Persistent Systems BUY (Powered by Four Engines) 20160622

Rs696.
15 - BUY
Powered by four engines
Ankur Rudra
Digital, IoT, IP and product engineering power growth
ankur.rudra@clsa.com
+91 22 6650 5059
Following its recent IBM IoT deal, Persistent is now powered by four
strong growth drivers: IoT, digital, outsourced product development
(OPD) services and intellectual property (IP). Its recent reorganisation
should help streamline the business and improve profits. We expect
Persistent to be a Double Bagger over the next three years powered by a
21% revenue FY16-19 Cagr and recovering margins. At 12x FY18CL, it is
an attractive next-generation services play and we reiterate our BUY call.
Digital remains a dominant near-term driver
Persistents early focus on digital/SMAC (social, mobile, analytics and cloud)
helped to expand its addressable market to financial services, telecom and
healthcare enterprises. Its focus on front-end digital offerings and softwareas-a-service platforms differentiates it from larger peers. Its enterprise
business has grown to 29% of revenue and should continue to deliver a Cagr
of more than 30%.
22 June 2016
India
Technology
Reuters
Bloomberg
PERS.BO
PSYS IN
Priced on 21 June 2016

CNX Nifty @ 8,219.9
12M hi/lo
IBM IoT deal could prove a game changer

Persistents recent alliance with IBM reflects its leadership in next-generation
Internet of Things (IoT) services. This deal marks its first >US$100m
customer and is a significant vote of confidence in its capability by its top
customer given it is now working on IBMs crown jewels. With engineering
talent trained on cutting-edge services and access to IBMs deep enterprise
relationships, Persistent can accelerate its enterprise practice.
Rs771.25/579.28
12M price target

% potential
Rs900.00
+29%
Shares in issue
Free float (est.)
80.0m
61.5%
Market cap
US$818m
Reorganisation streamlines the business, puts focus back on profit

Persistents services and IP units have been cash cows, funding rapid
expansion into faster-growing digital and IOT businesses. Its recent
reorganisation should help to put a greater focus on profitability for its main
business units while maintaining their growth potential.
3M average daily volume
Rs100.1m
(US$1.5m)
Foreign s'holding 22.5%

Major shareholders
Anand Deshpande 28.5%

FIIs 22.5%
Stock performance (%)

1M
3M
12M
Absolute
Relative
(3.7)
(9.2)
(6.0)
(11.9)
(2.3)
(2.2)
Abs (US$)
(3.9)
(7.6)
(8.1)
1000
(Rs)
(%)
150
904
100
808
712
50
616
520
Jun-14
0
Feb-15
Oct-15
Persistent Systems (LHS)

Rel to Nifty (RHS)
Source: Bloomberg
www.clsa.com
Jun-16
Remains the attractive next-gen services play

With digital, IoT and IP collectively contributing more than 50% of revenue,
drags from legacy OPD services that plagued Persistent in CY14/15 are
unlikely to be material. Moreover, upfront margin investments should peak in
FY17, with margin recovering sharply in FY18 driving a more than 20%
earnings Cagr over FY16-19. Persistent remains the most attractive Indian
next-gen services play at 12x FY18CL in our sector coverage and we remain
BUYers.
Financials
Year to 31 March
Revenue (Rsm)
Net profit (Rsm)
EPS (Rs)
CL/consensus (30) (EPS%)
EPS growth (% YoY)
PE (x)
Dividend yield (%)
FCF yield (%)
PB (x)
ROE (%)
Net cash per share (Rs)
15A
18,913
2,906
36.3
16.6
19.2
1.0
3.9
4.0
22.1
11.1
16A
23,123
2,974
37.2
2.3
18.7
1.4
1.6
3.4
19.5
15.1
17CL
30,210
3,451
43.2
103
16.1
16.1
1.2
4.5
2.9
19.3
45.8
18CL
35,772
4,595
57.5
113
33.2
12.1
1.5
5.7
2.4
21.7
88.3
19CL
41,302
5,724
71.6
119
24.5
9.7
1.9
7.3
1.9
22.0
144.1
Source: CLSA
Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
For important disclosures please refer to page 15.

Persistent Systems - BUY
We would like to thank Evalueserve for its help in preparing our research reports. Chirag Gandhi (Financials); Nikhil Gada (Midcaps); Aniket
Sethi (Cement, Oil & Gas); Niket Gajra (Autos & IT); Vishal Nathany (Cap goods, utilities & power) provide research support services to CLSA.
Four clear growth drivers

Persistent has evolved
into a niche next-gen
service provider
Over the past five years, Persistent has successfully evolved from a service
provider limited to the hi-tech industry for offshore product engineering
services to a niche next-generation service provider for enterprises across
financial services, healthcare, telecom and hi-tech. The key driver for this
transformation was its early recognition of technology changes leading
towards digital/SMAC (social, mobile, analytics and cloud) services.
It recently signed a
landmark deal with IBM
It signed a landmark deal with IBM in March 2016 for the development and
maintenance of applications on the US companys Watson Internet of Things
(IoT) platform. Persistent has been contracted to build and maintain
applications leveraging IBMs IoT platform for enterprise customers. This
further expands its ability to provide next-generation services besides its
digital capabilities. Its recent reorganisation towards creating four distinct
business units - digital, IBM, intellectual property (IP) and services streamlines leadership and improves its focus.
The digital services unit

has been growing 3545% YoY over FY14-16
Digital/SMAC for enterprise: Persistent has broken away from its digital
services unit that focuses on enterprises customers into an independent P&L
after its reorganisation. This is under the leadership of Sunil Kulkarni, head of
sales. The unit focuses on providing digital transformation and implementing
SaaS platforms such as Appian, Salesforce.com, Oracle Identity management
and SAP HANA. The unit has grown at a breakneck speed of 35-45% YoY over
the past couple of years to US$52m (annualised) and has now achieved the
critical mass to grow independently. This part of the business has the highest
onsite mix given recent investment and hence the lowest margins in high
single digits. As growth continues, improvement in onsite utilisation can drive
substantial margin improvement. Continued strong traction in digital services,
leveraging its early focus and expertise is likely to remain a key driver of
long-term growth potential.
Figure 1
Persistent is among niche

contenders in digital
platform engineering
services
Competitive landscape in digital platform engineering services
Source: EPAM, CLSA
22 June 2016
2

Persistents IBM business

is likely to grow to
US$130m-150m in FY17
IBM alliance: Persistent is likely to merge its existing IBM outsourced

product development (OPD) services unit with its business of licensing
connector IP from IBM along with the recently-awarded IoT contract. This
business is likely to be US$130m-150m in size in FY17. While the legacy
business around OPD and IP services is highly profitable (18% and over 30%
Ebit margins), the newly- forged IoT segment is likely to be a drag in the first
couple of years. However, this should grow at more than 15% YoY over the
next five years and provide Persistent with a solid reference customer for
similar deals with other large hi-tech customers (such as Microsoft) and
enterprise clients.
We expect the new IoT deal to be a game changer for Persistent in three ways:
The IBM-IoT deal should

increase differentiation
and access to customers
q Stronger differentiation on next-gen services: Persistent takes over

significant IBM engineers with expertise on new technologies and an ability
to train its offshore staff for a rapidly-expanding market for IoT services
over the next decade. This will help to increase its competitive advantage
over similar-sized rivals and maintain differentiation with larger peers.
q Access to enterprise customers: The IBM deal gives Persistent an
opportunity to develop applications and provide services to IBMs deep
roster of enterprise clients. This can help accelerate Persistents expansion
beyond its hi-tech customers.
q Key customer reference for larger deals: The deal expands Persistents
relationship with IBM to more than US$100m that can be crucial in winning
large deals with other customers. This can help Persistent scale up its
business over the next five years.
Figure 2
IBM alliance accelerates

revenue growth, but
needs upfront margin
investments
Persistent: Revenue and Ebit estimates from the new IBM alliance
25
(US$m)
IBM alliance revenue
IBM alliance Ebit

20
20
18
17
15
15
14
13
15
11
10
0
(5)
(2)
(2)
(1)
(0)
(0)
4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18

Source: CLSA
Persistents IP business
grew to US$70m in FY16
22 June 2016
Accelerite - IP: Persistent has been focused on creating an IP portfolio from

the acquisition of end-of-life IP from its hi-tech customers. Investments in
this area have extended the lifecycle of most of its portfolio. This business has
grown to US$70m in FY16, giving it a critical mass. Rebranded Accelerite, it
will be led by Nara Rajagopalan. The recent addition of products by Intels IoT
(Aepona) and Citrix further enhance the portfolio among enterprise clients. In
particular, Aeponas contribution can help Persistent bid for work with telecom
customers and enterprises that need IP for IoT applications. Its Citrix portfolio
provides essential IP for supporting enterprise clients in developing private
clouds and harnessing public clouds. Persistent aims to continue to make
3

similar acquisitions and extend the life of acquired IP. This provides the
benefit of differentiation, customer acquisition and wider margins.
Figure 3
Figure 4
Persistent: Breakdown of US$67m IP business in FY16
IP revenue delivered a 42% Cagr over FY12-16
Citrix
products
US$0m
30
Others
US$11m
Radia/HP CA
US$17m
(US$m)
YoY growth (RHS) (%)
IP revenue
25
150
20
Aepona
US$7m
100
15
50
10
Location
(openwave)
US$8m
IBM TNPM
US$13m
4QFY16
3QFY16
2QFY16
1QFY16
4QFY15
3QFY15
2QFY15
1QFY15
4QFY14
3QFY14
2QFY14
1QFY14
4QFY13
3QFY13
2QFY13
1QFY13
4QFY12
3QFY12
2QFY12
Connectors
US$9m
(50)
1QFY12
0
rCloud
US$4m
200
Source: Company, CLSA
Engineering-services
business is expected to
grow in the mid-single
digits
Product engineering services - for hi-tech and enterprises: Persistent

has broken out from its services business that includes OPD for hi-tech firms
and for enterprises into a separate services unit under the leadership of its
COO, Mrityunjai Singh. This unit remains the key cash cow of the business,
earning 18-20% Ebit margins and bank rolling its investment into digital and
IoT services. This business should grow in the mid-single digits. Persistent
continues to lead in software product engineering and should benefit
significantly as enterprises adopt IoT products.
Figure 5
Persistent is rated well in

its traditional OPD
business segment
Competitive landscape in offshore product development
Source: EPAM, CLSA
22 June 2016
4

Financials and valuation

Strength in digital/SMAC
will drive 21% US-dollar
revenue Cagr over
FY16-19
We expect Persistent to see a 21% US-dollar revenue Cagr over FY16-19 - an

acceleration of 700bps over its FY13-16 average revenue growth rate, thanks
to its strength in digital/SMAC services. We expect this to be driven by
continuing robust expansion in enterprise (digital), recent IP acquisitions
(Aepona and Citrixs portfolio) and the IBM IoT contract. This will reduce its
dependence and associated drags from the legacy OPD business to 46%,
down from more than 60% in 1Q15.
IBM-IoT deal to drive

29% YoY growth in USdollar revenue in FY17
Key catalysts over the next 12 months: We expect Persistents US-dollar

revenue growth to accelerate to 29% YoY in FY17, thanks to the IoT deal that
will be accompanied by a strong QoQ growth momentum of 4-10% over the
next few quarters. This deal would lead to strong improvement in organic
growth. Persistent could also realise revenue synergies via larger deals with
other hi-tech customers and improved access to enterprise clients for its
digital business in this period.
Figure 6
Figure 7
Expect stronger growth trajectory . . .

(%)
50
QoQ revenue growth
(%)
YoY revenue growth
45
12
Expect 2-6%
QoQ growth ahead
10
Expect 13-35%
YoY growth ahead
40
35
30
25
20
15
10
3QFY19
1QFY19
3QFY18
1QFY18
3QFY17
1QFY17
3QFY16
1QFY16
3QFY15
1QFY15
3QFY14
1QFY14
3QFY13
1QFY13
3QFY12
1QFY12
1QFY11
3QFY19
1QFY19
3QFY18
1QFY18
3QFY17
1QFY17
3QFY16
1QFY16
3QFY15
1QFY15
3QFY14
1QFY14
3QFY13
1QFY13
3QFY12
1QFY12
3QFY11
1QFY11
(2)
3QFY11
14
. . . as enterprise digital becomes a larger part of mix

Figure 8
Persistent: Key revenue drivers

(Rsm)
FY15
FY16
FY17CL
FY18CL
FY19CL
Linear - onsite: Billed person months
5,113
6,623
8,093
9,112
10,278
14,944
14,898
15,275
16,013
16,496
Billing rates (US$)

Linear-onsite revenue (US$m)
76
99
124
146
170
33.2
29.1
25.3
18.0
16.2
40,981
42,328
45,377
52,184
58,427
4,222
4,223
4,377
4,457
4,480
Linear-offsite revenue (US$m)
173
179
199
233
262
YoY growth (%)
3.3
3.3
11.1
17.1
12.5
YoY growth (%)

Linear - offsite: Billed person months
Billing rates (US$)
IP-led revenue (US$m)

YoY growth (%)
59
67
77
87
97
19.9
13.0
15.4
13.0
11.5
53

YoY growth (%)
70
90
32.1
28.6
Total revenue (US$m)
309
352
452
536
618
YoY growth (%)
12.6
14.0
28.6
18.4
15.5
18,913
23,123
30,210
35,772
41,302
13.3
22.3
30.6
18.4
15.5
Total revenue
YoY growth (%)
22 June 2016
5

Margin recovery from digital/IBM IoT

Rising onsite utilisation in
digital, growth from IBMIoT deal and rising sales
productivity to drive
wider margins
Persistent has seen significant margin investments over the past couple of
years as it invested heavily into sales and an onsite presence for its
enterprise business. Structurally, its business earns a higher billing rate over
similar-sized peers. We expect margins to recover with rising onsite utilisation
in digital, growth from the IBM IoT deal and rising sales productivity.
Revenue growth, margin

expansion and cost
leverage expected to
drive 24% EPS Cagr over
FY16-19
We model a 230bps Ebit margin recovery over FY16-19, driven by scale

benefits and higher billing rates. However, margins will be volatile during the
first year of its IBM IoT contract. Robust revenue growth, gross margin
stability and sales & marketing cost leverage should drive rapid earnings
expansion at 16%, 33% and 25% over FY17, FY18 and FY19.
Figure 9
Figure 10
Margins and US$ revenue growth to drive Ebit recovery
EPS to grow at 24% over FY16-19
14
12
35
40
60
30
30
50
25
20
40
20
10
30
15
20
10
(10)
10
(20)
FY11
FY19CL
FY18CL
FY17CL
FY16
FY15
FY14
FY13
FY12
FY11
10
70
YoY growth (RHS)
40
FY19CL
16
50
EPS
FY18CL
18
(%)
80
FY17CL
20
(Rs)
60
FY16
(%)
FY15
YoY growth (RHS)
FY14
Ebit margin
FY13
(%)
FY12
22

Figure 11
Persistent: DuPont analysis

Ebit margin (%)
FY11
FY12
FY13
FY14
FY15
FY16 FY17CL FY18CL FY19CL
14.9
17.1
19.7
19.6
15.7
13.9
13.5
15.2
16.2
Interest burden (PBT/Ebit) (x)
1.3
1.1
1.0
1.0
1.3
1.2
1.1
1.1
1.2
Tax burden (PAT/PBT) (x)
0.9
0.7
0.7
0.7
0.7
0.8
0.7
0.7
0.7
Asset turnover (sales/TA)
0.9
1.0
1.1
1.2
1.1
1.2
1.3
1.4
1.3
Financial leverage (TA/net worth) (x)
1.2
1.2
1.2
1.3
1.3
1.3
1.3
1.2
1.2
20.1
17.9
20.0
22.3
22.1
19.5
19.3
21.7
22.0
FY11
FY12
FY13
FY14
FY15
100
62
65
65
80
61
61
60
62
43
(5)
55
89
74
30
72
68
71
ROAE (%)
Figure 12
Persistent: Cash conversion ratios

Cash conversion ratios (%)
CFO/Ebitda
FCF/PAT
FY16 FY17CL FY18CL FY19CL
We value Persistent at
Rs900, which equates to
16x 1Y forward PE
22 June 2016
Valuation details
We value Persistent at Rs900, which equates to 16x one-year forward PE. This
is based on a combination of DCF and a fundamental PE multiple, implying 31%
upside. The multiple is 1sd above its past five-year average PE. It is also at the
upper end of domestic peers and below intnl mid-sized IT service providers of
a similar product development heritage (eg, EPAM, Luxoft and Globant).
6

DCF valuation of
Rs909
DCF valuation
We detail below our 15-year DCF, which assumes 5% terminal growth and
13% cost of equity (COE) with a RFR of 7.5%, equity-risk premium of 5.5%
and applying a beta of one. With a net cash balance sheet, WACC is equal to
COE. This leads to a one-year forward fair value of Rs909.
Figure 13
DCF assumes 5% terminal

growth, 13% COE, RFR of
7.5% and equity risk
premium of 5.5%
DCF valuation
PV of forecasting period up to FY29 (Rsm)
36,712
Terminal value (Rsm)
28,155
Enterprise value (Rsm)
64,868
Add: Net cash (Rsm)
7,834
Implied equity value (Rsm)
72,702
Implied equity value (Rs per share)
909
Source: CLSA
Figure 14
We expect Persistents
discounted FCF to remain
stable over the years
Free cashflow
4,000
(Rsm)
PV of FCF (LHS)
WACC
ROE
(%)
30
3,500
25
3,000
20
2,500
2,000
15
1,500
10
1,000
5
500
0
FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29
Source: CLSA
Figure 15
Even at 4% terminal
growth rate, the fair value
of Persistent is
Rs868/share at 13%
WACC
Sensitivity to valuation assumptions

Terminal-growth rate
WACC
3%
4%
5%
6%
7%
11%
1,033
1,097
1,182
1,300
1,475
12%
923
968
1,026
1,104
1,211
13%
834
868
909
962
1,032
14%
763
787
818
855
904
15%
703
722
745
772
806
Source: CLSA
Theoretical PE implies a
share price of Rs916/sh
22 June 2016
Theoretical PE implies per share price of Rs916

Our second valuation approach is based on a theoretical PE multiple (twostage DCF) for Persistent which indicates a PE of 15.9x FY18CL earnings. This
implies a per share fair value of Rs916 on a one-year forward multiple basis.
7

Figure 16
A theoretical estimate of PE for Persistent
Theoretical valuation
methodology for
Persistent indicates a PE
of 15.9x FY18CL earnings
Payout ratio (%) (A)
20
ROE (%) (F)
25
High growth rate (%) (B)
20.0
Payout ratio (%) (n) (D)
77
Stable growth rate (%) (E)
8.3
ROE steady state (%) (G)
25
Risk-free rate (%) (H)
7.5
Market-risk premium (%) (I)
5.5
Beta (J)
1.03
Cost of equity (%) (C)
13.2
No. of years of high growth (K)
#PE (x)
15.9
FY18CL EPS (Rs)
57.5
Fair value per share
916
Source: CLSA
#PE = (A*(1+B)*((1-(1+B)^K/(1+C)^K)/(C-B)))+D*(1+B)^K*(1+E)/((CE)*(1+C)^K)
Source: Aswath Damodaran
Three-year price target implies return over 100%
We expect Persistent to deliver a 24% earnings Cagr over FY16-19; using 16x
PE (1sd above the five-year average) we arrive at a three-year target of
Rs1,542. With a dividend yield of 1-1.5% over the next three years, we
expect the stocks total returns to exceed 100%.
We expect Persistent to
deliver a TSR of 129%
over next three years
Figure 17
We expect total returns from Persistent to exceed 100% over next three years
Company
Mcap Current
(US$m)
price
(Rs)
Persistent
821
1-year
target
1-year
return
(%)
Div
yield
(%)
1-year
TSR
(%)
3-year
target
(Rs)
2-year
div
(%)
3-year
div
(%)
3-year
return
(%)
3-year
TSR
(%)
Rec
900
31.3
1.1
32.4
1,542
1.5
1.5
125.0
129.1
BUY
685
Source: CLSA; priced as of 17 June 2016
Key risks
The key risks to our growth estimates include:
Volatile revenue from
legacy business and rupee
appreciation are some of
the key risks
q Revenue from legacy independent software vendor clients could be volatile

in the coming years and a softer-than-expected trajectory may drive cuts.
q Rupee appreciation, which could hurt earnings, given that Persistent
benefits from a weaker local currency; we estimate every 1% drop in the
INR/USD boosts margin by 30-40bps and earnings by 1.5-3%, all else
being equal.
q Discretionary spend on new technology services such as SMAC across
enterprises and hi-tech firms is lower than we estimate.
q Adverse immigration regulations, which can hurt Persistents ability to staff
projects at client locations in the USA.
q Inability to successfully penetrate enterprise customers due to go-tomarket issues when competing with larger Indian and global IT services
firms.
22 June 2016
8

We value Persistent at
16x one-year forward PE,
which is 1sd above its
past five-year average
Historical and relative valuation

We value Persistent at 16x one-year forward earnings, which is at the upper
end of domestic peers and 1sd above its past five-year average. This is
justified by its strong focus on digital/SMAC - the key industry growth driver
that could transform Persistent into a leading futuristic IT services firm. This
multiple is below international software product development peers that are
exploiting the SMAC opportunity to expand beyond OPD services.
Figure 18
Multiples have recovered

after its IBM deal and
should stay in this range
Five year one-year forward PE

23
(x)
21
19
17
+1sd 16.2x
15
13
Avg 12.6x
11
9
-1sd 9.0x
7
Jun 11
Jun 12
Jun 13
Jun 14
Jun 15
Jun 16
Source: Bloomberg, CLSA; Priced as of 17 June 2016

Figure 19
Better IT midcaps have

seen discounts to larger
peers shrink over the
past five years
Relative valuation versus peers

120
(PE rebased to TCS PE)

TCS
Mindtree
Cyient
Mphasis
Persistent
110
100
90
80
70
60
50
40
30
Jun 11
Jun 12
Jun 13
Jun 14
Jun 15
Jun 16
Source: Bloomberg, CLSA; priced as of 17 June 2016
Robust earnings growth

and high exposure to
digital/SMAC justify a
premium PE to peers
22 June 2016
Persistents organic earnings growth is stronger than most similar-sized peers

and larger counterparts. Its robust earnings growth and high exposure to
digital/SMAC justify a premium PE to domestic peers. Persistent is attractive
on a PE/G basis relative to most mid-sized and larger counterparts.
9

Figure 20
Global valuations for comparable technology companies

Div yield
(%)
CY16
Ebitda
Cagr (%)
(CY15-17)
CY16
CY17
Nopat
Cagr (%)
(CY15-17)
EV/Ebitda (x)
EPS Cagr
(%)
CY17 (CY15-17)
EV/Nopat (x)
CY16
PE (x)
ROE (%)
CY16
CY17
CY16
CY17
Indian peers (Large-sized cos)

TCS
2.0
14.3
14.2
12.1
15.0
19.6
16.6
14.0
19.0
16.8
34.5
33.3
Infosys
2.0
15.7
12.2
10.2
15.1
18.7
15.6
11.8
18.9
16.5
22.5
23.1
Wipro
1.6
14.3
9.7
7.9
13.8
14.5
11.8
9.1
14.5
13.0
19.4
19.2
HCL Tech
2.2
19.0
11.7
8.3
17.4
15.3
11.4
16.6
16.1
12.2
23.9
26.7
Median
2.0
15.0
12.0
9.3
15.0
17.0
13.7
12.9
17.5
14.7
23.2
24.9
Mean
2.0
15.8
11.9
9.6
15.3
17.0
13.9
12.9
17.2
14.6
25.1
25.5
Indian peers (mid-sized services)

Tech Mahindra
2.0
10.8
9.2
8.0
10.7
14.3
12.4
8.3
14.8
13.5
21.4
20.2
Hexaware
4.7
11
10.4
9.0
10.6
15.0
12.8
9.3
15.7
13.6
28.2
30.5
Mindtree
1.7
17
10.6
9.0
19.0
16.2
13.6
15.1
15.7
13.5
26.1
26.4
eClerx
0.5
13.2
13.0
10.5
12.1
15.8
13.5
11.3
16.7
14.9
33.4
30.7
Persistent
1.3
25.4
10.1
7.3
26.2
17.5
12.2
20.8
17.0
13.3
19.4
21.1
Polaris
5.3
55
6.0
5.2
NA
NA
NA
13.7
10.7
9.1
21.1
23.4
Median
1.8
12.3
9.0
8.5
12.1
15.8
12.8
12.5
15.7
13.5
23.8
24.9
Mean
2.6
13.9
9.1
8.2
15.7
15.8
12.9
13.1
15.1
13.0
25.0
25.4
Next-generation IT companies
Globant
0.0
51
20.1
17.1
80.3
43.8
26.4
65.4
34.0
27.9
22.0
21.1
Luxoft
0.0
18
12.9
10.7
20.1
15.4
13.1
17.6
19.9
16.7
30.9
27.6
EPAM
0.0
46
15.2
12.5
49.3
21.3
17.5
47.2
23.2
19.5
22.1
21.6
Median
0.0
46
15.2
12.5
49
21.3
17.5
47.2
23.2
19.5
22.1
21.6
Mean
0.0
38
16.1
13.4
50
26.8
19.0
43.4
25.7
21.4
25.0
23.4
Source: Bloomberg estimates for not-rated companies, CLSA; *GAAP EPS; Priced as of 17 June 2016
Sound corporate governance track record

Persistent has nine
directors on its board of
which seven are
independent
Persistent has nine directors on its board of which seven are independent. Its
board has a strong combination of directors with diverse mix of distinguished
careers in technology, financial services and marketing roles.
Management has a strong

track record in corporate
governance since listing
Management has a strong track record in corporate governance since its

listing. It recently increased its dividend payout ratio and has seen strong
cash conversion and healthy return ratios. Persistent had instituted ESOP
grants at book value to its senior management in FY15 that were based on
quarterly growth metrics. The choice of quarterly performance as a
measurement period prompts questions on the short duration performance
that could be at odds with long-term performance. However, its watermarks
for these grants have been steep and based on organic growth metrics or
acquisitions without upfront payments.
Underlying theme has

been the expansion of its
addressable market
beyond hi-tech customers
Management has a robust track record. After scaling up its OPD practice since
its listing, Persistent spotted an early opportunity in digital/SMAC services.
The company faced challenges in its go-to-market strategy for expanding in
enterprise accounts and has changed its sales leadership several times to
drive change towards strengthening its sales. While its stated strategy has
seen some course correction over the past five years from partner-sales for
SaaS customers to IP-lead strategy to digital and more recently a
combination of digital and IoT, the underlying theme has been the expansion
of its addressable market beyond hi-tech customers.
22 June 2016
10

Figure 21
Persistent: Detailed income statement

(Rsm)
Linear - onsite: Billed person months
FY15
5,113
FY16
6,623
FY17CL
8,093
FY18CL
9,112
FY19CL
10,278
Billing rates (US$)

Linear - onsite revenue (US$m)
14,944
76
14,898
99
15,275
124
16,013
146
16,496
170
YoY growth (%)

Linear - offsite: Billed person months
33.2
40,981
29.1
42,328
25.3
45,377
18.0
52,184
16.2
58,427
4,222
4,223
4,377
4,457
4,480
173
3.3
179
3.3
199
11.1
233
17.1
262
12.5
59
19.9
67
13.0
77
15.4
87
13.0
97
11.5
53
70
32.1
90
28.6
309
12.6
352
14.0
452
28.6
536
18.4
618
15.5
Total revenue
18,913
23,123
30,210
35,772
41,302
YoY growth (%)

Gross profit
13.3
7,596
22.3
8,819
30.6
11,027
18.4
13,602
15.5
16,079
Gross margin (%)

SG&A
40
3,690
38
4,647
37
5,747
38
6,760
39
7,813
Ebitda
Ebitda margin (%)
3,906
20.7
4,171
18.0
5,280
17.5
6,842
19.1
8,267
20.0
Billing rates (US$)

Linear-offsite revenue (US$m)
YoY growth (%)
IP-led revenue (US$m)
YoY growth (%)
YoY growth (%)
Total revenue (US$m)
YoY growth (%)
D&A
939
965
1,198
1,393
1,587
Ebit
Ebit margin (%)
2,967
15.7
3,206
13.9
4,082
13.5
5,449
15.2
6,680
16.2
PBT
Provision for tax
3,900
993
3,956
983
4,680
1,229
6,252
1,657
7,787
2,064
Net income
2,906
2,974
3,451
4,595
5,724
22 June 2016
11

Figure 22
Persistent: Key ratios

Ratios
Growth (%)
FY15
FY16
FY17CL
FY18CL
FY19CL
US$ revenue growth

Rupee revenue growth
13
13
14
22
29
31
18
18
15
15
Ebitda growth
Ebit growth
(9)
(9)
7
8
27
27
30
34
21
23
Gross margin
Ebitda margin
40
21
38
18
37
17
38
19
39
20
Ebit margin
PAT margin
16
15
14
13
14
11
15
13
16
14
Per share ratios (%)

EPS (Rs)
36.3
37.2
43.2
57.5
71.6
YoY growth
Cash EPS (Rs)
17
48.1
2
49.2
16
58.1
33
74.9
25
91.5
18
29
22
Margin (%)
YoY growth
Cash conversion ratios (%)
CFO/Ebitda
80
61
61
60
62
FCF/PAT
Return ratios (%)
74
30
72
68
71
ROE
ROCE
22
17
20
16
19
17
22
19
22
19
ROIC
18
17
20
26
30
DuPont analysis (%)

Ebit margin (%)
15.7
13.9
13.5
15.2
16.2
Interest burden (PBT/Ebit) (x)

Tax burden (PAT/PBT) (x)
1.3
0.7
1.2
0.8
1.1
0.7
1.1
0.7
1.2
0.7
Asset turnover (sales/TA) (x)

Financial leverage (TA/net worth) (x)
1.1
1.3
1.2
1.3
1.3
1.3
1.4
1.2
1.3
1.2
22
20
19
22
22
ROAE (%)
Valuation details
We value Persistent at Rs900, which equates to 16x one-year forward PE, 1sd
above its five-year average and the average since listing. This is justified by
its strong focus on digital/SMAC, the key industry growth driver that could
transform Persistent into a leading futuristic IT services firm. Our TP is based
on a combination of DCF and a fundamental PE multiple.
Investment risks
Key risks include: rupee appreciation, which could hurt earnings given that
Persistent benefits from a weaker local currency - we estimate every 1% drop
in Rs/US$ boosts margin by 30-40bps and earnings by 1.5-3%, all else being
equal; discretionary spend on new technology services such as SMAC across
enterprises and hi-tech firms; adverse immigration regulation, which can hurt
Persistent's ability to staff projects at client locations in the USA; and the
inability to successfully penetrate enterprise customers due to "go-to-market"
issues when competing with larger Indian and global IT services firms.
22 June 2016
12

Summary financials
We expect US$-revenue
growth to accelerate from
14% in FY16 to 29%/
18% in FY17/18
Cash conversion remains

healthy
We expect DSOs to stay

healthy at 69 days
IBM contract to be
margin-dilutive in FY17
Year to 31 March
Summary P&L forecast (Rsm)
Revenue
Op Ebitda
Op Ebit
Interest income
Interest expense
Other items
Profit before tax
Taxation
Minorities/Pref divs
Net profit
2015A
2016A
2017CL
2018CL
2019CL
18,913
3,906
2,967
932
0
3,900
(993)
2,906
23,123
4,171
3,206
750
0
0
3,956
(983)
2,974
30,210
5,280
4,082
598
0
4,680
(1,229)
3,451
35,772
6,842
5,449
803
0
6,252
(1,657)
4,595
41,302
8,267
6,680
1,107
0
7,787
(2,064)
5,724
Summary cashflow forecast (Rsm)

Operating profit
2,967
Operating adjustments
487
Depreciation/amortisation
939
Working capital changes
(276)
Net interest/taxes/other
(1,001)
Net operating cashflow
3,116
Capital expenditure
(957)
Free cashflow
2,159
Acq/inv/disposals
(1,766)
Int, invt & associate div
308
Net investing cashflow
(2,415)
Increase in loans
13
Dividends
(560)
Net equity raised/other
(110)
Net financing cashflow
(657)
Incr/(decr) in net cash
44
Exch rate movements
Opening cash
872
Closing cash
916
3,206
219
965
(838)
(1,012)
2,541
(1,659)
881
276
429
(955)
(15)
(1,040)
(212)
(1,266)
319
916
1,235
4,082
0
1,198
(816)
(1,229)
3,235
(740)
2,496
598
(142)
0
(640)
0
(640)
2,454
1,235
3,689
5,449
0
1,393
(1,069)
(1,657)
4,117
(971)
3,146
803
(168)
0
(552)
0
(552)
3,397
3,689
7,086
6,680
0
1,587
(1,061)
(2,064)
5,142
(1,051)
4,091
1,107
56
0
(735)
0
(735)
4,463
7,086
11,548
Summary balance sheet forecast (Rsm)

Cash & equivalents
916
Debtors
3,586
Inventories
Other current assets
5,655
Fixed assets
4,093
Intangible assets
24
Other term assets
3,475
Total assets
17,749
Short-term debt
Creditors
529
Other current liabs
1,265
Long-term debt/CBs
25
Provisions/other LT liabs
1,875
Minorities/other equity
0
Shareholder funds
14,055
Total liabs & equity
17,749
1,235
4,275
6,615
4,453
175
4,311
21,065
1,651
1,647
26
1,349
0
16,393
21,065
3,689
5,586
6,321
3,995
175
4,311
24,076
1,851
1,647
26
1,261
0
19,292
24,076
7,086
6,614
6,561
3,573
175
4,311
28,320
2,051
1,647
26
1,445
0
23,152
28,320
11,548
7,637
6,800
3,037
175
4,311
33,508
2,251
1,647
26
709
0
28,875
33,508
22.3
6.8
18.0
12.9
25.9
24.8
(7.4)
19.5
17.5
4.0
30.6
26.6
17.5
11.4
18.7
26.3
(19.0)
19.3
19.9
6.4
18.4
29.6
19.1
12.8
18.7
26.5
(30.5)
21.7
25.6
12.1
15.5
20.8
20.0
13.9
18.7
26.5
(39.9)
22.0
30.3
16.8
Ratio analysis
Revenue growth (% YoY)
Ebitda growth (% YoY)
Ebitda margin (%)
Net profit margin (%)
Dividend payout (%)
Effective tax rate (%)
Ebitda/net int exp (x)
Net debt/equity (%)
ROE (%)
ROIC (%)
EVA/IC (%)
13.3
(9.2)
20.7
15.4
18.7
25.5
(6.3)
22.1
18.0
4.5
Source: CLSA
22 June 2016
13

Important disclosures
Companies mentioned
Persistent Systems (PSYS IN - RS696.15 - BUY)
Citrix (CTXS US - US$85.14 - OUTPERFORM)
Cyient (N-R)
eClerx (ECLX IB - RS1,438.7 - OUTPERFORM)
EPAM (N-R)
Global Logic (N-R)
Globant (N-R)
Haman Connected Services (N-R)
HCL Tech (HCLT IB - RS768.8 - BUY)
Hexaware (N-R)
IBM (IBM US - US$153.61 - OUTPERFORM)
Infosys (INFO IB - RS1,205.9 - OUTPERFORM)
Intel (INTC US - US$32.17 - UNDERPERFORM)
Luxoft (N-R)
Microsoft (MSFT US - US$50.07 - OUTPERFORM)
MindTree (N-R)
Ness Software Engineering Services (N-R)
Oracle (ORCL US - US$39.73 - UNDERPERFORM)
Pactera (N-R)
Polaris (N-R)
Salesforce.com (CRM US - US$81.22 - BUY)
SAP (N-R)
Symphony Teleca (N-R)
Tata Consultancy (TCS IB - RS2,647.3 - BUY)
Tech Mahindra (TECHM IB - RS537.3 - OUTPERFORM)
Wipro (WPRO IB - RS560.3 - OUTPERFORM)
Covered by CLSA; Covered by CLSA Americas
Analyst certification
The analyst(s) of this report hereby certify that the views expressed in this research report accurately reflect
my/our own personal views about the securities and/or the issuers and that no part of my/our compensation
was, is, or will be directly or indirectly related to the specific recommendation or views contained in this
research report.
22 June 2016
14

Stock price (Rs)
Recommendation history of Persistent Systems Ltd PSYS IN

Ankur Rudra
Other analysts
No coverage
1,200
BUY
U-PF
N-R
O-PF
SELL
1,000
800
600
400
Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16
Date
22 Mar 2016
26 Jan 2016
27 Oct 2015
Rec
BUY
BUY
BUY
Target
900.00
970.00
1,030.00
Date
04 Sep 2015
20 Jul 2015
20 May 2015
Rec
BUY
BUY
BUY
Target
1,100.00
1,000.00
996.10
Source: CLSA
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22 June 2016
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only: 0.00%, Restricted - CLSA: 0.00%; CLSA Americas
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Digital, IoT, IP and product engineering power growth

Priced on 21 June 2016

IBM IoT deal could prove a game changer

12M price target

Reorganisation streamlines the business, puts focus back on profit

3M average daily volume

Foreign s'holding 22.5%

Anand Deshpande 28.5%

Stock performance (%)

Persistent Systems (LHS)

Remains the attractive next-gen services play

For important disclosures please refer to page 15.

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