation platform that allows enterprises to add a service layer to the basic APIs exposed to by connected devices, and to expose and monetize APIs. The company serves the banking, financial services, insurance, healthcare and life sciences, industrial, and software and technology industries.

Q3FY21 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
  Q3FY21 Q3FY20 YoY % Q2FY21 QoQ % 9MFY21 9MFY20 YoY%
Sales 675 586 15.19% 617 9.40% 1878 1670 12.46%
PBT 161 121 33.06% 159 1.26% 478 366 30.60%
PAT 126 90 40.00% 118 6.78% 365 280 30.36%

Consolidated Financials (In Crs)
  Q3FY21 Q3FY20 YoY % Q2FY21 QoQ % 9MFY21 9MFY20 YoY%
Sales 1105 958 15.34% 1024 7.91% 3142 2746 14.42%
PBT 165 114 45% 138 19.57% 425 339 25.37%
PAT 121 88 38% 102 18.63% 313 256 22.27%

Detailed Results

  1. The company had an excellent quarter with consolidated revenue growth of 15% YoY and PAT growth of 38% YoY.
  2. 9M performance was similar with revenue growth of 14% YoY and 22% YoY PAT growth.
  3. USD revenues were at $146.15 million which was up 12.9% YoY.
  4. EBITDA was up 47.8% YoY.
  5. Industry revenue mix was at:
    1. BFSI: 29.5%
    2. HCLS: 19.1%
    3. Tech & Emerging: 51.5%
  6. Client concentration was: Top 1 @ 18.5%, Top 5 @ 37.8% & Top 10 @ 47%.
  7. Revenue breakup in terms of business offerings was at 81.9% for Services & 18.1% for IP led.
  8. Geographical revenue breakup was:
    1. North America: 81%
    2. EU: 8.8%
    3. India: 8.6%
    4. RoW: 1.6%
  9. Persistent Systems was recognized as a Top 15 Service Provider in 2020 ISG Index™ for a fourth consecutive quarter.
  10. The company has cash & investments of Rs 1903 Cr as of 31st Dec 2020.
  11. The company has 17 clients of > $5 million engagement and 65 clients of engagement size of $1-5 million.
  12. PS announced an interim dividend of Rs 14 per share.
  13. Persistent completed acquisition of 100% shares of CAPIOT Software Private Limited.

Investor Conference Call Highlights

  1. The company added >1600 new full time employees in Q3 with >70% of them being lateral hires.
  2. The salary increment postponed from July was implemented in November.
  3. PS added new deals with a total TCV of $302 million in Q3.
  4. The cash on books was at $258 million or Rs 1888 Cr as of the end of Q3.
  5. The acquisition of CAPIOT added $1 million to revenues while alliance business added $34.6 million in Q3.
  6. PS’s large deal wins in alliance business will see revenues coming in from Q1 onwards.
  7. In BFSI, PS won a large multiyear deal to deliver a solution. It will be helping the client, who is one of the top 5 banks globally, to comply with the rules issued by U.S. Financial Crimes Enforcement Network, FinCEN, through identification and verification of beneficial owners of legal entity customers and so on.
  8. The management states that the broad theme in BFSI will be compliance, modernization, launching new products in digital banking, & making new digital products more secure. The main theme in Healthcare & Life Science will be the digital front door, which is the consumer experience, for Persistent.
  9. In terms of the linear revenue, offshore linear revenue grew by 8.9%, comprising of volume growth of 11.5% and declining billing rate by 2.3%, essentially because of the lower number of working days.
  10. The on-site linear revenue decreased by 1%, while there was an increase in volume by 0.2% and the billing rate declined by 1.2%, again, basically because of the impact of furloughs.
  11. BFSI had a marginally soft quarter with a dip of 0.8% given the seasonality factor, while health care saw good 6.4% QoQ and technology companies and emerging verticals registered a very good growth of 13.2% QoQ.
  12. The gross margin in Q3 was at 34.3% vs 34.7% in Q2.
  13. The SG&A expenses were 17.3% as against 18.3% in the previous quarter
  14. Forex loss was much less at Rs 20 lacs as against Rs 5.1 Cr in the previous quarter.
  15. The lateral hires of around 1000 employees in Q3 were done mainly for the deal wins in FY21 so far. The fresh hires of 600+ people were done anticipating future deal wins as the company is ramping up its winning momentum.
  16. Around $175 million of the TCV of deal wins in Q3 was from new customers.
  17. The utilization rate was in the range of 80-81% in Q3. The employee costs rose 4% QoQ mainly due to the new hires done in Q3 and the wage hike in November.
  18. The management has admitted that some of the cost savings like the ones in travel will get reversed in the future.
  19. The company is not going to do any buybacks with its cash and is keeping large cash reserves to stay ready for any potential acquisitions.
  20. The management believes that the improvement in IP business in Q3 is sustainable.
  21. In BFSI, the management has stated that it is seeing most of the activity coming in from the digital banking side with more and more banks are trying to launch newer products in the online space. A lot of them are looking at working with the hyperscalers and working towards a hybrid cloud environment.
  22. The average duration of the new customer deals in Q3 with TCV of $175 million is less than 3 years.
  23. The management has stated that PS will concentrate on consolidating industry verticals and sharpening service lines for organic growth and it will also be looking for inorganic growth opportunities in Europe. This has been identified as the go-to strategy to pursue growth for PS for the next 4-8 quarters.
  24. The management has admitted that its strategy to keep creating opportunities in services is to compensate for the volatility in the IP side of the business. Another reason for pursuing services with partners is to source new customers and add new revenue streams which can be expanded upon with cross selling at a later date.
  25. The management has stated that the M&A would be more in terms of getting capabilities on cloud, security, data and it is not looking to acquire IP-based companies.
  26. PS is looking to double down in Europe to reduce geographical concentration and dependence on USA and to leverage the opportunities there with its acquisitions. In 3-4 years, the management expects revenues from EU to be at 15-18% of total revenues.

Analyst’s View

Persistent System is a fast-rising player in the digital transformation space. It has seen good growth in recent years and is looking to capitalize on this momentum and aim to reach revenues of $1 billion in the next 4 years. The company had an excellent quarter with many deal wins resulting in a TCV of $302 million. It is also looking to double down on the industry partnerships as it is a growing source of income for PS and a new medium to source new customers. The company is also looking at possible acquisition opportunities particularly in Europe to reduce dependence on USA. It remains to be seen whether the company will be able to maintain its current momentum and whether its strategic acquisitions will prove to be as useful as projected. Nonetheless, given its fast rise in recent years and its big presence in North America & its various Alliances, Persistent Systems remains a key technology stock to watch out for.


 

Q2FY21 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q2FY21 Q2FY20 YoY % Q1FY21 QoQ % H1FY21 H1FY20 YoY
Sales 617 558 10.57% 586 5.29% 1202 1084 10.89%
PBT 159 134 18.66% 158 0.63% 317 246 28.86%
PAT 118 107 10.28% 121 -2.48% 239 190 25.79%

 

Consolidated Financials (In Crs)
Q2FY21 Q2FY20 YoY % Q1FY21 QoQ % H1FY21 H1FY20 YoY
Sales 1024 923 10.94% 1012 1.19% 2037 1785 14.12%
PBT 138 116 18.97% 122 13.11% 260 225 15.56%
PAT 102 86 18.60% 90 13.33% 192 169 13.61%

Detailed Results

  1. The company had a decent quarter with consolidated revenue growth of 11% YoY and PAT growth of 19% YoY.
  2. H1 performance was similar with revenue growth of 14% YoY and 13.6% YoY PAT growth.
  3. USD revenues were at $136.09 million which was up 8.4% YoY.
  4. EBITDA was up 36.3% YoY.
  5. Industry revenue mix was at:
    1. BFSI: 9%
    2. HCLS: 3%
    3. Tech & Emerging: 8%
  6. Client concentration was: Top 1 @ 19.4%, Top 2-5 @ 22.2% & Top 6-10 @ 9%.
  7. Revenue breakup in terms of business offerings was at 83.8% for Services & 16.2% for IP led.
  8. Geographical revenue breakup was:
    1. North America: 9%
    2. EU: 6%
    3. India: 1%
    4. RoW: 4%
  9. Persistent Systems was cited as a Strong Performer in the Forrester Wave: Digital Process Automation Service Providers, Q3 CY2020.
  10. Persistent launched Center of Excellence Accelerating Hybrid Cloud Journey with Red Hat OpenShift.
  11. Persistent Achieved AWS Service Delivery Designation for AWS Lambda.
  12. Persistent Systems was recognized as a Top 15 Service Provider in 2020 ISG Index™ for a second consecutive quarter.
  13. The company has cash & investments of Rs 1693 Cr as of 30th Sep 2020.
  14. The company has 16 clients of > $5 million engagement and 63 clients of engagement size of $1-5 million.

Investor Conference Call Highlights

  1. The company has appointed Mr. Sandeep Kalra as CEO in Q2.
  2. Tech companies and emerging verticals led the growth at 4.7% QoQ, followed by BFSI at 4.2% QoQ and Healthcare & Life Sciences at 1.4% QoQ.
  3. The company continues to see strong traction in its Product Engineering Services as well as cloud and infrastructure service lines.
  4. Persistent won a number of large deals in the quarter in TSU across its existing customers and net new customers.
  5. It won large multiyear, multimillion-dollar deals to set up a global technology center for a leading cloud-based voice, video messaging platform & a large tax technology company.
  6. It also won a multimillion, multi-year deal to provide operational support, including IT service desk and onboarding for end customers and traders for an innovative multi-bank trade finance network in Europe.
  7. The company also won a multiyear, multimillion-dollar deal for a large multinational medical technology company for rearchitecting their flagship product from legacy to modern component-based architecture.
  8. For one of its existing customers in the scientific instrumentation space, PS won a multiyear, multimillion-dollar contract across new business units to build newer reporting applications.
  9. The company has announced the acquisition of CAPIOT to strengthen its data integration capabilities in the MuleSoft, TIBCO, and Red Hat space. This deal is expected to help expand the footprint with its Salesforce customers.
  10. The utilization improved to 81.2% as compared to 78.5% last quarter. Attrition was lower at 10.6% on the trailing 12-month basis as compared to 12.7% in the previous quarter. The company has planned to do salary increments in November for all employees.
  11. The gross margin came in at 34.7% as against 33% in the previous quarter. Sales and marketing expenses came in at 8.9% of revenue as against 8.7% in the previous quarter.
  12. Admin and other expenses came in at 8.1% of revenue. Forex loss came in at INR 51 million as against INR 58 million in the previous quarter.
  13. The operational CapEx for the quarter was INR 263 million, part of which was to enable all employees to have the equipment to continue to work from home.
  14. The forward contracts outstanding as at 30th September were $129 million with an average rate of INR 76.30 per $1.
  15. The management maintains that there are a lot of service offerings that can be taken from the tech services business to the Alliance and vice versa.
  16. The company will be looking to significantly move the resources from on-site to offshore, and that will provide cost savings and help mitigate the impact of the salary increment along with the reduction in discounts.
  17. It is indeed part of the company’s strategy to keep trying to book larger deals, long-term deals with both existing customers or new customers and bring up the quality of revenue and the quality of customers in each packet.
  18. The management maintains that it is seeing green shoots of opportunities from alliances.
  19. In terms of acquisition strategy, the company is looking at 3 things basically. They are to increase the value proposition, industry vertical, and geographic diversification.
  20. Margins are expected to rise in FY22 as amortization comes down and provisioning for COVID gets reduced.
  21. The company is broadly at 60% offshoring. The management believes that offshoring will rise as more & more customers come to accept it and due to the cost savings involved.
  22. The company had 2 large deals in the reseller business in Europe last quarter which was a one-off but gets renewed each year.
  23. The company is also looking to expand the services business in both alliance and tech services verticals in the EU.
  24. The company is looking to target growth to $1 billion over the next 4 years.
  25. The company is looking to bring in its existing services into the Alliance side in the next 2-3 quarters.
  26. The management aims to maintain the company’s position in the top quartile of the industry growth at least.
  27. The Salesforce business had indeed paused in the EU at the start of COVID but it is coming back now.
  28. The company will unveil its plans to reach $ 1 billion in the next 4 years in the coming quarters.
  29. The company is maintaining big cash reserves to be able to do any acquisitions whenever it needs to.
  30. The company has initiated a program to reduce its dependence on subcontractors. This dependence should trend down in the medium term.
  31. For this quarter and next quarter, PS has a plan to add anywhere between 300 to 400 people on a quarterly basis.

Analyst’s View

Persistent System is a fast-rising player in the digital transformation space. It has seen good growth in recent years and is looking to capitalize on this momentum and aim to reach revenues of $1 billion in the next 4 years. The company had a decent quarter with much large deal wins. It is also looking to increase its offshoring quantum which should yield cost savings in the long term. The company is also looking to introduce many cross-sell opportunities between its tech services and alliance verticals. It remains to be seen whether the company will be able to maintain its current momentum and whether its strategic acquisitions will prove to be as useful as projected. Nonetheless, given its fast rise in recent years and its big presence in North America & its various Alliances, Persistent Systems remains a key technology stock to watch out for.

 

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