2QFY2013 Result Update | IT

October 18, 2012

Persistent Systems
Performance highlights
Y/E March (` cr) Net revenue EBITDA EBITDA margin (%) PAT 2QFY13 327 89 27.2 45 1QFY13 301 81 26.8 42 % chg (qoq) 8.7 10.3 41bp 7.4 2QFY12 238 45 19.0 32 % chg (yoy) 37.2 96.3 819bp 37.7

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 1,711 (308) 0.2 443/290 7,657 10 18,792 5,719 PERS.BO PSYS@IN

`428 `485
-

Source: Company, Angel Research

Persistent Systems (Persistent) reported its 2QFY2013 results which exceeded our as well as the streets expectations on the revenue as well as operating front. Intellectual property (IP) led revenue, the companys major focus area, posted a revenue growth of 49% qoq to US$11.3mn. The management sounded confident of surpassing Nasscoms industry growth forecast of 11-14% yoy (USD revenue) for FY2013 with incremental growth being led by growth from the key focus areas of cloud, analytics and collaboration which we believe is achievable keeping in view the current quarters performance. We recommend an Accumulate rating on the stock. Quarterly highlights: For 2QFY2013, Persistent reported a revenue of US$60.1mn, up 9.4% qoq. The companys EBITDA margin increased by 41bp qoq to 27.2%, despite having a negative impact related to wage hike of ~330bp qoq, which was a positive surprise. The PAT came in at `45cr, impacted by a `16cr forex loss. Outlook and valuation: Persistents management sounded confident of the companys growth exceeding Nasscoms estimate of 11-14% yoy growth in FY2013, despite a challenging macro environment, citing that the deal pipeline has increased by 20-25% as compared to that in the previous quarter. Also, the company will get back to hiring after four consecutive quarters of net headcount reduction, and will add ~600 net employees in 2HFY2013. Persistent had earlier stated its intent to grow share from IP-led revenues to 20% of overall business. In 2QFY2013, the share of IP led revenue was 19%, fueled by growth in acquired IP assets, particularly in the telecom domain. Over FY2012-14E, the company is expected to record a USD and INR revenue CAGR of 13.0% and 16.2%, respectively. Over FY2012-14E, we expect the company to record an EBITDA and PAT CAGR of 19.7% and 23.4%, respectively. We value the stock at 9x FY2014E EPS, which gives us a target price of `485, and recommend an Accumulate rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 39.0 32.1 2.6 26.4

Abs. (%) Sensex Persistent

3m 9.4 12.8

1yr 12.2 35.6

3yr 8.5 -*

Note: * Listed on April 6,2010

Key financials (Indian GAAP, Consolidated)

Y/E March (` cr) Net sales % chg Net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) FY2010 601 1.2 115 74.0 24.3 32.1 13.3 2.4 18.0 17.5 2.3 9.3 FY2011 776 29.1 140 21.5 20.4 34.9 12.3 2.3 18.7 15.2 1.8 8.7 FY2012E 1,000 28.9 142 1.5 23.2 35.4 12.1 2.0 16.9 20.2 1.4 5.9 FY2013E 1,261 26.0 193 35.9 26.4 48.2 8.9 1.7 19.0 25.2 1.0 3.9 FY2014E 1,352 7.2 216 12.1 24.6 54.0 7.9 1.4 17.9 20.8 0.9 3.5

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

Source: Company, Angel Research

Please refer to important disclosures at the end of this report

Persistent | 2QFY2013 Result Update

Exhibit 1: 2QFY2013 performance (Indian GAAP, Consolidated)

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

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

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

% chg (qoq) 8.7 8.4 9.0 7.3 6.7 10.3 2.5 12.7

2QFY12 238 150 89 17 27 45 14 31 7 6

% chg (yoy) 37.2 22.2 62.5 39.8 19.2 96.3 35.5 123.3

FY2012 628 351 276 45 61 170 37 132 (13) -

FY2011 462 290 172 34 52 85 27 59 14 13 85 25 60 15.0 37.2 18.5 12.7 12.3

% chg (yoy) 35.9 21.2 60.6 31.0 17.9 98.6 40.5 124.8

8.2 10.4 7.4 7.4 13bp 41bp 76bp (5)bp

45 13 32 8.1 37.2 19.0 13.2 12.9

38.0 38.8 37.7 37.8 686bp 819bp 827bp 113bp

120 34 86 21.6 44.0 27.0 21.1 14.0

40.7 33.5 43.7 43.8 678bp 854bp 834bp 173bp

Exhibit 2: Actual vs Angel estimates

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

Actual 327 27.2 45

Estimate 305 26.8 40

% Var. 7.0 41bp 13.0

Strong performance
For 2QFY2013, Persistent reported strong revenue of US$60.1mn, up 9.4% qoq. This was on the back of considerable growth in the IP-led services revenue, which came in at US$11.3mn, up 49% qoq. Linear revenues were also up by 3.0% qoq. The management indicated that it foresees IP-led revenue to be higher in FY2013, but it will remain volatile on a qoq basis. The companys offshore as well as onsite billing rate improved on a sequential basis to US$3,978ppm and US$12,863ppm respectively, backed by increase in IP-led revenue. The management indicated that the pricing will remain stable going ahead. In INR terms, the revenue came in at `327cr, up 8.7% qoq, aided by a qoq INR depreciation against the USD in 2QFY2013.

October 18, 2012

Persistent | 2QFY2013 Result Update

Exhibit 3: Trend in revenue growth (qoq)

62 58 54 54.2 51.5 51.7 4.9 1.3 0.3 2QFY12 3QFY12 4QFY12 1QFY13 qoq growth (%) 2QFY13 54.9 60.1 9.4 10 8 6 4 2 0

(US$ mn)

46 42 38 34 3.1

Revenue (US$mn)
Source: Company, Angel Research

Exhibit 4: Trend in billing rates (qoq)

14,000 12,000 12,665 12,387 12,603 12,789 12,863

(US$/ppm)

10,000 8,000 6,000 4,000 2,000 2QFY12 3QFY12 Onsite 4QFY12 Offshore 1QFY13 2QFY13 3,771 3,778 3,895 3,898 3,978

Source: Company, Angel Research

Industry wise, the companys growth was once again led by the telecom and wireless segment (contributing 28.0% to revenue), the revenue from which grew by 48.2% qoq (majorly IP led revenues). The companys revenue from its anchor industry segment infrastructure and systems (contributed 62.4% to revenue) increased by 7.8% qoq. The revenue from the life sciences and healthcare segment (contributing 9.6% to revenue) grew by 5.5% qoq.

Exhibit 5: Growth trend in industry segments

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

% chg (qoq) 6.1 26.5 (8.7)

% chg (yoy) 7.8 48.2 5.5

62.4 28.0 9.6

Geography wise, the companys growth was led by developed markets with revenues from the North America and Europe geographies growing by 20.2% and 10.3% qoq, respectively.

October 18, 2012

(%)

50

Persistent | 2QFY2013 Result Update

Exhibit 6: Growth trend in geographies

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

% chg (qoq) 9.7 17.3 0.6

% chg (yoy) 20.2 10.3 (8.2)

84.6 7.4 8.0

Hiring and utilization

Persistent, unlike its peers, again reported a reduction in its employee base, by 166 people, to 6,370. The companys technical employee base reduced by 176 people to 5,976. The attrition rate (last twelve month [LTM] basis) declined substantially to 16.9% in 2QFY2013 from 18.9% in 1QFY2013. The management indicated that it will get back to hiring after four consecutive quarters of net headcount reduction and will add ~600 net employees in 2HFY2013.

Exhibit 7: Employee metrics

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

2QFY12 6,469 113 318 6,900 280 17.7

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

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

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

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

The net utilization (excluding resources in IP-led work) increased by 360bp qoq to 77.7%, due to a low base effect as the total employee headcount reduced on a qoq basis.

Exhibit 8: Utilization trend

78.5 77.5 76.5 75.5 74.1 74.1 77.7

(%)

74.5 73.5 72.5 71.5 70.5

73.8

71.7

2QFY12

3QFY12

4QFY12 Utilization (%)

1QFY13

2QFY13

Source: Company, Angel Research

The companys client metrics saw a qualitative improvement with the number of clients in the US$3mn plus bracket increasing by two. The companys total active client base increased to 293 in 2QFY2013 from 291 in 1QFY2013. The revenue from the top 5/10 clients grew by 18.5%/13.5% qoq, respectively.

October 18, 2012

Persistent | 2QFY2013 Result Update

Exhibit 9: Client metrics

Particulars Customers billed <US$1mn US$1mn-3mn >US$3mn 2QFY12 253 211 32 10 3QFY12 273 236 27 10 4QFY12 288 251 26 11 1QFY13 291 243 35 13 2QFY13 293 246 32 15

Source: Company, Angel Research

Margin profile
In 2QFY2013, the companys EBITDA and EBIT margins improved by 41bp and 76bp qoq to 27.2% and 21.5%, respectively, despite giving wage hikes during the quarter which was a positive surprise. The margin improvement came on the back of factors such as higher margin IP business outperformance and 360bp qoq uptick in utilization to 77.7%.

Exhibit 10: Margin profile

50 45 40 35 30 25 20 15 10 5 2QFY12 3QFY12 4QFY12 EBITDA margin 1QFY13 2QFY13 13.2 37.2 19.0 20.1 21.7 20.7 21.5 42.9 26.0 44.7 28.6 44.0 26.8 44.1 27.2

(%)

Gross margin
Source: Company, Angel Research

EBIT margin

Outlook and valuation

The management sounded confident of the companys growth exceeding Nasscoms growth estimate of 11-14% yoy in FY2013, despite a challenging macro environment, citing that the deal pipeline has increased by 20-25% as compared to that in the previous quarter. Also, the company will get back to hiring after four consecutive quarters of net headcount reduction, and will add ~600 net employees in 2HFY2013. Persistent had earlier stated its intent of growing the share of IP-led revenues to 20% of overall business. In 2QFY2013, the share of the IP led revenue was 19%, fueled by growth in acquired IP assets, particularly in the telecom domain. The company will now increase its targeted share from IP revenues for next year. Persistent also announced the acquisition of rCloud, which provides backup and disaster recovery for physical and virtual servers. rCloud currently has a run rate of US$4m revenues annually and has been integrated with effect from October 12, 2012. Over FY2012-14E, the company is expected to record a USD and INR revenue CAGR of 13.0% and 16.2%, respectively.

October 18, 2012

Persistent | 2QFY2013 Result Update

On the operating margin front, we expect that sustained operations at healthy margins could be challenged by high attrition and a heavily off-shored model. Over FY2012-14E, we expect the company to record an EBITDA and PAT CAGR of 19.7% and 23.4%, respectively. At the current market price of `428, the stock is trading at 7.9x FY2014E EPS of `54.0. We value the stock at 9x FY2014E EPS, which gives us a target price of `485, and recommend an Accumulate rating on the stock.

Exhibit 11: Key assumptions

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

FY2014 12.0 51.0 20.8 24.6 29.0 12.1

14.1 53.3 18.4 26.4 28.6 35.9

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

900 800 700

(`)

600 500 400 300 200

Dec-10

Aug-10

Aug-11

Dec-11

Aug-12

Apr-10

Apr-11

Oct-10

Oct-11

Apr-12

Feb-11

Feb-12

Price
Source: Company, Angel Research

16x

14x

12x

10x

8x

October 18, 2012

Oct-12

Jun-10

Jun-11

Jun-12

Persistent | 2QFY2013 Result Update

Exhibit 13: Recommendation summary

Company HCL Tech Hexaware Infosys Infotech Enterprises KPIT Cummins Mahindra Satyam Mindtree Mphasis NIIT Persistent TCS Tech Mahindra Wipro Reco Accumulate Buy Accumulate Neutral Buy Neutral Accumulate Neutral Neutral Accumulate Accumulate Accumulate Buy CMP (`) 601 112 2,376 195 117 109 660 397 34 428 1,305 940 346 Tgt. price (`) 648 140 2,573 202 142 110 747 392 36 485 1,405 1046 421 Upside (%) 7.9 24.6 8.3 3.5 21.8 1.2 13.2 (1.4) 4.8 13.4 7.7 11.4 21.5 FY2014E EBITDA (%) 18.1 21.4 30.4 17.3 16.4 18.4 17.7 16.9 11.0 24.6 29.1 17.1 19.3 FY2014E P/E (x) 12.5 9.2 13.8 9.7 9.0 10.9 8.8 10.6 5.4 7.9 17.6 9.4 12.3 FY2011-14E EPS CAGR (%) 10.1 10.9 5.6 11.6 17.3 (0.6) 11.6 (0.5) (1.5) 15.1 10.8 4.2 7.3 FY2014E EV/Sales (%) 1.4 1.2 2.7 0.7 0.8 1.1 0.8 0.8 0.3 0.9 3.5 1.7 1.3 FY2014E RoE (%) 22.0 23.9 23.1 14.0 20.0 22.2 19.7 12.6 14.3 17.9 28.6 20.5 17.9

Source: Company, Angel Research

Company background
Persistent is a leading player in the global outsourced software product development (OPD) market and has service offerings across the various stages of product lifecycle. The company primarily focuses on the infrastructure, telecom and lifesciences industry segments. Persistent 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.

October 18, 2012

Persistent | 2QFY2013 Result Update

Profit and loss statement (Indian GAAP, Consolidated)

Y/E March (` cr) Net sales Direct costs % of net sales Gross profit % of net sales S&M expenses % of net sales G&A expenses % of net sales EBITDA % of net sales Depreciation EBIT Other income Forex gain/(loss) Profit before tax Provision for tax % of PBT PAT Extraordinary expenses Final PAT EPS (`) FY2010 601 337 56.1 264 43.9 46 7.7 71 11.9 146 24.3 34 113 8 3 124 9 7.3 115 115 32.1 FY2011 776 472 60.9 304 39.1 62 8.0 83 10.8 158 20.4 42 116 17 17 150 11 7.1 140 140 34.9 FY2012 1,000 592 59.2 408 40.8 69 6.9 107 10.7 232 23.2 61 171 17 9 197 55 28.0 142 142 35.4 FY2013E 1,261 715 56.7 546 43.3 91 7.2 123 9.7 332 26.4 75 257 0 13 270 77 28.6 193 193 48.2 FY2014E 1,352 786 58.2 566 41.8 97 7.2 135 10.0 333 24.6 81 252 31 21 304 88 29.0 216 216 54.0

October 18, 2012

Persistent | 2QFY2013 Result Update

Balance sheet (Indian GAAP, Consolidated)

Y/E March (` cr) Liabilities Share capital ESOP outstanding Reserves and surplus Hedge reserves Total shareholders' funds Borrowings Deferred payment liability Total liabilities Assets Gross block - fixed assets Accumulated depreciation Net block Capital work-in-progress Total fixed assets Investments Deferred tax assets, net Other non-current assets Current assets Sundry debtors Cash and bank balance Other current assets Loans and advances Less: - Current liab. and provisions Current liabilities Provisions Net current assets Total assets 148 32 255 644 75 74 448 762 88 78 438 848 98 98 551 1,019 108 105 681 1,214 136 192 34 72 158 89 100 250 203 137 72 192 235 182 91 240 252 288 97 257 371 188 183 48 232 156 1 457 228 229 52 281 6 26 611 289 321 51 372 12 11 15 731 365 366 60 426 15 11 16 871 446 425 60 485 15 11 23 40 3 580 16 639 5 644 40 707 747 15 762 40 801 841 1 7 848 40 972 1,012 7 1,019 40 1,167 1,207 7 1,214 FY2010 FY2011 FY2012 FY2013E FY2014E

October 18, 2012

Persistent | 2QFY2013 Result Update

Cash flow statement (Indian GAAP, Consolidated)

Y/E March (` cr) Pre tax profit from operations Depreciation Pre tax cash from operations Other income/prior period ad Net cash from operations Tax Cash profits (Inc)/dec in Current assets Current liabilities Net trade working capital Cashflow from operating activities (Inc)/dec in fixed assets (Inc)/dec in investments (Inc)/dec in deferred tax assets Inc/(dec) in deferred payment liab. (Inc)/dec in other assets Cashflow from investing activities Inc/(dec) in debt Inc/(dec) in equity/premium Dividends Cashflow from financing activities Cash generated/(utilized) Cash at start of the year Cash at end of the year (81) 88 7 156 (48) (68) 1 5 (110) 132 (2) 129 175 17 192 (265) (31) (296) (114) (92) 156 (5) 10 (26) 43 (6) (26) (32) (103) 192 89 41 17 59 262 (152) (12) (5) (8) 11 (165) 1 (27) (21) (48) 49 89 138 (99) 30 (68) 200 (129) (3) (1) (133) (1) (21) (22) 45 137 182 (41) 17 (24) 273 (140) (6) (146) (21) (21) 106 182 288 FY2010 113 34 146 11 158 9 149 FY2011 116 42 158 34 193 11 182 FY2012 171 61 232 26 258 55 203 FY2013E 257 75 332 13 345 77 268 FY2014E 252 81 333 52 385 88 297

October 18, 2012

10

Persistent | 2QFY2013 Result Update

Key ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BVPS Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS Cash EPS Dividend Book value Dupont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover ratio (Sales/Assets) Leverage ratio (Assets/Equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (fixed assets) Receivables days Payable days 2.7 73 120 3.0 69 86 3.1 66 50 3.2 68 50 3.0 68 50 17.5 45.7 18.0 15.2 18.7 18.7 20.2 26.5 16.9 25.2 33.7 19.0 20.8 29.6 17.9 0.9 1.1 0.2 0.9 1.0 18.0 0.9 1.3 0.1 1.0 1.0 18.7 0.7 1.1 0.2 1.2 1.0 16.9 0.7 1.1 0.2 1.2 1.0 19.0 0.7 1.2 0.2 1.1 1.0 17.9 32.1 41.4 0.6 178.1 34.9 45.5 5.5 186.8 35.4 50.7 4.5 210.1 48.2 67.0 4.5 253.0 54.0 74.3 4.5 301.8 13.3 10.3 2.4 0.1 2.3 9.3 2.1 12.3 9.4 2.3 1.3 1.8 8.7 1.8 12.1 8.4 2.0 1.1 1.4 5.9 1.6 8.9 6.4 1.7 1.1 1.0 3.9 1.3 7.9 5.8 1.4 1.1 0.9 3.5 1.0 FY2010 FY2011 FY2012 FY2013E FY2014E

October 18, 2012

11

Persistent | 2QFY2013 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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

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

Persistent No No No No

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

Ratings (Returns):

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

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

Neutral (-5 to 5%)

October 18, 2012

12