2nd Feb ,

Persistent Systems Ltd.

Buy

BP

EQUITIES

th

IT Services | Initiating Coverage

11 August 2011 Stock Rating

Niche service offering — pure play OPD player Persistent Systems Ltd. is a pune based Outsourced product development (OPD) player, primarily focused on infrastructure, telecom and life sciences verticals. The company deep technical expertise and ability to provide services across the product life cycle differentiate it from its peers. The company also focuses on new technological areas such as cloud computing, enterprise mobility etc and banks on deriving growth through increasing client penetration by cross selling its IP-led services. It derives around 40% revenues from non linear initiatives which will help the company to offset margin pressure going forward.

Sector Outlook

Investment Rationale

Stock

Differentiated business model, Strong focus on fast growing OPD Market Persistent is a leader in offshore OPD market and currently enjoys ~12-13% market share. The global OPD segment is expected to grow at a CAGR of 16-17% to become a US$60 bn plus industry by 2014. The offshore OPD market which currently stands at US$10 bn is expected to grow at a CAGR 22% to US$16.1 bn at the end of 2014. Going forward we believe that persistent due to it’s a) deep technical expertise b) unique service offering spanning across the whole product life cycle (PLC) c) strong relationship with large marquee clients like IBM, Google and Microsoft, is well positioned to encash upon the huge opportunities present in this space.

CMP

Rs 305.6

Target Price

Rs 404.1

Investment in higher margin IP led services – to spur growth and offset margin pressure Persistent has strategically invested significantly in IP-led business, which basically is a non-linear source of revenues and is independent of headcount growth, have higher margins (something in the range of 50-60%), have consistent cash flows and helps in improving productivity per employee (Yield), which in turn provides cushion to margin pressure arising due to supply side concerns. The company currently invests around 5% of its technical man month into R&D, which is used to develop IPs and currently contribute ~9% to total revenues. Going forward we expect the company is well poised to tap the immense opportunities present in IP-led services business and thus will boost top line and provide cushion to margins.

Key Data

BUY

HOLD

SELL

> 15%

-5% to 15%

< -5%

Bullish

BSE code

533179

NSE Symbol

PERSISTENT

Bloomberg

PSYS.IN

Reuters

PERS.BO

Nifty

5138.3

52WeekH/L(Rs)

491.9/301

O/s Shares (mn)

40

Market Cap (Rs bn)

12.2

Face Value (Rs)

10

Average volume

Foray into new technological areas to fuel growth Persistent identified four focus areas such as Cloud Computing, Enterprise Mobility, Enterprise Collaboration and Business Intelligence/Analytics and started to invest into them during the downturn to tap the tremendous opportunity present in this space and enjoys a early mover advantage. These areas now contribute 40% to total revenues spanning across existing verticals and provide good opportunities for cross-selling within existing client accounts. We expect it to contribute significantly to top line and support margins due to its non–linear nature. Outlook and Valuation In view of company’s ability to maintain long term relationships with large marquee clients, immense opportunities present in the OPD market, shift to non linear pricing models, superior pricing and foray into new technological areas we expect the company revenue and Diluted EPS to grow at 21.6% and 34.1% to Rs 11.8 bn and Rs 42.4 respectively in FY13E. For FY12E we expect the top line to grow at 25.4% to Rs 9.7 bn while Diluted EPS to decline by 9.5% to Rs 31.6, primarily due to supply side concerns and significant rise in tax rate from 7.2% in FY11 to 31% in FY12E. The stock currently trades at a P/E of 9.7x and 7.2x FY12E and FY13E earnings which we think is at a discount to its peers considering its high growth rate, healthy return ratios and higher margins. We initiate the company with a “BUY” rating and a DCF based target price of Rs 404 an upside of 32.2% from current levels. At this fair value the stock trades at a P/E of 12.8x and 9.5x FY12E and FY13E estimates. YE March (Rs. mn) Net Sales Sales Growth (Y-o-Y) EBIDTA EBIDTA Growth (Y-o-Y) Net Profit Net Profit Growth (Y-o-Y) Diluted EPS Diluted EPS Growth (Y-o-Y) No of Diluted shares (mn)

FY08 4,249 36.0% 900 11.7% 832 49.8% 24.2 63.3% 36

EBIDTA (%) NPM (%) RoE (%) RoCE (%) Tax Rate % Book Value Per share (Rs.)

21.2% 19.6% 29.6% 29.6% 2.6% 91.6

P/E (x) EV/EBITDA P/BV (x) Market Cap./ Sales (x) Source: Company Reports , BP Equities Research

Key Financials FY09 FY10 5,938 6,012 39.8% 1.2% 914 1,464 1.5% 60.2% 661 1,150 (20.5%) 74.0% 18.4 32.1 -23.8% 73.9% 36 36 Key Ratios 15.4% 24.3% 11.1% 19.1% 18.2% 22.0% 18.2% 21.9% 1.4% 7.3% 110.1 178.1 Valuation Ratios

FY11 7,758 29.1% 1,583 8.2% 1,397 21.5% 34.9 9.0% 40

FY12E 9,731 25.4% 1,806 14.1% 1,264 (9.5%) 31.6 -9.5% 40

FY13E 11,834 21.6% 2,309 27.9% 1,695 34.1% 42.4 34.1% 40

20.4% 18.0% 19.8% 19.7% 7.2% 186.8

18.6% 13.0% 15.5% 15.4% 31.0% 215.1

19.5% 14.3% 17.7% 17.6% 28.0% 256.5

8.7x 6.7 1.6x 1.5x

9.7x 6.1 1.4x 1.2x

7.2x 4.4 1.2x 1.0x

3 months

39,521

6 months

52,015

1 year

72,000

Share Holding Pattern (%)

29.6%

38.9%

25.1%

6.5% Promoter

FII

DII

Others

Relative Price Chart 550 500 450 400 350 300 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Persistent Systems Ltd

S&P CNX NIFTY

Research Analyst Amit Chandra [email protected] 022-61596411

6,500 6,300 6,100 5,900 5,700 5,500 5,300 5,100 4,900 4,700

Persistent Systems Ltd.

Initiating Coverage

Investment Rationale Strong growth in the OPD market—Less penetration makes the market very attractive Persistent is the only listed player in India primarily catering to the fast growing OPD market. The total OPD market size is around $40 bn across the world, out of which Indian companies have a share of just ~ 3%, which is $1 bn in absolute terms, thus huge opportunity lies for Indian OPD players going forward. The offshore segment of the OPD market stood at US$ 10.7 bn (approx) in FY11 and is expected to grow at a CAGR of 22% to US$16.1 bn in 2014. Persistent, which is well positioned in this niche segment (currently enjoys ~12-13% market share) is well poised to derive growth from the huge opportunities present in this space.

Offshore segment of OPD market to grow to US$16.1 bn in 2014.

Persistent current market share of 12-13% expected to grow to 16% in FY13E

Global OPD market scenario 18

16.1

30%

16

12

10.7 9.0

10 8

25%

13.0

14

7.4

7.7

8.0

6

23.8% 21.5%

18.9%

20% 15% 10%

12.5%

4 5% 2 0 FY07

4.1%

3.9%

FY08

FY09

0% FY10

FY11

FY12E

Offshore R&D/Prod Development spend (US$ bn)

FY13E Growth Y-o-Y %

Source: Zinnov & BP Equities Research

OPD market is highly under penetrated in comparison to IT services, where 70% of the market is Outsourcing market highly outsourced while in R&D market only 4% of the total work is currently outsourced, thus there lies under-penetrated, with only huge opportunity. We believe that with increased competition and lesser time to market, more and 4% penetration more R&D related work will be outsourced. Persistent and other pure-play OPD companies like Global Logic will be benefitted from increased penetration in R&D market going forward.

Institutional Research

BP Equities Pvt. Limited (www .bpw ealth.com) BP Equities reports are also available on Bloomberg [BPEP ]

11/8/2011

2

Persistent Systems Ltd.

Initiating Coverage

Difference b/w Tradition IT Services and Outsourced Product Development (OPD) Outsourced Product Development (OPD) is completely different from traditional IT services in the sense that IT services projects start with well defined requirements and cater to wider range of industries, OPD projects start with comparatively lesser defined requirement and cater specifically to Independent Software Vendors (ISV’s). IT Services projects have more well defined requirements and focuses on cost reduction and improving efficiencies for clients whereas, outsourced product development aims at cutting down variable costs and reduce the time to market for clients. IT services companies build software applications as their end product, which is highly customized for the particular client, while a software product, which is an end result of product development project, is generic in nature and is meant to be sold in marketplace with buyers having varied requirements. It has to be more flexible as it has to address a variety of users and should be highly customizable and scalable and must have a strong architecture built on a solid framework to enable building of software interfaces, connectors and adding new features to the product at every release. IT Services projects clients are only interested in end result and doesn’t care for technical capabilities of resources deployed, whereas an OPD company requires a) highly skilled technical resources b) ample technical talent who can understand technical requirements and can work in a fast pace environment.

Key Differences between Traditional IT Services & OPD

Source: Company Reports, BP Equities Research

Institutional Research

BP Equities Pvt. Limited (www .bpw ealth.com) BP Equities reports are also available on Bloomberg [BPEP ]

11/8/2011

3

Persistent Systems Ltd.

Initiating Coverage

IP-Led Services (Non Linear Initiative) to spur top line growth and support margins Persistent has strategically invested significantly in IP-led services and expects the business to contribute significantly to the top line and boost margins in coming years. IP-led business basically is a non-linear source of revenues and is independent of headcount growth, have higher margins (something in the range of 50-60%), have consistent cash flows and helps in improving productivity per employee (Yield). The company has strong focus on R&D (it consistently invests around 5% of technical man month into R&D), which is used to develop IPs and believes that IPled services could contribute significantly to top-line and help expand margins. The company has patented around 4 patents till now and draws around 8-10% revenues annually (8.8% for FY11E) which we expect to increase to 12-15% in next 2-3 years and will help to offset the effect of salary hikes and rising attrition (supply side concerns). There are many top clients of persistent like IBM, Google and Microsoft which are using its IP-led solutions and 60% of IP-led revenues comes from one top client. There is some seasonality involved with that top-client and the company expects Q4 FY12E to be a very robust quarter related to work with that client, thus will spur revenues from IP-led services. Going forward we expect the company is well poised to tap the immense opportunities present in IP-led services with consistent investment in R&D activity which in turn will boost top line and margins. Revenue Contribution of IP led services and Investment into R&D 12.0%

Huge investment is being done in IP led services, the company expects it to contribute significantly to both top line and profits in next 2-3 years

Cross selling IP led services to top clients will provide tremendous opportunities.

10.3% 8.9%

10.0%

8.9% 7.7%

8.0%

8.2%

7.2%

8.8% 7.5%

6.1% 5.7%

6.1%

6.0%

5.2%

4.0%

5.1% 4.7% 4.8% 4.8% 4.3% 4.6% 4.3% 4.4% 4.1%

2.0%

3.6%

4.1%

4.7%

Top client contributes 60% of IP led revenues

0.0% FY 09 Q1 Q2 Q3 Q4 FY 10 Q1 Q2 Q3 Q4 FY 11 Q1 FY10 FY10 FY10 FY10 FY11 FY11 FY11 FY11 FY12 Revenue comtribution from IP-Led Services (% of Total revenues) Investment in IP Led work (% of Total Technical Time Spend) Source: Company Reports BP Equities Research

IP-Led Revenue Contribution % (FY07-11) 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

8.8% 7.2% 5.2%

2.0% 1.0% FY07

FY08

FY09

FY10

FY11

IP-led Revenue Contribution % Source: Company Reports BP Equities Research

Institutional Research

BP Equities Pvt. Limited (www .bpw ealth.com) BP Equities reports are also available on Bloomberg [BPEP ]

11/8/2011

4

Persistent Systems Ltd.

Initiating Coverage

Investment into New Technological Areas — Long-term Strategy Persistent started investing into new business lines during the downturn to balance slow-down in revenue growth and margin pressures arising from its customary telecom, infrastructure, and life sciences vertical. Persistent identified four focus areas such as Cloud Computing, Enterprise Mobility, Enterprise Collaboration and Business Intelligence/Analytics and started to invest into them with a believe that these areas will act as future growth drivers. These new focus areas now contribute ~40% to revenue and span across existing verticals, which should allow for good opportunities for cross-selling within existing client accounts and we expect it to contribute significantly to top line in next 2-3 years.

New technological areas currently contribute 40% to total revenues and engages around 2000 employees.

Huge opportunities lies in We believes that these 4 focus areas provide tremendous revenue opportunity for the company these areas going forward. (~US$ 500 mn) and its non linear nature which has comparatively higher margins will help the company counter supply side margin headwinds. Total Revenue Contribution & Key clients of New Focus Areas Technological Focus % of Total revenues Headcounts Key Clients Area (Approx)

~10-15%

Cloud Computing

~500

IBM, Rackspace, VMware and Google Google, Samsung, HTC, Sony and Motorola

Enterprise Mobility

~10%

~500

Enterprise Collaboration

~10%

~500

Facebook, Twitter, LinkedIn

Business Intelligence/ Analytics

~6-8%

~500

BFSI Clients & Data Companies

Persistent enjoys early mover advantages due to initial invest during in these areas downturn.

Source: Company, BP Equities Research

Cloud Computing: According to Gartner and IDC ~20% of CY11 IT budgets are expected to be spent on Cloud computing thus making the space pretty attractive. Persistent helps Independent Software vendors (ISV’s) to develop platforms and connectors which helps ISV’s to migrate their ongo- Cloud computing is a emerging IT applications on to the cloud platform. Microsoft plan to spend 90% of their R&D budgets ~US$ ing field with tremendous

10bn on cloud strategy. Persistent key client IBM plans to derive ~US$ 3bn from cloud related services and thus we expect Persistent to expand its existing relationship with IBM to diversify its portfolio of services through its strong domain knowledge and expertise in cloud computing. We believe, Persistent existing clients (which are planning huge investment into Cloud services) will help the company expand its portfolio of services and thus will boost top line in the years to come. Persistent has been able to grow its revenue contribution from top client at a 4 year CAGR of 39.1% to US$ 26.2mn in FY11. Revenue contribution stood at 15.1% in Q1 FY12.

opportunities and persistent has strong relationship with big players like IBM, Microsoft which are planning to spend huge amount in this area

Revenue contribution from top client (FY 07-11) 30.0

$26.2

25.0 87.2% 20.0 CAGR of 39.1% $11.9

15.0 10.0

$7.0

5.0

$14.0

$8.7 36.3% 24.7% 17.7%

0.0 FY07

FY08

FY09

Revenue From Top client US$ mn

FY10

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

FY11

Y-o-Y Growth %

CAGR Growth % FY07-11 Source: Company, BP Equities Research

Institutional Research

BP Equities Pvt. Limited (www .bpw ealth.com) BP Equities reports are also available on Bloomberg [BPEP ]

11/8/2011

5

Persistent Systems Ltd.

Initiating Coverage

Enterprise Mobility Persistent provides OPD services to Telecom OEMs /ISVs that build applications for the mobile platforms for clients like HTC, Motorola, Sony, Google and Nokia. These companies have now started launching Smartphone's based on Android platform (Google’s market share in Smartphone OS market has gone up from 3% to 25% in the last 24 months), Persistent which provides OPD services to these companies to develop platforms and apps marks a huge market for Persistent going forward. It has also tied up with Nokia to help develop applications for mobile devices based on Symbian and Meego platforms which will further boost revenues from enterprise mobility. Enterprise Collaboration Persistent have e-Commerce/Networking companies like Facebook, Twitter and LinkedIn as it clients in enterprise collaboration space. It basically provides OPD services for the search technologies used by these social networking websites. It has also developed connectors for search engines like Google which pays Persistent on a subscription basis and provides tremendous opportunity.

Onsite Billing rate Comparable to Large Cap IT companies Persistent enjoys premium pricing on onsite billing rate as compared to its midcap peers whereas comparable to what Large IT Players like Infosys & TCS charge from their clients. Persistent has only 6% of its workforce onsite and derives around 22% of its revenues from onsite locations, Onsite billing rates comparalargely due to premium onsite pricing. Persistent hires only computer science engineers from ble to large Tier-1 players like country’s premium colleges and maintains a highly skilled workforce onsite. This highly skilled Infosys labor force has enabled Persistent to charge premium pricing as compared to peers. Going forward, we expect Persistent to maintain its premium on pricing for its quality offerings which will help fight margins pressure and boost top line.

Onsite & Offshore Billing rates comparison with Infosys Ltd 78

29

76

28 27

74

26

72

25

70

24 23

68

22 66

21

64

20 FY Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY Q1 09 FY10 FY10 FY10 FY10 10 FY11 FY11 FY11 FY11 11 FY12

FY Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY Q1 09 FY10 FY10 FY10 FY10 10 FY11 FY11 FY11 FY11 11 FY12

Persistent Onsite Billing Rates US$/hour

Persistent Offshore Billing Rates US$/hour

Infosys Onsite Billing Rates US$/hour

Infosys Offshore Billing Rates US$/hour

Source: Company Reports, BP Equities Research

Institutional Research

Source: Company Reports BP Equities Research

BP Equities Pvt. Limited (www .bpw ealth.com) BP Equities reports are also available on Bloomberg [BPEP ]

11/8/2011

6

Persistent Systems Ltd.

Initiating Coverage

Onsite Revenues(%) & percentage of employees onsite 25.0%

22.2% 19.3%

18.2%

20.0%

22.6% 21.1%

22.3%

Persistent has only 6% of its workforce onsite and derives around 22% of its revenues from onsite locations largely due to premium onsite pricing

20.2% 15.0%

14.2%

11.6% 8.7%

12.7%

10.5%

10.0% 5.0%

2.8%

2.8% 1.9% 2.4%

5.8% 5.0% 5.0% 5.6% 5.7% 5.7% 3.9% 4.7%

0.0% FY 09 Q1 Q2 Q3 Q4 FY 10 Q1 Q2 Q3 Q4 FY 11 Q1 FY10 FY10 FY10 FY10 FY11 FY11 FY11 FY11 FY12 % of employees onsite

% of revenues Onsite

Source: Company Reports, BP Equities Research

Well diversified Client base and higher repeat business to provide stability & growth Revenue distribution from Top, Top 5 & Top 10 clients 100.0% 90.0%

% of revenues from Top client & % of Repeat business 25.0%

91.8%

100.0% 98.0%

81.2%

20.0%

80.0%

96.0%

70.0%

94.0% 15.0%

60.0% 50.0% 40.0%

49.7% 38.5%

38.4%

38.3%

90.0%

10.0%

88.0%

30.7% 24.7%

30.0% 20.0%

92.0%

51.8%

15.4%

86.0%

5.0% 12.5%

7.0%

10.0% 0.0% Persistent Top Client

Infinite

Mindtree

Top 5 Clients

Top 10 clients

Source: Company Reports, BP Equities Research

84.0% 0.0%

Hexaware

82.0% FY Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY Q1 09 FY10 FY10 FY10 FY10 10 FY11 FY11 FY11 FY11 11 FY12 Top Client Revenue %

Persistent has a well diversified customer base ranging from big global software companies (IBM, Microsoft, Yahoo, Google etc) to start-up companies developing cutting edge technology products. The company has consistently moved higher in the value chain (towards design and development) by providing strong project management skills and process frameworks which enabled the company to deliver quality work and serve clients well. Persistent has a brilliant track record of maintaining multi-year relationships with leading software vendors with IBM being its largest client which contribute around 15% of revenues. The company has relatively higher repeat business of around 95% from its existing clients, which reflects the strong relationship the company has with its existing clients. For FY11 persistent has 300+ active customers, derives 94% of its business from existing customers and top clients contributed 15.4% to top line. In terms of client mix the company is well diversified as compared to its peers as top five and top ten customers contribute only 38.4% and 49.7% to total revenues respectively. Going forward we believe that the company will get a key competitive edge over its mid-cap peers, as it is continuously looking out for new clients and deepening relationship with existing clients across various segments.

Institutional Research

Repeat Business %

Source: Company Reports BP Equities Research

IBM contributes 15% to revenues and has 300+ active customers

198 customers are small fall in less than $1mn revenue contribution bracket

BP Equities Pvt. Limited (www .bpw ealth.com) BP Equities reports are also available on Bloomberg [BPEP ]

11/8/2011

7

Persistent Systems Ltd.

Initiating Coverage

Enjoys Strong Return Ratios and Higher Margins as compared to its peers RoE % (FY11) 30.0% 25.8% 25.0% 19.8% 20.0%

17.3%

15.0% 10.1% 10.0% 5.0% 0.0% Persistent

Infosys

Geometric

Mindtree

ROE % Source: Company Reports, BP Equities Research

Persistent has a RoE of 19.8% higher than that of its midcap peers, in fact its inline with Infosys and we believe that stronger cash flows, lower client concentration, higher margins, zero debt and stronger return ratios makes the company fundamentally very strong.

EBITDA Margins comparison — Peers 25.0% 20.4% 20.0%

18.0%

18.0%

16.7%

15.3% 15.0%

12.1%

10.0%

11.8%

Margins are quite impressive comparable to large players

8.2%

5.0% 0.0% Persistent

Infinite

EBITDA Margins % Source: Company Reports, BP Equities Research

Mindtree

Hexaware

NPM Margins %

Persistent reported EBIDTA margin of 20.4% for FY11, which is quite impressive and higher than those of other small- and mid-cap companies primarily attributable to stronger business model.

 

         

Institutional Research

BP Equities Pvt. Limited (www .bpw ealth.com) BP Equities reports are also available on Bloomberg [BPEP ]

11/8/2011

8

Persistent Systems Ltd.

Initiating Coverage

Recent acquisition of Agilent French software business & Info spectrum to boost European business Persistent acquired Agilent’s software marketing and development business based in Grenoble, France in May11, which we believe will provide thrust to its life sciences and healthcare vertical and will expand its presence in European markets. Persistent has a decade long experience in life sciences and healthcare business domain and this acquisition will further strengthen company’s position in this particular market. Life sciences vertical currently contributes 10.8% to total revenues which we expect to grow in the coming quarters. Persistent works with leading companies in the Life Sciences and Healthcare markets, has a strong team of 40 life sciences domain experts and more than 500 software professionals working on services supporting laboratory instrumentation, bioinformatics and chemical informatics projects which we believe will help the company improve revenues from this vertical. Persistent also strategically acquired OPD business of Info spectrum Inc in Feb 11 which clearly depicts the company desire to expand its presence in European markets. Info spectrum is already a well-established player in the market having customers from different geographies and domains which will provide synergies for the company and will be a good growth drivers for the company going forward. The acquisition will help persistent to tap the European markets in verticals like aerospace and defense, complex manufacturing, maritime, transportation and logistics, satellite imaging and geographic information systems. With the acquisition the Nagpur centre will have 800+ people out of which 200 will be from Info spectrum. This clearly reflects the company strategy to expand into Tier-I and Tier-II locations which we believe is a strategically very correct decision as attrition is very low and employee satisfaction is comparatively higher in tier-I and Tier-II cities as compared to metro cities. This will help the company to fight the supply side concerns prevalent in the industry effectively and thus will protect margins going forward.

Institutional Research

BP Equities Pvt. Limited (www .bpw ealth.com) BP Equities reports are also available on Bloomberg [BPEP ]

11/8/2011

9

Persistent Systems Ltd.

Initiating Coverage

Financial Outlook Revenue, EBITDA and Net Profit expected to grow at a CAGR of 23.5%, 20.8% and 10.1% for FY11-13E Revenue, EBIDTA, EPS trends for FY07-13E 14,000

80%

12,000

60%

10,000

40%

8,000

Dip in Net profits due to higher tax rate for FY12E

20% 6,000 0%

4,000

-20%

2,000

-40%

0 FY07

FY08

Revenues (Rs Mn) Revenue Growth %

FY09

FY10

FY11

EBITDA (Rs Mn) EBITDA Growth %

FY12E

FY13E

Net Profit (Rs Mn) Net Profit Growth%

Source: Company Reports BP Equities Research

Persistent revenues grew at a 3 year CAGR of 22.2% to Rs 7.6 bn in FY11 on account of in- Revenues to grow at a creased spending in OPD space and diversification into other technological service areas like IP healthy CAGR of 25.3% for leverage and cloud computing. We expect the company to post similar healthy top-line growth FY10-13E rate and project its revenue to grow at a CAGR of 23.5% over FY11-13E to Rs 11.8 bn. EBITDA too grew at a 3 year healthy CAGR of 20.7% to Rs 1.58 bn in FY11, however EBITDA margins contracted ~78 bps (from 21.2% in FY08 to 20.4% in FY11). Margins contraction was primarily due to higher onsite shift of revenues, rise in salaries, higher attrition and adverse currency movements offset by shift to higher margin IP leverage services and engagement into non linear revenue models. We expect the company’s EBITDA Margins to expand ~95 bps to 19.5 % in FY13E from 18.6% in FY12E due to rise in non linear component in revenues. Margins will be under pressure in FY12E and expected to contract by185 bps Y-o-Y to 18.6% primarily due to appreciating rupee, increase in onsite employee, salary hikes proposed in Q2 FY12E.

EBITDA margins to contract by 185 bps Y-o-Y to 18.6% in FY12E though will expand in FY13E

Net Profit grew at a 3 year CAGR of 18.9% to Rs 1.4 bn in FY11. We expect Net profit to grow at Tax rate to rise from 7.2% in a FY11-13E CAGR of 10.1% to Rs 1.7 bn. Net profit for FY12E is going to be under pressure and FY11E to 31.0% in FY12E imis expected to decline 9.5% Y-o-Y to Rs 1.3 bn primarily due to rise in tax rate from 7.2% in pacting profits FY11E to 31.0% in FY12E.

Institutional Research

BP Equities Pvt. Limited (www .bpw ealth.com) BP Equities reports are also available on Bloomberg [BPEP ]

11/8/2011

10

Persistent Systems Ltd.

Initiating Coverage

Diluted EPS to grow at a 3 year CAGR of 9.8% to Rs 42.4 in FY13E Diluted EPS and EPS Growth 42.4

45.0 40.0

32.1

51.5%

35.0

34.9

60% 31.6 34.1%

30.0

40%

23.2

25.0 20.0

80%

73.9%

20%

18.4 9.0%

15.3

15.0

0%

-9.5%

10.0

-20%

-20.5%

5.0

Diluted EPS to grow at a 3 year CAGR of 9.8% to Rs 42.4 in FY13E

0.0

-40% FY07

FY08

FY09

FY10

Diluted EPS (Rs)

FY11

FY12E

FY13E

Diluted EPS Growth %

Source: Company Reports BP Equities Research

Revenues in US$ terms to grow at a 3 year CAGR of 27.4% to Rs 263 mn in FY13E Total revenues and Growth in US$ terms 300

60%

51.2%

50%

250 33.7%

200

40%

28.2% 20.9%

150

20.5%

30% 20%

100

10%

-0.5% 50 70.0

105.8

127.9

127.3

170.2

218.3

263.1

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

0

Revenues in US$ terms to grow at a 3 year CAGR of 27.4% to Rs 263 mn in FY13E

0% -10%

Revenue US$ mn

Growth %

Source: Company Reports BP Equities Research

We expect revenue to grow at a modest 3 year CAGR of 27.4% to US$ 263.1 mn in FY13E. Revenues in FY12 E and FY13E are expected to grow at 28.4% and 20.5% to US$ 218.3 mn and 263.1 mn respectively aided by robust growth expected in OPD market, rise in revenues from other technological services like cloud computing, enterprise mobility & collaboration, recent acquisition of Info spectrum and French software business of Agilent Technologies. The acquisitions will spur the company’s revenues from European region and will provide enormous opportunities in life sciences and OPD market, thus will provide boost to revenues in FY12-13E.

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11/8/2011

11

Persistent Systems Ltd.

Initiating Coverage

Margins to be under pressure in FY12E , one of the highest amongst IT Midcap Space—Comparable to Large Players Margin Trends 30% 24.3% 25% 21.2%

20.4% 18.6%

19.1%

20% 19.6%

15.4%

18.0% 18.8%

15% 14.6%

11.1%

13.0% 14.9% 12.8%

10%

19.5% 14.3% 13.9%

10.4% 5% FY08

FY09

EBITDA Margin

FY10

FY11E

Operating Margin

FY12E

FY13E

Margins to be under pressure in FY12E due to supply side concerns and higher tax rate which gradually will recover in FY13E due to higher revenues from non linear sources

NPM Margin

Source: Company Reports BP Equities Research

Persistent operates at a EBITDA margin of 20.4% for FY11E which is highest amongst Mid-cap players and almost comparable to large cap players like Tech Mahindra and HCL Tech. However for FY12E the company is going to witness margins pressure due to higher salaries, rising attrition and higher tax rate. EBITDA margins for FY12E is expected to decline 185 bps to 18.6% primarily due to 7-10% hike in salaries offshore and 2-4% salary hike onsite. NPM margins will contract 502 bps from 18.0% in FY11 to 13.0% in FY12E because of significant increase in tax rate from 7.2% in FY11 to 31.0% in FY12E. The increase in tax rate is primarily due to ending of tax soaps for IT companies operating from STPI effective from April 2011 and Persistent derives around 85-90% revenues from STPI’s. We expect the company is well poised to absorb the effect of higher tax rates and supply side pressure and expect growth in bottom line to resume from FY13E onwards.

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11/8/2011

12

Persistent Systems Ltd.

Initiating Coverage

Company Description Persistent Systems Ltd. (Incorporated in 1990 and Publicly listed in 2010) specializes in Outsourced Software Product Development (OPD) services. The company is into development of products, applications and functionality enhancement services and has more than 18 years of experience working with software product companies. It provides full product development services including value-added products and services for all stages of the product life cycle with focus in Telecom, life sciences, and infrastructure & systems verticals. The company has invested in services lines with tremendous growth opportunity like IP led business, cloud computing and enterprise collaboration. It currently derives 8.8% to total revenues from IP driven services and deploys around 4-6% of its team effort in it, however sees tremendous opportunity in this field going forward. The company has 6,600+ professionals, has operations spread across seven delivery centers (Pune, Goa, Hyderabad and Nagpur) and sales office in seven countries. The company has over 37 customers with having over US$1 bn annual revenue and has delivered over 3,000 products releases in the last 5 years. The company’s has 4 wholly subsidiaries which are 1. Persistent Systems Inc.(USA) 2. Persistent eBusiness Solutions Ltd.(India) 3. Persistent Systems Solutions Ltd. (India) 4. Persistent Systems Pte. Ltd. (Singapore)

Key Milestones 1990-91 Incorporated May 30 1990 and Started Operation from Pune STPI 1991-92 GIP ALTAIR-02 Technology France became the first customer 1993-94 Annual Turnover crossed Rs 5 mn 1994-95 First self owned development center( Kapil Vastu) becomes operational 1998-99 Total employee strength crossed the 100 mark 1999-00 Introduction of ESOPS 2000-01 Intel IA-64 Invested in the company Formed Wholly owned subsidiary in USA as Persistent Systems Inc., Independent direc2001-02 tors appointed 2003-04 Set up a branch office in Scotland. ODC in Nagpur operational. 2004-05 Partnered with Microsoft. Opened office in Tokyo, Japan. 2005-06 Joint investment by Norwest Venture Partners (NVP) and Gabriel Venture Partners (GVP) 2006-07 Group strength crossed 3,000 mark 2007-08 Setup branch offices at Rotterdam (The Netherlands), Ottawa and Vancouver (Canada) 2007-08 Converted into a public limited company 2008-09 Set up a branch office at Quebec, Canada and group strength crossed 4,000 mark 2009-10 Acquired certain assets of Paxonix, Inc., a subsidiary of MeadWestvaco Corporation 2009-10 Received ISO 9001:2008 Certification for software product design 2010-11 Acquired OPD operations of Info spectrum 2010-11 Acquired French Software business from Agilent Source: Company Reports

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11/8/2011

13

Persistent Systems Ltd.

Initiating Coverage

Business Highlights Persistent focuses exclusively on the Offshore Product Development (OPD) segment which consists of servicing software product companies in prototyping, development, testing, performance engineering, maintenance & support, virtualization and research & documentation thus catering to the whole product life cycle of software development. Broadly the services can be classified into product life cycle services and Other technological services illustrated in the figure below.

Persistent Systems Ltd.

Product Lifecycle Services

Other Technology Services

Product Concept

SaaS/Cloud Computing

Product Design

Enterprise Mobility

Product Engg/Development

Enterprise Collaboration

Maintenance & Support

Business Intelligence/Analytics

Persistent traditional services include Product Engg and development (contributes major chuck of revenues ~ 70%) which provides the following benefits to clients. ⇒ ⇒ ⇒ ⇒

Minimize time-to-market Lower development costs (compared to in-house) Access to experts in the latest technologies Access to solutions that integrates next generation technologies to end products

Other Technologies Services Adapting to changing market landscape Persistent also focus into areas like Cloud computing, Enterprise mobility, Enterprise collaboration and Business Intelligence/ Analytics. These areas contribute around 40% to total revenues( including intersegment revenues). Cloud Computing Cloud computing provides enormous flexibility and offers end-customers to use the services on pay-per-use basis . This usage/outcome based Non linear model is different from traditional Time and Material (T&M) model of outsourcing work. Cloud computing delivers much better resource utilization and thereby minimizes costs significantly through infrastructure and resource sharing, which significantly reduces the marketing time for the product. This means that software companies will have to redesign their products which is not a easy task to implement. Persistent works with its customers to build necessary components and enable them to deliver high-performance cloud computing platform. The company has partnered with leading cloud platform vendors to facilitate clients to migrate their products to the cloud platform, which helps them save cost. Major clients of Persistent in cloud computing space are IBM, Rackspace, VMware and Google. Enterprise Mobility Persistent has a decade experience in mobility solutions and has worked pretty closely with mobility OEM’s. With the launch of iPhone, Smart phone penetration has grown significantly, smart phones, net books and mobile Internet devices have become an integral part of the enterprise and are being managed as a corporate resource. The company has been working with handset manufacturers, wireless network equipment companies and telecommunication infrastructure companies, building software solutions.

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11/8/2011

14

Persistent Systems Ltd.

Initiating Coverage

Enterprise Collaboration Persistent has been working with companies to build products that leverage technologies across search, email and messaging, text mining and analytics, social networking and web 2.0, integration of Microsoft Office and SharePoint and other related areas. As corporate deploy these products within their internal environment, there arise multiple customization needs thus the company builds frameworks to integrate diverse collaboration tools. It provides a library of custom connectors sold as "Persistent branded custom connectors" to help in developing of enterprise search product to extract data from multiple enterprise data sources. The company has been working with networking sites like Twitter, Linked-In, Facebook etc providing them tools and applications in the areas of social networking, collaborative business, social analytics and enterprise reach. Business Intelligence/Analytics Global data is growing at an exponential rate, and its becoming very difficult to manage it in a way that will allow corporate to take effective decisions. Persistent which has a decade old practice of BI/ analytics, implements Data Warehouse, BI and analytics, database tuning etc services to these clients primarily BFSI clients. The company exposure to BFSI is very negligible and it is looking forward in winning contracts from this vertical going forward.

Key Contributing Verticals Persistent presently cater to the Telecom and wireless, Infrastructure and systems, and Life sciences and healthcare verticals, however it is also trying to penetrate into Financial Services and Healthcare verticals. Revenues mix has been constant since the last many quarters with Infrastructure & Systems being the highest contributor with 65-70% of total revenues, followed by Telecom 20-25 % of revenues and lastly Life sciences 10-15% of revenues.

Vertical wise Revenue Composition 100% 90%

13%

11%

11%

10%

10%

11%

12%

11%

63%

64%

67%

70%

72%

69%

65%

68%

19%

24%

25%

23%

20%

19%

20%

23%

21%

Q4 FY09

Q1 FY10

Q2 FY10

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

14%

80% 70% 60% 50%

67%

40% 30% 20% 10% 0%

Telecom

Infrastructure & Systems

Life Sciences

Source: Company Reports, BP equities Research

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11/8/2011

15

Persistent Systems Ltd.

Initiating Coverage

Geographical Revenue Concentration Geography wise revenue distribution 100% 3.0%

1.4%

4.0%

3.7%

4.0% 7.0%

6.4%

95% 10.0%

7.0%

8.7%

8.5%

8.6%

90%

8.2%

5.9%

84.8%

85.6%

FY10

FY11

85% 92.3% 80%

87.0%

89.0%

87.6%

87.3%

75% FY05

FY06

FY07

North Americas

FY08

FY09

Europe

Asia-Pacific

Source: Company Reports, BP equities Research

USA is the largest market for Persistent, with a contribution of 85.6% in FY11, while Europe and Asia pacific contributed 5.9% and 8.5% respectively. The company’s revenue from US is more or less constant since the last many years whereas revenues from Asia–Pacific has increased significantly since FY07. The company faces the risk of high revenue concentration from US, thus has started to expand into other geographies to mitigate risk. It also acquired the OPD business of Info spectrum in FY11, which will the company to expand its presence in Continental Europe, North Africa and New Zealand. Revenue Mix Onsite Offshore Revenue Mix 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

87.8% 91.3% 89.5% 88.4%

81.8% 80.7% 79.8% 77.8% 77.7%

22.2% 22.3% 18.2% 19.3% 20.2%

12.2%

8.7% 10.5% 11.6%

Q4 FY09

Q1 FY10

Q2 FY10

Q3 FY10

Q4 FY10

Onsite

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Offshore

Source: Company Reports, BP equities Research

The company derives 22.3% of its revenues from onsite locations with just 6% of employees onsite primarily due to higher billing rates. Persistent has increased its onsite revenues significantly in the last 2 years, from 8.7% on Q1 FY10 to 22.3% in Q4 FY11 and thus have contracted margins. Onsite billing rates are comparable to Tier-1 players , while offshore billing rates are lower. The company is looking forward to increase its offshore revenue contribution to boost margins which are already under pressure due to rising salary and attrition.

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11/8/2011

16

Persistent Systems Ltd.

Initiating Coverage

Revenue from different pricing models /contracts Contract wise revenue mix 100% 80% 60%

80.6% 81.3% 81.1% 78.6% 74.4% 76.4% 77.4% 74.2% 74.2%

40% 20% 0%

16.6% 17.5% 16.9% 16.9%

11.7% 9.8% 10.7% 13.9% 15.5%

9.1%

6.1%

5.7%

8.9%

7.7%

8.9%

8.2%

7.5% 10.3%

Q4 FY09

Q1 FY10

Q2 FY10

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

-20%

FPP

IP driven

Q4 FY11

T&E

Source: Company Reports, BP equities Research

The company derives maximum revenues from traditional Time & Material (T&M) billing system which accounts for 74.2 % of total revenues. Revenues from non-linear IP driven services stood at 10.3% in Q4 FY11, which we expect to become 12-15% in FY13E, providing support to margins. The company is making serious efforts to improve non-linear revenue through Fixed Price (FPP) contracts, which is also a margin and utilization lever.

Client Concentration Revenue mix from Top, Top 5 and Top 10 clients 80% 70%

67.0%

62.0%

60%

51.0%

50% 40%

38.5% 40.0%

37.4%

35.0%

20% 0%

49.7%

47.0%

30% 10%

43.8%

14.0%

33.3% 27.0%

26.4%

9.0%

10.0%

8.3%

9.3%

11.0%

FY06

FY07

FY08

FY09

FY10

38.4%

15.4%

-10% -20% FY05

Top Client

Top 5

FY11

Top 10

Source: Company Reports, BP equities Research

The company derives 15.4% of its revenues from its top client (IBM) in FY11 which has grown from 11.0% in FY10 due to its continuous efforts of increasing revenues from existing clients. Revenues from Top 5 and Top 10 clients also stand at 38.4% and 49.7% in FY11 as compared to 33.3% and 43.8% in FY10 respectively.

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11/8/2011

17

Persistent Systems Ltd.

Initiating Coverage

Experienced and efficient Management Team Management Team Name

Designation

Brief Profile B. Tech (1984) in Comp Sc from IIT Kharagpur, Masters (1986) Chairman, Managing Director & and a Ph.D. (1989) in Comp Sc from Indiana University, BloomDr. Anand Deshpande ington (USA). Worked with HP and was President of the Software CEO Exporters’ Association and NASSCOM B.Tech from IIT Kharagpur; M.S from Illinois Institute of Technology, USA; MBA from University of Louisiana, USA. Has over 22 years of experience in the telecom, wireless, broadband, convergence, and Hari Haran President, Persistent Systems Inc. professional services verticals. Heads the USA subsidiary, and manages Global Sales, Marketing, Business Development and brand management. MS in Engineering in Electronics from VNIT, Nagpur. Has over 18 years of experience delivering business solutions in various caNitin Kulkarni Chief Operating Officer pacities in companies such as Persistent Systems, Infosys, Siemens Information Systems Ltd, and NELCO ( a TATA company) B.Tech from IIT Madras and M.S. and Ph.D. in Comp Sc from University of Illinois University. Has more than 20 years of innovative interWorldwide Head of Corporate Dr. Srikanth Sundararajan national IT experience with HP, HCL Technologies and Cognizant Strategy Tech Solutions. B. E from Karnatak University and MBA from Kellogg School of Management. Has worked with worked with GE, Motorola and EVP and Head, New Business Ranganath Puranik Sasken in various leadership roles over the past 20 years and is Initiatives and Portfolio the head of New Business Initiatives and Portfolio at Persistent A C.A, C.S and Cost Accountant. Has 20 years of experience with Wipro, Deutsche Software, ICICI Venture Funds Management and Hexaware. He manages the financial risks of the business, does fiRajesh Ghonasgi Chief Finance Officer nancial planning and record-keeping and financial reporting for Persistent M. Tech From IIT Madras, Has 30 years of professional experience in architecting, designing and building systems and is reT M Vijayaraman Head, Persistent Labs sponsible for contributing technical insights from customer perspective and guiding the delivery organization B. Com, Bachelor's degree in Law and Chartered Secretary. Served Company Secretary and Head persistent for 11 years and is responsible for legal, compliance, govVivek Sadhale Legal and Investor Relations ernance, investor relations and corporate secretarial matters Source: Company Reports, BP equities Research

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11/8/2011

18

Persistent Systems Ltd.

Initiating Coverage

Key Risks Salary hikes and rising attrition — Supply side concerns to impact EBITDA Margins Mid Cap players like persistent are likely to face tremendous margins pressure due to rising attrition, increased competition and salary hikes. Persistent has already given two salary hikes in FY11 itself to retain talent but still the attrition rate stands at 18.4%, which is still on the higher side. We believe the company can face tremendous margins pressure due to higher salaries and increased tax rate which could dent profits. Adverse currency movements & Instability in US economy Persistent derives around 85% revenues from US economy and earns primarily in dollars, only 6% of the employees are onsite and maximum expenses are in INR thus significant appreciation in INR could hit margins significantly. Recent downgrade of US to AA+ by S&P and instability in US economy can hit IT spending significantly which is a big risk to outsourcing companies like persistent. Huge investment in R&D and IP– led services —- Any Failure can impact severely Persistent management is largely eyeing upon non linear stream of revenues to boost margins and derive growth. In this regard it is putting ~5% of its billable workforce in developing IP and R&D related work. While IP led revenues have witnessed some initial success and currently accounts for ~8% of total revenues, any failure of IP led business will hit Persitent’s efforts and growth targets may slow down. Higher tax rate to contract margins & cash Flows Persistent’s effective tax rates is expected to go up from 7.2% in FY11 to 31% in FY12 as tax benefits have ended. The increase in tax rate is primarily due to ending of tax soaps for IT companies operating from STPI effective from April 2011 and Persistent derives around 85-90% revenues from STPI’s. Moreover, imposition of MAT on SEZs will put additional pressure on cash flows.

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11/8/2011

19

Persistent Systems Ltd.

Initiating Coverage

Valuation & Recommendation In view of company’s ability to maintain long term relationships with large marquee clients, immense opportunities present in the OPD market, shift to non linear pricing models and foray into new technological areas we expect the company revenue and Diluted EPS to grow at 21.6% and 34.1% to Rs 11.8 bn and Rs 42.4 respectively in FY13E. For FY12E we expect the top line to grow at 25.4% to Rs 9.7 bn while Diluted EPS to decline by 9.5% to Rs 31.6, primarily due to supply side concerns and significant rise in tax rate from 7.2% in FY11 to 31% in FY12E. The stock currently trades at a P/E of 10.3x and 7.7x FY12E and FY13E earnings which we think is at a discount to its peers considering its high growth rate and healthy return ratios. We initiate the company with a “BUY” rating and a DCF based target price of Rs 404 an upside of 24.3% from current levels. At this fair value the stock trades at a P/E of 12.8x and 9.5x FY12E and FY13E estimates. Key DCF assumptions 1. 2. 3.

We have done DCF on FCF basis from FY11E to FY22E. We have considered a uniform growth rate of 15% from FY15-22E to reach our target price Cost of Equity and WACC both at 13.3%, considering negligible debt levels Terminal Growth rate taken at 3.5%

Peer Comparison With superior top line growth (FY10-13E CAGR of 25.3% vs average growth of ~15% for mid-cap IT companies), higher margins and decent return ratios the stock’s has been at trading at a ~4050% discount to Tier-1 companies and 10-15% premium to some midcap companies. We believe that main reasons for the premium to mid cap peers like Polaris and Patni is its higher margins, healthier client concentration, and niche service offering. Going forward we believe that company’s proven track record to manage relationship with large clients and startups, ability to rampup operations effectively, increased traction in the OPD segment and the recent acquisition of Agilent and info spectrum will help it earn higher premium over its peers and can trade at premium valuations.

Comparative Analysis Rs mn Persistent Systems Infinite Computers InfoTech Enterprises Mindtree Patni

EBITDA Margin Market EPS Rs P/E P/BV EV/EBITDA RoE% Net Profit EBITDA Sales Growth Growth Growth % Cap % % % Rs bn FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E 12.2

9,731 11,834 21.6%

1,806

2,309

27.9%

1,264

1,695

34.1% 18.6% 19.5%

31.6

42.4

9.7

7.2

1.4

1.2

6.1

4.4

15.5% 17.7%

4.1

10,971 12,977 18.3%

1,885

2,334

23.8% 1,240

1,544

24.5% 17.2% 18.0%

29.9

38.8

5.5

4.2

1.3

1.0

3.4

2.4

27.3% 27.0%

13.6

14,800 17,697 19.6%

2,209

2,730

23.5% 1,484

1,861

25.4% 14.9% 15.4%

12.9

16.3

9.8

7.8

1.2

1.1

4.7

3.7

13.4% 15.0%

16.1 38.9

17,877 21,180 18.5% 38,473 44,023 14.4%

2,328 6,464

2,902 7,886

24.7% 1,474 22.0% 4,764

1,773 5,416

20.3% 13.0% 13.7% 13.7% 16.8% 17.9%

36.5 35.6

43.6 39.6

11.5 8.1

9.6 7.3

1.9 0.8

1.6 0.7

7.0 5.6

5.6 4.6

17.4% 18.0% 11.5% 12.5%

Hexaware

23.7

16,191 18,532 14.5%

2,382

2,676

12.3% 2,111

2,324

10.1% 14.7% 14.4%

7.1

7.4

11.4

11.0

2.0

1.7

8.4

7.5

19.9% 18.4%

E-clerx Tech Mahindra

22.0

4,449

1,703

2,089

22.7% 1,464

1,745

19.2% 38.3% 36.9%

49.3

58.7

15.4

12.9

7.0

5.4

11.8

9.6

51.5% 46.4%

92.6

54,530 61,368 12.5% 10,528 11,502

9.3%

7,810

9,245

18.4% 19.3% 18.7%

59.9

70.1

12.2

10.4

2.2

1.8

9.7

8.9

20.0% 19.4%

Polaris

14.6

19,098 22,302 16.8%

18.3% 2,062

2,397

16.2% 14.0% 14.2%

20.7

24.1

7.1

6.1

1.2

1.1

4.9

4.2

18.1% 18.6%

Rolta HCL Tech

16.3 20,749 23,822 14.8% 8,007 8,858 10.6% 3,398 3,642 7.2% 38.6% 37.2% 283.9 195,093 240,082 23.1% 34,003 42,395 24.7% 21,877 27,768 26.9% 17.4% 17.7%

20.4 31.2

22.2 39.6

5.0 13.2

4.6 10.4

0.8 2.9

0.7 2.4

3.6 7.8

3.3 5.9

16.1% 15.2% 23.0% 24.2%

5,660

27.2%

2,669

3,157

Source: BP Equities Research, Bloomberg Estimates except for Infinite Computers & Persistent Systems

Institutional Research

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11/8/2011

20

Persistent Systems Ltd.

Initiating Coverage

Income Statement

Balance Sheet

YE June (Rs. mn)

FY09

FY10

FY11

FY12E

Total Revenues

5,938

6,012

7,758

9,731

39.8%

1.2%

29.1%

25.4%

Employees Cost

3,324

3,687

5,123

6,547

Operating & Other expenses

1,701

860

1,052

1,379

Total Op. Expenditure

5,025

4,548

6,175

7,926

Revenue Growth (Y-o-Y) Less:

EBIDTA

914

1,464

1,583

1,806

1.5%

60.2%

8.2%

14.1%

Less: Depreciation

297

335

424

562

Operating Profit

617

1,128

1,159

1,244

-0.5%

83.0%

2.7%

7.3%

EBIDTA Growth (Y-o-Y)

Operating Profit Growth (Y-o-Y) Non-operating Income Extraordinary Income Extraordinary Expense Profit Before tax Tax Deferred Tax

69

112

344

587

(15)

0

2

0

0

0

0

0

671

1,241

1,505

1,832

22

77

159

567

(23)

14

(51)

0

Fringe Benefit Tax reports, BP Equities11 Source: Company Research0

0

0

661

1,150

1,397

1,264

(20.5%)

74.0%

21.5%

(9.5%)

Adjusted Net Profit

676

1,150

1,396

1,264

Diluted EPS (Rs.)

18.8

32.1

34.9

31.6

Growth (Y-o-Y) % -22.1% 70.1% Source: Company reports, BP Equities Research

8.8%

-9.4%

Net Profit Net Profit Growth (Y-o-Y)

FY13E

YE June (Rs. mn)

FY09

FY10

FY11

FY12E

FY13E

11,834 Equity Capital Reserves & Surplus 21.6% Equity Net Worth Minority Interest 7,845 Net Deferred tax liability/ 1,680 (Asset) 9,525 Total Loans Capital Employed 2,309 Assets 27.9% Gross Block 664 Less: Depreciation Net Block 1,645 Capital WIP 32.2% Investments Intangible Assets 710 Other Non-current Assets 0 Current Assets

359 3,589 3,948 3,948 0

400 5,990 6,390 6,390 0

400 7,071 7,471 7,471 0

404 8,198 8,602 8,602 0

404 9,855 10,259 10,259 0

0 0 3,948

45 0 6,435

30 0 7,501

28 0 8,630

33 0 10,292

3,372 1,573 1,800 377 880 0 20

3,715 1,881 1,834 485 1,562 0 7

4,543 2,281 2,261 605 2,500 0 60

5,743 2,843 2,900 633 2,530 0 60

6,643 3,507 3,135 710 2,603 0 60

0 Inventories Sundry Debtors Cash and Bank Balance 659 Loans & Advances Other Current Assets 0 Total Current Assets 0 Current Liabilities & Provi1,695 sions Sundry Creditors 34.1% Provisions 1,695 Other Current Liabilities Total Current Liabilities & 42.4 Provisions 34.1% Capital Applied

0 1,034 211 408 130 1,784

0 1,363 1,918 723 340 4,344

0 1,582 1,000 869 226 3,677

0 2,000 550 1,051 302 3,902

0 2,432 1,396 1,278 367 5,473

140 170 604

398 317 1,080

465 396 741

608 445 341

757 519 414

914

1,796

1,602

1,394

1,690

3,948 6,435 Source: Company reports, BP Equities Research

7,501

8,630

10,292

2,355

Free Cash Flow Analysis

Key Ratios YE June (Rs. mn)

FY09

Key Operating Ratios EBITDA Margin (%) 15.4% Tax / PBT (%) 1.4% Net Profit Margin (%) 11.1% RoE (%) 18.6% RoCE (%) 18.6% Current Ratio (x) 2.0x Dividend Payout (%) 6.3% BV Per Share (Rs.) 110.1 Financial Leverage Ratios Debt/ Equity (x) 0.0x Growth Indicators % Gross Block Growth (%) 15.2% Sales Growth (%) 39.8% EBITDA Growth (%) 1.5% Net Profit Growth (%) (20.5%) Diluted EPS Growth (%) Turnover Ratios Debtors (Days)

FY10

FY11

FY12E

FY13E

YE June (Rs. mn)

FY09

FY10

FY11

FY12E

FY13E

617

1,128

1,159

1,244

1,645

9

82

83

385

460

NOPLAT

608

1,046

1,076

859

1,184

Plus: Depreciation

297

335

424

562

664

Less: Increase in Working Capital

416

(269)

721

841

484

Operating Cash flow

489

1,650

779

580

1,364

Less: Net Capex

501

476

971

1,228

977

(105)

183

(173)

84

(18)

93

991

(19)

(732)

405

9

(9)

0

0

0

84

1,000

(19)

(732)

405

(15)

0

2

0

0

70

1,000

(17)

(732)

405

EBITA 24.3% 7.3% 19.1% 22.0% 21.9% 2.4x 10.0% 178.1

20.4% 7.2% 18.0% 19.8% 19.7% 2.3x 18.4% 186.8

18.6% 31.0% 13.0% 15.5% 15.4% 2.8x 22.2% 215.1

19.5% 28.0% 14.3% 17.7% 17.6% 3.2x 19.3% 256.5

0.0x

0.0x

0.0x

0.0x

10.2% 1.2% 60.2% 74.0%

22.3% 29.1% 8.2% 21.5%

26.4% 25.4% 14.1% (9.5%)

(20.5%)

73.9%

9.0%

(9.5%)

64

83

74

75

27 0

28 0

Creditors (Days) 10 32 Inventory (Days) 0 0 Source: Company reports, BP Equities Research

Less: Adjusted Taxes

Less: Increase in Net 15.7% Other Assets 21.6% FCF From Operation 27.9% 34.1% Less: Inc./(Dec.) in Investment 34.1% FCF after Investment 75 Plus: Gain/(loss) on Ex29 traordinary Items 0 Total FCF

Source: Company reports, BP Equities Research

Valuation Ratios YE June (Rs. mn)

FY09

FY10

P/E (x) P/BV (x) EV/EBIDTA (x) EV/Sales Market Cap./ Sales (x) Dividend Yield (%) Source: Company reports, BP Equities Research

Institutional Research

BP Equities Pvt. Limited (www.bpw ealth.com) BP Equities reports are also available on Bloomberg [BPEP ]

FY11

FY12E

FY13E

8.8x 1.6x 6.7x 1.4x 1.5x 1.9%

9.7x 1.4x 6.1x 1.1x 1.2x 2.1%

7.2x 1.2x 4.4x 0.9x 1.0x 2.4%

11/8/2011

21

Research Desk

Tel: +91 22 61596464

Institutional Sales Desk

Tel: +91 22 61596403/04/05

Disclaimer Appendix

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