1QFY2014 Result Update | IT

July 30, 2013

Persistent Systems
Performance highlights
Y/E March (` cr) Net revenue EBITDA EBITDA margin (%) PAT 1QFY14 357 78 21.7 57 4QFY13 334 83 24.9 52 % chg (qoq) 7.0 (6.5) (313)bp 10.0 1QFY13 301 81 26.8 42 % chg (yoy) 18.8 (3.7) (508)bp 37.3

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 2,101 (457) 0.3 590/364 22,586 10 19,593 5,832 PERS.BO PSYS@IN

`525 `568
12 Months

Source: Company, Angel Research

Persistent Systems (Persistent) reported its 1QFY2014 results, which were below our expectations on the revenue and operating margin fronts but were better than our expectation on the bottom-line front because of robust forex gain. Revenues were impacted due to a 13% qoq decline in IP-led revenues. The Management remains confident of FY2014 with the deal pipeline being strong and remains focused on increasing the share of IP-led revenues in its portfolio with incremental growth being led by the key focus areas of cloud, analytics and collaboration. We maintain our Accumulate rating on the stock. Quarterly highlights: For 1QFY2014, Persistent reported a revenue of US$63.0mn, up 1.5% qoq. In INR terms, the revenue came in at `357cr, up 7.0% qoq. The companys EBITDA margin declined by 313bp qoq to 21.7%, well below our expectation of 24.1%. This was because of negative impacts suffered due to 3.5% onsite wage hikes, visa costs incurred during the quarter and increased investments in senior S&M resources. The PAT stood at `57cr, up 10% qoq, aided by a forex gain of `18cr as against `4cr in 4QFY2013. Outlook and valuation: The Management indicated that the deal pipeline has improved by ~50% compared to last quarter and the company continues to observe increasing client budgets. The company is witnessing good momentum in the product engineering business (linear IT services), and IP-led revenues will add to it going forward, thus making the outlook for 2HFY2014 look definitely better than 1H. Revenues from HP client automation (HPCA) should flow in largely from the 2QFY2014 and that along with healthy traction in product engineering segment keeps growth outlook sanguine. Over FY2013-15, the company is expected to record a USD and INR revenue CAGR of 11.5% and 15.1%, respectively. Over FY2013-15, we expect the company to record an EBITDA and PAT CAGR of 7.4% and 10.0%, respectively. We value the stock at 10x FY2015E EPS, which gives us a target price of `568, and maintain an Accumulate rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 39.0 19.3 14.8 26.9

Abs. (%) Sensex Persistent

3m 1.1 1.0

1yr 16.4 43.6

3yr 8.9 14.3

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) FY2011 776 29.1 140 21.5 20.4 34.9 15.1 2.8 18.7 15.2 2.3 11.1 FY2012 1,000 28.9 142 1.5 23.2 35.4 14.8 2.5 16.9 20.2 1.8 7.6 FY2013 1,295 29.4 188 32.3 25.9 46.9 11.2 2.1 18.4 23.7 1.2 4.8 FY2014E 1,533 18.4 197 5.0 22.2 49.2 10.7 1.7 16.4 19.2 1.0 4.4 FY2015E 1,715 11.9 227 15.3 22.5 56.8 9.2 1.5 16.1 19.2 0.8 3.4

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

Source: Company, Angel Research; CMP as of July 29, 2013

Please refer to important disclosures at the end of this report

Persistent | 1QFY2014 Result Update

Exhibit 1: 1QFY2014 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 PBT Income tax PAT EPS (`) Gross margin (%) EBITDA margin (%) EBIT margin (%) PAT margin (%)
Source: Company, Angel Research

1QFY14 357 210 147 32 37 78 24 54 26 80 23 57 14.3 41.1 21.7 15.1 14.9

4QFY13 334 192 142 26 33 83 21 62 10 72 20 52 13.0 42.6 24.9 18.5 15.1

% chg (qoq) 7.0 9.8 3.1 22.3 12.2 (6.5) 12.0 (12.8) 11.3 14.5 10.0 10.0 (153)bp (313)bp (342)bp (19)bp

1QFY13 301 169 132 22 30 81 18 62 (5) 58 16 42 10.4 44.0 26.8 20.7 14.0

% chg (yoy) 18.8 24.9 11.1 46.7 25.1 (3.7) 28.3 (13.2) 39.6 45.4 37.3 37.3 (286)bp (508)bp (557)bp 84bp

FY2013 1,295 731 563 96 132 335 78 257 6 263 75 188 46.9 43.5 25.9 19.8 14.4

FY2012 1,000 592 408 69 107 232 61 171 17 197 55 142 35.4 40.8 23.2 17.1 13.8

% chg (yoy) 29.4 23.4 38.1 39.9 23.5 44.2 28.1 50.0 33.6 36.8 32.3 32.3 273bp 266bp 272bp 61bp

Exhibit 2: Actual vs Angel estimates

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

Actual 357 21.7 57

Estimate 364 24.1 51

% Var. (1.9) (238)bp 12.4

Subdued performance
For 1QFY2014, Persistent reported a revenue of US$63.0mn, up 1.5% qoq. This was on the back of a 4.5% qoq revenue growth (3.0% qoq volume growth and 1.5% qoq rise in price realization) in linear IT services (product engineering) to US$53.5mn. Onsite revenues grew by 14.6% qoq on the back of a 10.7% qoq volume growth and 3.9% qoq rise in price realization. Offshore revenues grew by 1.5% qoq on the back of a 2.3% qoq rise in volumes and 0.8% qoq decline in price realization. IP-led revenues declined by 13% qoq to US$9.5mn. IP-led revenues declined for the third consecutive quarter as Radia HPCA revenues were delayed and its contribution during this quarter was miniscule. The company is not concerned about the drop during the quarter. The Management indicated that the deals in this business are annual maintenance contracts from HPCA which would see significant ramp up in the second half and provide stability to IP led revenues. In INR terms, the revenue came in at `357cr, up 7.0% qoq.

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Persistent | 1QFY2014 Result Update

Exhibit 3: Trend in revenue growth (qoq)

66 62 58 60.1 54.9 9.4 60.8 62.1 63.0 10 8 6 4 2.2 1.2 1.3 1QFY13 2QFY13 3QFY13 4QFY13 qoq growth (%) 1.5 2 0 1QFY14 Revenue (US$mn)
Source: Company, Angel Research

(US$ mn)

54 50 46 42 38 34

Exhibit 4: Trend in billing rates (qoq)

16,000 14,000 12,000 12,789 12,863 12,772 14,014 14,567

(US$/ppm)

10,000 8,000 6,000 4,000 2,000 1QFY13 2QFY13 Onsite 3QFY13 Offshore 4QFY13 1QFY14 3,898 3,978 4,032 4,143 4,111

Source: Company, Angel Research

Industry wise, the companys growth was driven by its anchor industry segment Infrastructure and Systems (contributed 69.1% to revenue) the revenue from which grew by 5.5% qoq. Revenue from the Telecom and Wireless segment (contributed 20.7% to revenue) declined on a sequential basis for the third consecutive quarter. The Life Sciences and Healthcare segment (contributed 10.2% to revenue) reported a 3.4% qoq decline 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) 5.5 (8.0) (3.4)

% chg (yoy) 23.5 (1.9) 1.7

69.1 20.7 10.2

Geography wise, North America was the only region to show growth this quarter, and the company expects this to continue with increased traction in SMAC (social networks, mobile computing, analytics, and cloud computing) related product engineering services in the region. Persistents presence in Europe is small and
July 30, 2013

(%)

Persistent | 1QFY2014 Result Update

dominated by a few customers. During the quarter, the conclusion of a project and a client facing stress, resulted in a weak performance in the geography.

Exhibit 6: Growth trend in geographies

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

% chg (qoq) 4.5 (14.5) (16.2)

% chg (yoy) 19.2 (20.1) 0.3

87.6 4.8 7.6

Hiring and utilization

Persistent reported a net addition of 174 employees into the system, taking its total employee base to 7,144. The companys technical employee base increased by 149 people to 6,689. Attrition rate dropped marginally to 14.2% in 1QFY2014 from 14.4% in 4QFY2013.

Exhibit 7: Employee metrics

Particulars Technical Sales Rest Total Net addition
Source: Company, Angel Research

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

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

3QFY13 6,287 101 331 6,719 349

4QFY13 6,540 99 331 6,970 251

1QFY14 6,689 119 336 7,144 174

Exhibit 8: Utilization trend

78 77 76 75 74 73 72 71 70 69 1QFY13 2QFY13 3QFY13 Utilization (%)
Source: Company, Angel Research

77.3 75.2

(%)

72.5 71.7 70.0

4QFY13

1QFY14

Operating margin declined considerably

In 1QFY2014, the companys EBITDA margin declined by 313bp qoq to 21.7%, well below our expectations of 24.1%. This was on account of the following factors: a) 3.5% onsite wage hikes, b) visa costs incurred during the quarter, c) 250bp qoq decline in utilization (100bp impact), d) investments in senior S&M resources (110bp impact), e) HPCA related knowledge transfer costs (~40bp impact) and f) provisions for doubtful debts in 1QFY2014 as against a reversal in the prior quarter (~120bp qoq impact). Of these, investment in sales is the sole factor that
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Persistent | 1QFY2014 Result Update

will persist going forward, offsetting the gains from currency. The only tailwind available to Persistent in 1QFY2014 was the 5.4% qoq depreciation in INR against USD, which gave an ~180bp qoq benefit to margins.

Exhibit 9: Margin profile

50 45 40 35 44.0 44.1 43.5 42.6 41.1

(%)

30 25 20 15 10

26.8

27.2

24.8

24.9 21.7

20.7

21.5

18.8 3QFY13 EBITDA margin

18.5 15.1 4QFY13 1QFY14

1QFY13

2QFY13

Gross margin
Source: Company, Angel Research

EBIT margin

Outlook and valuation

The Management sounded confident of the companys growth matching or exceeding Nasscoms growth estimate of 12-14% yoy in FY2014, based on the healthy pipeline and plans to continue investments in new technologies and sales efforts, to take advantage of improved demand. The company sees itself well positioned with respect to its SMAC offering. Hence, Persistent has taken the advantage of favorable currency to invest heavily in S&M, adding 20 senior sales executives this quarter and will add further in the coming quarter too. It is also adding capacity with 500 freshers joining in in the coming two quarters. The Management indicated that the deal pipeline has improved by ~50% compared to last quarter and the company is continuing to observe increase in budgets of clients and excitement related to its SMAC stack of services. The Management indicated that the product engineering business (linear IT services) is seeing good momentum and IP-led revenues will add to it going forward, making the outlook for 2HFY2014 look definitely better than 1H. Revenues from HP client automation should flow in largely from the next quarter, and that along with healthy traction in product engineering segment keeps growth outlook sanguine. Over FY2013-15, the company is expected to record a USD and INR revenue CAGR of 11.5% and 15.1%, respectively. Persistent would be extending wage hikes to its offshore employees in 2QFY2014 (8-9%), which will be a significant drag on the margins. However, the substantial currency depreciation (INR vs USD), absence of visa and knowledge transfer costs (related to HPCA) should assist in protecting margins to an extent in 2QFY2014. Beyond 2QFY2014, we expect a significant improvement in margins driven by a) increased revenue contribution from HPCA (US$8-9mn in H2FY2014) for which the costs have already been incurred, b) utilization improvements and c) employee pyramid rationalization as Persistent intends to bring ~500 freshers onboard in the

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Persistent | 1QFY2014 Result Update

next couple of quarters. Over FY2013-15, we expect the company to record an EBITDA and PAT CAGR of 7.4% and 10.0%, respectively. At the current market price of `525, the stock is trading at 10.7x FY2014E and 9.2x FY2015E EPS. We value the stock at 10x FY2015E EPS, which gives us a target price of `568, and maintain our Accumulate rating on the stock.

Exhibit 10: Key assumptions

FY2014 Revenue growth USD terms (%) USD-INR rate Revenue growth INR terms (%) EBITDA margin (%) Tax rate (%) EPS growth (%)
Source: Company, Angel Research

FY2015 12.0 58.0 17.5 22.5 28.0 15.3

11.0 58.0 15.2 22.2 28.3 5.0

Exhibit 11: One-year forward PE(x) chart

800 700 600 500

(` )

400 300 200 100 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Price 13x 11x 9x 7x 5x

Source: Company, Angel Research

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Persistent | 1QFY2014 Result Update

Exhibit 12: Recommendation summary

Company HCL Tech Hexaware Infosys KPIT Cummins Mindtree Mphasis NIIT Persistent TCS Tech Mahindra Wipro Reco Neutral Accumulate Neutral Accumulate Accumulate Neutral Neutral Accumulate Buy Accumulate Accumulate CMP (`) 897 116 2,921 179 131 961 388 16 525 1,780 1,248 409 Tgt. price (`) 123 190 144 1050 568 2,060 1,390 435 Upside (%) 6.3 6.1 10.2 9.2 8.1 15.7 11.4 6.5 FY2015E EBITDA (%) 22.0 20.5 26.4 17.6 16.7 19.9 18.2 9.1 22.5 30.0 19.1 21.6 FY2015E P/E (x) 14.2 9.0 15.4 8.0 9.1 9.1 8.9 3.0 9.2 17.3 10.7 13.1 FY2012-15E EPS CAGR (%) 20.7 13.1 9.2 15.7 21.6 25.1 4.9 (7.1) 17.0 23.8 11.4 11.2 FY2015E EV/Sales (%) 1.7 1.2 2.5 0.5 0.7 0.9 0.6 (0.0) 0.8 3.5 1.8 1.6 FY2015E RoE (%) 21.7 23.5 19.3 14.0 16.7 20.3 14.2 11.9 16.1 29.2 18.9 19.4

Infotech Enterprises Accumulate

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.

July 30, 2013

Persistent | 1QFY2014 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 (`) 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 FY2013 1,295 731 56.5 563 43.5 96 7.4 132 10.2 335 25.9 78 257 6 263 75 28.7 188 188 46.9 FY2014E 1,533 899 58.6 634 41.4 134 8.7 161 10.5 340 22.2 97 243 43 (12) 275 78 28.3 197 197 49.2 FY2015E 1,715 1,011 59.0 704 41.0 146 8.5 171 10.0 386 22.5 103 283 40 (8) 316 88 28.0 227 227 56.8

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Persistent | 1QFY2014 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. & prov. Current liabilities Provisions Net current assets Total assets 75 74 448 762 88 78 438 848 100 101 618 1,084 123 120 762 1,268 139 134 952 1,476 158 89 100 250 203 137 72 192 238 241 93 247 281 320 110 293 315 459 123 328 457 228 229 52 281 6 26 611 289 321 51 372 12 11 15 731 368 363 51 414 12 19 20 871 464 407 51 458 12 19 17 991 567 424 51 475 12 19 18 40 707 747 15 762 40 801 841 1 7 848 40 978 1,018 65 1,084 40 1,162 1,202 65 1,268 40 1 1,369 1,410 1 65 1,476 FY2011 FY2012 FY2013 FY2014E FY2015E

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Persistent | 1QFY2014 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 (Inc)/dec in fixed assets (Inc)/dec in investments (Inc)/dec in deferred tax assets Inc/(dec) in deferred liab. (Inc)/dec in other assets Cashflow from investing Inc/(dec) in debt Inc/(dec) in equity/premium Dividends Cashflow from financing Cash generated/(utilized) Cash at start of the year Cash at end of the year (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 (112) 35 (77) 189 (120) (8) 58 (5) (75) (1) 9 (19) (11) 104 138 241 (106) 42 (65) 229 (140) 3 (137) (13) (13) 79 241 320 (81) 30 (52) 278 (120) (1) (121) 1 1 (21) (19) 138 320 459 FY2011 116 42 158 34 193 11 182 FY2012 171 61 232 26 258 55 203 FY2013 257 78 335 6 341 75 266 FY2014E 243 97 340 31 371 78 294 FY2015E 283 103 386 32 418 88 330

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Persistent | 1QFY2014 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 (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 3.0 69 86 3.1 66 50 3.3 67 50 3.5 67 50 3.7 67 50 15.2 18.7 18.7 20.2 26.5 16.9 23.7 33.0 18.4 19.2 27.5 16.4 19.2 29.7 16.1 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 1.2 1.1 18.4 0.7 1.1 0.2 1.2 1.1 16.4 0.7 1.1 0.2 1.2 1.0 16.1 34.9 45.5 5.5 186.8 35.4 50.7 4.5 210.1 46.9 66.5 4.0 254.6 49.2 73.4 2.8 300.6 56.8 82.5 4.5 352.4 15.1 11.5 2.8 1.0 2.3 11.1 2.3 14.8 10.4 2.5 0.9 1.8 7.6 2.1 11.2 7.9 2.1 0.8 1.2 4.8 1.5 10.7 7.2 1.7 0.5 1.0 4.4 1.2 9.2 6.4 1.5 0.9 0.8 3.4 0.9 FY2011 FY2012 FY2013 FY2014E FY2015E

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11

Persistent | 1QFY2014 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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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%)

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