3QFY2013 Result Update | IT

January 28, 2013

Persistent Systems
Performance highlights
Y/E March (` cr) Net revenue EBITDA EBITDA margin (%) PAT 3QFY13 333 82 24.8 50 2QFY13 327 89 27.2 45 % chg (qoq) 1.9 (7.4) (248)bp 10.9 3QFY12 268 70 26.0 41 % chg (yoy) 24.4 18.4 (125)bp 22.0

ACCUMULATE
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code IT 2,088 (440) 0.2 589/301 22,754 10 20,103 6,075 PERS.BO PSYS@IN

`522 `550
-

Source: Company, Angel Research

Persistent Systems (Persistent) reported its 3QFY2013 results, which came in line with our expectations on the revenue front but disappointed on the operating margin front due to higher than expected S&M investments. The Management sounded confident of surpassing Nasscoms industry growth forecast of 11% yoy (USD revenue) for FY2013 with incremental growth being led by the key focus areas of cloud, analytics and collaboration. Also, considering the companys buoyant performance in 9MFY2013, we believe the Managements growth outlook is achievable. We maintain our Accumulate rating on the stock. Quarterly highlights: For 3QFY2013, Persistent reported a revenue of US$60.8mn, up 1.2% qoq. The companys EBITDA margin declined by 248bp qoq to 24.8% due to higher SG&A costs (up 13.3% qoq). The PAT came in at `50cr, up 10.9% qoq, aided by forex gain of `1.8cr as against loss of `4.1cr n 2QFY2013. Outlook and valuation: Persistents Management sounded confident of the companys growth exceeding Nasscoms growth estimate for the industry of 11% yoy in FY2013, citing that the deal pipeline has increased by ~50% as compared to that in the same quarter last year. Also, the company got back into hiring mode after five consecutive quarters of net headcount reduction seen earlier, and indicated that it will add ~300 net employees in 4QFY2013. The Management also indicated that ~500 offers have already been extended to campus graduates for FY2014. Over FY2012-14, the company is expected to record a USD and INR revenue CAGR of 13.1% and 19.7%, respectively. Over FY2012-14, we expect the company to record an EBITDA and PAT CAGR of 21.8% and 23.4%, respectively. At the current market price of `522, the stock is trading at 9.7x FY2014E EPS of `54.0. We value the stock at 10x FY2014E EPS, which gives us a target price of `550, and maintain an Accumulate rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 39.0 22.2 11.7 27.2

Abs. (%) Sensex Persistent

3m 7.9 11.0

1yr 17.7 61.9

3yr 23.3 -*

Note: * Listed on April 6,2010

Key financials (Indian GAAP, Consolidated)

Y/E March (` cr) Net sales % chg Net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) FY2010 601 1.2 115 74.0 24.3 32.1 16.3 2.9 18.0 17.5 2.9 11.9 FY2011 776 29.1 140 21.5 20.4 34.9 15.0 2.8 18.7 15.2 2.3 11.1 FY2012E 1,000 28.9 142 1.5 23.2 35.4 14.7 2.5 16.9 20.2 1.8 7.6 FY2013E 1,297 29.6 186 31.2 25.6 46.5 11.2 2.1 18.5 25.1 1.3 5.0 FY2014E 1,433 10.5 216 16.1 24.1 54.0 9.7 1.7 18.0 21.4 1.1 4.4

Ankita Somani
+91 22 39357800 Ext: 6819 ankita.somani@angelbroking.com

Source: Company, Angel Research

Please refer to important disclosures at the end of this report

Persistent | 3QFY2013 Result Update

Exhibit 1: 3QFY2013 performance (Indian GAAP, Consolidated)

Y/E March (` cr) Net revenue Cost of revenue Gross profit S&M expenses G&A expenses EBITDA Depreciation EBIT Other income Forex gain/(loss) PBT Income tax PAT EPS (`) Gross margin (%) EBITDA margin (%) EBIT margin (%) PAT margin (%)
Source: Company, Angel Research

3QFY13 333 188 145 25 37 82 20 63 8 2 71 21 50 12.4 43.5 24.8 18.8 14.5

2QFY13 327 183 144 23 32 89 19 70 (8) (16) 62 18 45 11.2 44.1 27.2 21.5 14.0

% chg (qoq) 1.9 3.0 0.5 7.9 17.3 (7.4) 4.6 (10.7)

3QFY12 268 153 115 17 28 70 16 54 7 (4)

% chg (yoy) 24.4 23.1 26.0 49.7 30.6 18.4 24.4 16.6

9MFY13 961 539 421 70 99 252 57 195 (4) (26)

9MFY12 730 443 287 51 81 155 42 113 20 9 142 41 101 25.1 39.3 21.3 15.4 13.3

% chg (yoy) 31.6 21.9 46.7 37.1 22.4 62.6 34.5 73.2

14.0 21.9 10.9 10.9 (59)bp (248)bp (264)bp 51bp

56 16 41 10.2 42.9 26.0 20.1 15.0

25.8 35.3 22.0 22.0 57bp (125)bp (125)bp (50)bp

191 55 136 33.9 43.8 26.2 20.3 14.2

34.8 34.2 35.0 35.0 451bp 499bp 487bp 94bp

Exhibit 2: Actual vs Angel estimates

(` cr) Net revenue EBITDA margin (%) PAT
Source: Company, Angel Research

Actual 333 24.8 50

Estimate 329 27.2 52

% Var. 1.4 (246)bp (4.2)

Operating performance disappoints

For 3QFY2013, Persistent reported a revenue of US$60.8mn, up 1.2% qoq. This was on the back of 2.1% qoq revenue growth in linear IT services (product engineering) with revenues coming in at US$49.7mn. Offshore revenues grew by 3.8% qoq on the back of 2.4% qoq volume growth and 1.4% qoq gain from increase in price realization. Onsite revenues, on the other hand, declined by 2.2% qoq because of a 1.5% qoq volume de-growth and 0.7% qoq decline in price realization. IP-led revenues stood almost flat qoq at US$11.1mn. The Management indicated that it foresees IP-led revenue to be higher in 4QFY2013, but it will remain volatile on a qoq basis. The companys offshore billing rate improved sequentially to US$4,032ppm, up 1.4% qoq. However its onsite billing rate declined by 0.7% qoq to US$12,772ppm. The Management indicated that the pricing will remain stable going ahead. The overall volume growth of the company stood at 2.1% qoq. In INR terms, the revenue came in at `333cr, up 1.9% qoq.

January 28, 2013

Persistent | 3QFY2013 Result Update

Exhibit 3: Trend in revenue growth (qoq)

66 62 58 60.1 54.2 51.7 54.9 4.9 4 2 0 3QFY12 4QFY12 1QFY13 2QFY13 qoq growth (%) 3QFY13 Revenue (US$mn)
Source: Company, Angel Research

9.4 60.8

10 8 6

(US$ mn)

54 50 46 42 38 34 0.3

1.3

1.2

Exhibit 4: Trend in billing rates (qoq)

14,000 12,000 12,387 12,603 12,789 12,863 12,772

(US$/ppm)

10,000 8,000 6,000 4,000 2,000 3QFY12 4QFY12 Onsite 1QFY13 Offshore 2QFY13 3QFY13 3,778 3,895 3,898 3,978 4,032

Source: Company, Angel Research

Industry wise, the companys growth was driven by its anchor industry segment infrastructure and systems (contributed 63.4% to revenue) revenues of which grew by 2.9% qoq. The telecom and wireless segment (contributing 26.1% to revenue), which was leading growth in the previous two quarters, posted a 5.7% qoq decline in revenue in 3QFY2013. The revenue from the life sciences and healthcare segment (contributing 10.5% to revenue) led the companys growth by posting an 11.1% qoq growth in revenues.

Exhibit 5: Growth trend in industry segments

% to revenue Infrastructure and systems Telecom and wireless Lifesciences and healthcare
Source: Company, Angel Research

% chg (qoq) 2.9 (5.7) 11.1

% chg (yoy) 11.2 50.4 (0.8)

63.4 26.1 10.5

Geography wise, the companys growth was led by developing geographies which posted an 11.3% qoq growth in revenues. Revenues from North America grew by 1.8% qoq while that from Europe declined considerably by 16.6% qoq.
January 28, 2013

(%)

Persistent | 3QFY2013 Result Update

Exhibit 6: Growth trend in geographies

% to revenue North America Europe Asia-Pacific
Source: Company, Angel Research

% chg (qoq) 1.8 (16.6) 11.3

% chg (yoy) 20.8 (0.3) 4.6

85.1 6.1 8.8

Hiring and utilization

Persistent, after having reported net reductions in the employee base in the past four quarters, finally reported a net addition of 349 employees (strongest in last eight quarters), taking its total employee base to 6,719. The companys technical employee base increased by 331 people to 6,287. The attrition rate (last twelve month [LTM] basis) declined substantially to 16.0% in 3QFY2013 from 16.9% in 2QFY2013. The Management indicated that it will add ~300 net employees in 4QFY2013 and has already given ~500 offers to campus graduates for FY2014.

Exhibit 7: Employee metrics

Particulars Technical Sales Rest Total Net addition Attrition LTM (%)
Source: Company, Angel Research

3QFY12 6,288 103 315 6,706 (194) 17.4

4QFY12 6,223 95 310 6,628 (78) 18.3

1QFY13 6,132 94 310 6,536 (92) 18.9

2QFY13 5,956 99 315 6,370 (166) 16.9

3QFY13 6,287 101 331 6,719 349 16.0

The net utilization (excluding resources in IP-led work) increased by 180bp qoq to 79.5%, despite strong gross additions done by the company.

Exhibit 8: Utilization trend

80.5 79.5 78.5 77.5 76.5 77.7 79.5

(%)

75.5 74.5 73.5 72.5 71.5 70.5

74.1

74.1

71.7

3QFY12

4QFY12

1QFY13 Utilization (%)

2QFY13

3QFY13

Source: Company, Angel Research

The companys client metrics saw movement of a few clients from US$3mn+ and US$1mn-3mn revenue brackets to lower revenue brackets. The companys total active client base increased to 309 in 3QFY2013 from 293 in 2QFY2013. The revenue from the top 5/10 clients grew by 2.8%/5.1% qoq, respectively.

January 28, 2013

Persistent | 3QFY2013 Result Update

Exhibit 9: Client metrics

Particulars Customers billed <US$1mn US$1mn-3mn >US$3mn 3QFY12 273 236 27 10 4QFY12 288 251 26 11 1QFY13 291 243 35 13 2QFY13 293 246 32 15 3QFY13 309 266 29 14

Source: Company, Angel Research

Margin profile
In 3QFY2013, the companys EBITDA and EBIT margins declined by 248bp and 264bp qoq to 24.8% and 18.8%, respectively due to higher SG&A costs (up 13.3% qoq). SG&A costs as a percentage to sales increased to 18.7% from 16.9% in 2QFY2013. The Management indicated that the company is deliberately investing in getting deals and so overall SG&A costs have gone up.

Exhibit 10: Margin profile

50 45 40 35 42.9 44.7 28.6 44.0 44.1 43.5

(%)

30 25 20 15 10

26.0

26.8

27.2

24.8

20.1

21.7

20.7

21.5

18.8 3QFY13

3QFY12

4QFY12

1QFY13 EBITDA margin

2QFY13

Gross margin
Source: Company, Angel Research

EBIT margin

Outlook and valuation

The Management sounded confident of the companys growth exceeding Nasscoms growth estimate of 11% yoy in FY2013, citing that the deal pipeline has increased by ~50% as compared to that in the same quarter last year. Also, the company got back into hiring mode during the quarter after five consecutive quarters of net headcount reduction, and indicated that it will add ~300 net employees in 4QFY2013. Persistent had earlier stated its intent of growing the share of IP-led revenues in its portfolio. Persistent also announced the acquisition of Novaquest, which is a product lifecycle management and search based technology solutions company. It has entered into a strategic partnership with Dassault Systems to sell and offer support, maintenance and deployment services as an authorized VAR for Dassault Systems in the US. Novaquest currently has a run rate of US$5mn in revenues annually and has been integrated with effect from December 31, 2012. Over FY2012-14, the company is expected to record a USD and INR revenue CAGR of 13.1% and 19.7%, respectively.

January 28, 2013

Persistent | 3QFY2013 Result Update

On the operating margin front, we expect that sustained operations at healthy margins could be challenged by high attrition rate, a heavily off-shored model and companys intentions of investing more in S&M going ahead. Over FY2012-14, we expect the company to record an EBITDA and PAT CAGR of 21.8% and 23.4%, respectively. At the current market price of `522, the stock is trading at 9.7x FY2014E EPS of `54.0. We value the stock at 10x FY2014E EPS, which gives us a target price of `550, and maintain an Accumulate rating on the stock.

Exhibit 11: Key assumptions

FY2013 Revenue growth USD terms (%) USD-INR rate Revenue growth INR terms (%) EBITDA margin (%) Tax rate (%) EPS growth (%)
Source: Company, Angel Research

FY2014 11.5 54.0 18.5 24.1 29.0 16.1

14.7 54.5 17.4 25.6 28.9 31.2

Exhibit 12: One-year forward PE(x) chart

800 700 600

(`)

500 400 300 200

Dec-10

Dec-11

Aug-10

Aug-11

Aug-12

Price
Source: Company, Angel Research

16x

14x

12x

10x

8x

January 28, 2013

Dec-12

Apr-10

Apr-11

Apr-12

Oct-10

Oct-11

Feb-11

Feb-12

Oct-12

Jun-10

Jun-11

Jun-12

Persistent | 3QFY2013 Result Update

Exhibit 13: Recommendation summary

Company HCL Tech Hexaware Infosys Infotech Enterprises KPIT Cummins Mahindra Satyam Mindtree Mphasis NIIT Persistent TCS Tech Mahindra Wipro Reco Accumulate Buy Neutral Accumulate Accumulate Neutral Accumulate Accumulate Buy Accumulate Accumulate Accumulate Neutral CMP (`) 697 82 2,810 174 115 124 797 367 28 522 1,344 1,015 414 Tgt. price (`) 765 118 184 130 868 396 36 550 1,465 1,087 Upside (%) 9.8 43.4 1.4 6.1 12.7 (4.3) 9.0 7.8 29.5 5.3 9.0 7.1 3.7 FY2014E EBITDA (%) 20.7 19.0 28.8 17.4 15.9 19.3 19.3 17.5 10.9 24.1 28.9 19.0 19.4 FY2014E P/E (x) 13.2 7.7 16.2 8.9 8.9 11.5 9.2 9.7 4.5 9.7 17.0 9.5 14.9 FY2011-14E EPS CAGR (%) 13.6 6.3 5.9 10.3 17.5 2.1 17.4 0.0 (2.7) 15.1 13.3 6.5 6.8 FY2014E EV/Sales (%) 1.5 0.8 2.9 0.6 0.8 1.3 0.9 0.7 0.2 1.1 3.5 1.8 1.7 FY2014E RoE (%) 22.9 22.0 21.3 13.6 20.9 23.5 21.7 13.5 14.1 18.0 29.7 21.6 17.9

Source: Company, Angel Research

Company background
Persistent is a leading player in the global outsourced software product development (OPD) market and has service offerings across various stages of product lifecycle. The company primarily focuses on the infrastructure, telecom and lifesciences industry segments. It has over 18 years of experience working with software product companies and has developed and released more than 3,000 products till now. The company has invested and plans to continuously invest in new technologies and frameworks in the areas of cloud computing, analytics, enterprise collaboration and enterprise mobility.

January 28, 2013

Persistent | 3QFY2013 Result Update

Profit and loss statement (Indian GAAP, Consolidated)

Y/E March (` cr) Net sales Direct costs % of net sales Gross profit % of net sales S&M expenses % of net sales G&A expenses % of net sales EBITDA % of net sales Depreciation EBIT Other income Forex gain/(loss) Profit before tax Provision for tax % of PBT PAT Extraordinary expenses Final PAT EPS (`) FY2010 601 337 56.1 264 43.9 46 7.7 71 11.9 146 24.3 34 113 8 3 124 9 7.3 115 115 32.1 FY2011 776 472 60.9 304 39.1 62 8.0 83 10.8 158 20.4 42 116 17 17 150 11 7.1 140 140 34.9 FY2012 1,000 592 59.2 408 40.8 69 6.9 107 10.7 232 23.2 61 171 17 9 197 55 28.0 142 142 35.4 FY2013E 1,297 734 56.6 563 43.4 96 7.4 136 10.5 332 25.6 77 254 2 6 262 76 28.9 186 186 46.5 FY2014E 1,433 829 57.8 604 42.2 106 7.4 153 10.7 345 24.1 86 259 23 23 304 88 29.0 216 216 54.0

January 28, 2013

Persistent | 3QFY2013 Result Update

Balance sheet (Indian GAAP, Consolidated)

Y/E March (` cr) Liabilities Share capital ESOP outstanding Reserves and surplus Hedge reserves Total shareholders' funds Borrowings Deferred payment liability Total liabilities Assets Gross block - fixed assets Accumulated depreciation Net block Capital work-in-progress Total fixed assets Investments Deferred tax assets, net Other non-current assets Current assets Sundry debtors Cash and bank balance Other current assets Loans and advances Less: - Current liab. and provisions Current liabilities Provisions Net current assets Total assets 148 32 255 644 75 74 448 762 88 78 438 848 101 101 563 1,015 114 112 701 1,210 136 192 34 72 158 89 100 250 203 137 72 192 238 186 93 248 263 286 103 274 371 188 183 48 232 156 1 457 228 229 52 281 6 26 611 289 321 51 372 12 11 15 731 367 364 51 415 12 11 14 871 452 418 51 469 12 11 17 40 3 580 16 639 5 644 40 707 747 15 762 40 801 841 1 7 848 40 968 1,008 7 1,015 40 1,163 1,203 7 1,210 FY2010 FY2011 FY2012 FY2013E FY2014E

January 28, 2013

Persistent | 3QFY2013 Result Update

Cash flow statement (Indian GAAP, Consolidated)

Y/E March (` cr) Pre tax profit from operations Depreciation Pre tax cash from operations Other income/prior period ad Net cash from operations Tax Cash profits (Inc)/dec in Current assets Current liabilities Net trade working capital Cashflow from operating activities (Inc)/dec in fixed assets (Inc)/dec in investments (Inc)/dec in deferred tax assets Inc/(dec) in deferred payment liab. (Inc)/dec in other assets Cashflow from investing activities Inc/(dec) in debt Inc/(dec) in equity/premium Dividends Cashflow from financing activities Cash generated/(utilized) Cash at start of the year Cash at end of the year (81) 88 7 156 (48) (68) 1 5 (110) 132 (2) 129 175 17 192 (265) (31) (296) (114) (92) 156 (5) 10 (26) 43 (6) (26) (32) (103) 192 89 41 17 59 262 (152) (12) (5) (8) 11 (165) 1 (27) (21) (48) 49 89 138 (113) 36 (77) 186 (120) 1 (119) (1) (19) (19) 48 138 186 (61) 24 (37) 265 (140) (3) (143) (21) (21) 101 186 286 FY2010 113 34 146 11 158 9 149 FY2011 116 42 158 34 193 11 182 FY2012 171 61 232 26 258 55 203 FY2013E 254 77 332 7 339 76 263 FY2014E 259 86 345 45 390 88 302

January 28, 2013

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Persistent | 3QFY2013 Result Update

Key ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BVPS Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS Cash EPS Dividend Book value Dupont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover ratio (Sales/Assets) Leverage ratio (Assets/Equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (fixed assets) Receivables days Payable days 2.7 73 120 3.0 69 86 3.1 66 50 3.3 67 50 3.2 67 50 17.5 45.7 18.0 15.2 18.7 18.7 20.2 26.5 16.9 25.1 33.2 18.5 21.4 30.1 18.0 0.9 1.1 0.2 0.9 1.0 18.0 0.9 1.3 0.1 1.0 1.0 18.7 0.7 1.1 0.2 1.2 1.0 16.9 0.7 1.0 0.2 1.3 1.0 18.5 0.7 1.2 0.2 1.2 1.0 18.0 32.1 41.4 0.6 178.1 34.9 45.5 5.5 186.8 35.4 50.7 4.5 210.1 46.5 65.8 4.5 251.9 54.0 75.5 4.5 300.7 16.3 12.6 2.9 0.1 2.9 11.9 2.7 15.0 11.5 2.8 1.1 2.3 11.1 2.3 14.7 10.3 2.5 0.9 1.8 7.6 2.1 11.2 7.9 2.1 0.8 1.3 5.0 1.6 9.7 6.9 1.7 0.9 1.1 4.4 1.3 FY2010 FY2011 FY2012 FY2013E FY2014E

January 28, 2013

11

Persistent | 3QFY2013 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Persistent No No No No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

January 28, 2013

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