4QFY2013 Result Update | IT

April 22, 2013

Persistent Systems
Performance highlights
Y/E March (` cr) Net revenue EBITDA EBITDA margin (%) PAT 4QFY13 334 83 24.9 52 3QFY13 333 82 24.8 50 % chg (qoq) 0.3 0.8 12bp 4.8 4QFY12 271 77 28.6 41 % chg (yoy) 23.4 7.4 (370)bp 25.9

ACCUMULATE
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code IT 2,180 (438) 0.3 589/317 20,697 10 19,170 5,834 PERS.BO PSYS@IN

`545 `593
12 Months

Source: Company, Angel Research

Persistent Systems (Persistent) reported its 4QFY2013 results, which came largely in line with our expectations. The Management remains confident of FY2014 with the deal pipeline being strong and remains focused on increasing the share of IP-led revenues in its portfolio with incremental growth being led by the key focus areas of cloud, analytics and collaboration. We maintain our Accumulate rating on the stock. Quarterly highlights: For 4QFY2013, Persistent reported a revenue of US$62.1mn, up 2.2% qoq. In INR terms, the revenue came in at `334cr, up just 0.3% qoq. The companys EBITDA margin grew by 12bp qoq to 24.9% with headwinds of rupee appreciation and higher G&A expenses and tailwinds of decline in doubtful debt provisions and flat employee costs even with number of employees going up. The PAT stood at `52cr, up 5% qoq, aided by a forex gain of `4.1cr as against `1.8cr in 3QFY2013. Outlook and valuation: Persistents Management sounded confident of the companys growth exceeding Nasscoms growth estimate of 12-14% yoy in FY2014, based on the healthy pipeline and plans to continue investments in new technologies and sales efforts, to take advantage of improved demand. It indicated that the demand pattern, over the past two years, has changed with deal sizes getting smaller but the quantum of deals having risen significantly, particularly in the products/ platforms space. Lower costs of development are encouraging more players to develop products, which in turn is throwing up a much larger number of such deals on the table. Over FY2013-15, the company is expected to record a USD and INR revenue CAGR of 12.3% and 11.8%, respectively. At the current market price of `545, the stock is trading at 9.9x FY2014E and 9.2x FY2015E EPS. We value the stock at 10x FY2015E EPS, which gives us a target price of `593, and maintain an Accumulate rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 39.0 21.6 12.4 27.1

Abs. (%) Sensex Persistent

3m (4.1) (4.9)

1yr 10.3 62.5

3yr 9.1 35.8

Key financials (Indian GAAP, Consolidated)

Y/E March (` cr) Net sales % chg Net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) FY2011 776 29.1 140 21.5 20.4 34.9 15.6 2.9 18.7 15.2 2.4 11.6 FY2012 1,000 28.9 142 1.5 23.2 35.4 15.4 2.6 16.9 20.2 1.9 8.0 FY2013E 1,295 29.4 188 32.3 25.9 46.9 11.6 2.1 18.4 23.7 1.3 5.0 FY2014E 1,445 11.6 221 17.8 25.1 55.3 9.9 1.8 18.1 21.5 1.1 4.3 FY2015E 1,617 12.0 237 7.3 25.0 59.3 9.2 1.5 16.5 20.4 0.9 3.4

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

Source: Company, Angel Research

Please refer to important disclosures at the end of this report

Persistent | 4QFY2013 Result Update

Exhibit 1: 4QFY2013 performance (Indian GAAP, Consolidated)

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

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

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

% chg (qoq) 0.3 1.8 (1.7) 3.6 (10.9) 0.8 6.9 (1.2) 1.6 (5.7) 4.8 4.8 (88)bp 12bp (27)bp 57bp

4QFY12 271 150 121 18 26 77 19 59 (3) 55 14 41 10.3 44.7 28.6 21.7 15.4

% chg (yoy) 23.4 28.2 17.5 47.9 27.0 7.4 13.7 5.4 30.6 44.5 25.9 25.9 (213)bp (370)bp (316)bp (35)bp

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

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

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

Exhibit 2: Actual vs Angel estimates

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

Actual 334 24.9 52

Estimate 337 24.3 51

% Var. (1.0) 54bp 1.3

In-line performance
For 4QFY2013, Persistent reported a revenue of US$62.1mn, up 2.2% qoq. This was on the back of a 3.1% qoq revenue growth in linear IT services (product engineering) to US$51.2mn. Offshore revenues grew by 0.5% qoq on the back of a 2.8% qoq rise in price realization and 2.1% qoq decline in volumes. Onsite revenues grew by 12.7% qoq because of 2.7% qoq volume growth and 9.7% qoq rise in price realization. IP-led revenues declined by 1.7% qoq to US$10.9mn. IPled revenues have surged from US$8mn in FY2012 (contributing 8.8% to revenue) to US$41mn in FY2013 (contributing 17.2% to revenue). On IP-led revenues, the Management indicated that the company is planning to increase its contribution to 25% of revenues in the next two years. The companys offshore and onsite billing rate improved sequentially to US$4,143ppm and US$14,014mn, up 2.8% and 9.7% qoq, respectively. Novaquest contributed US$1.8mn during the quarter; excluding it, revenue declined 0.7% qoq. In INR terms, the revenue came in at `334cr, up just 0.3% qoq.

April 22, 2013

Persistent | 4QFY2013 Result Update

Exhibit 3: Trend in revenue growth (qoq)

66 62 58 60.1 54.2 4.9 4 1.2 2.2 2 0 4QFY12 1QFY13 2QFY13 3QFY13 qoq growth (%) 4QFY13 Revenue (US$mn)
Source: Company, Angel Research

9.4 60.8 62.1

10 8 6

(US$ mn)

54 50 46 42 38 34

54.9

1.3

Exhibit 4: Trend in billing rates (qoq)

16,000 14,000 12,000 12,603 12,789 12,863 12,772 14,014

(US$/ppm)

10,000 8,000 6,000 4,000 2,000 4QFY12 1QFY13 Onsite 2QFY13 Offshore 3QFY13 4QFY13 3,895 3,898 3,978 4,032 4,143

Source: Company, Angel Research

Industry wise, the companys growth was driven by its anchor industry segment infrastructure and systems (contributed 66.5% to revenue) the revenues of which grew by 7.2% qoq. The telecom and wireless segment (contributed 22.8% to revenue), again posted a decline in revenue, ie of 10.6% qoq, in 4QFY2013. The life sciences and healthcare segment (contributed 10.7% to revenue) reported a 3.8% qoq growth in revenues.

Exhibit 5: Growth trend in industry segments

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

% chg (qoq) 7.2 (10.6) 3.8

% chg (yoy) 12.8 24.2 7.6

66.5 22.8 10.7

Geography wise, the developing geographies led with a 6.8% qoq growth in revenues. Revenues from North America grew by 2.2% qoq while that from Europe declined by 4.5% qoq.

April 22, 2013

(%)

Persistent | 4QFY2013 Result Update

Exhibit 6: Growth trend in geographies

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

% chg (qoq) 2.2 (4.5) 6.8

% chg (yoy) 18.3 (3.9) (2.4)

85.1 5.7 9.2

Hiring and utilization

Persistent reported a net addition of 251 employees into the system, taking its total employee base to 6,970. The companys technical employee base increased by 253 people to 6,540. The Management indicated that it has already given ~500 offers to campus graduates for FY2014.

Exhibit 7: Employee metrics

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

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

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

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

3QFY13 6,287 101 331 6,719 349

4QFY13 6,540 99 331 6,970 251

Exhibit 8: Utilization trend

78 77 76 75 74 73 72 71 70 69 4QFY12 1QFY13 2QFY13 Utilization (%)
Source: Company, Angel Research

77.3 75.2

(%)

72.5 71.7 70.1

3QFY13

4QFY13

Margin profile
In 4QFY2013, the companys EBITDA margin grew by 12bp qoq to 24.9% with headwinds of rupee appreciation and higher G&A expenses and tailwinds of decline in doubtful debt provisions and flat employee costs (even with number of employees going up). The EBIT margin of the company declined by 27bp qoq to 18.5%, during 4QFY2013.

April 22, 2013

Persistent | 4QFY2013 Result Update

Exhibit 9: Margin profile

50 45 40 35 44.7 28.6 44.0 44.1 43.5 42.6

(%)

30 25 20 15 10

26.8

27.2

24.8

24.9

21.7

20.7

21.5

18.8 3QFY13

18.5 4QFY13

4QFY12

1QFY13

2QFY13 EBITDA margin

Gross margin
Source: Company, Angel Research

EBIT margin

Outlook and valuation

The Management sounded confident of the companys growth exceeding Nasscoms growth estimate of 12-14% yoy in FY2014, based on the healthy pipeline and plans to continue investments in new technologies and sales efforts, to take advantage of improved demand. The Management indicated that the demand pattern, over the past two years, has changed with deal sizes getting smaller but the quantum of deals having risen significantly, particularly in the products/ platforms space. Lower costs of development are encouraging more players to develop products, which in turn is throwing up a much larger number of such deals on the table. To benefit from the same, the company has consistently acquired products/platforms that will drive growth. The company also remained confident of ramping up its IP revenues as well, considering strong demand and widening portfolio offerings. Over FY201315, the company is expected to record a USD and INR revenue CAGR of 12.3% and 11.8%, respectively. On the operating margin front, we believe that sustained operations at healthy margins could be challenged by high attrition rate, a heavily off-shored model and companys intentions of investing more in S&M going ahead. Over FY2013-15, we expect the company to record an EBITDA and PAT CAGR of 9.8% and 12.4%, respectively. At the current market price of `545, the stock is trading at 9.9x FY2014E and 9.2x FY2015E EPS. We value the stock at 10x FY2015E EPS, which gives us a target price of `593, and maintain an Accumulate rating on the stock.

April 22, 2013

Persistent | 4QFY2013 Result Update

Exhibit 10: Key assumptions

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

FY2014 12.5 54.0 17.5 25.1 29.5 17.8

FY2015 12.0 54.0 19.8 25.0 30.0 7.3

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

800 700 600 500

(` )

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

Source: Company, Angel Research

Exhibit 12: Recommendation summary

Company HCL Tech Hexaware Infosys Infotech Enterprises KPIT Cummins Mahindra Satyam Mindtree Mphasis NIIT Persistent TCS Tech Mahindra Wipro Reco Buy Buy Accumulate Buy Buy Buy Accumulate Accumulate Buy Accumulate Accumulate Buy Accumulate CMP (`) 721 85 2,244 163 96 108 849 363 23 545 1,425 935 339 Tgt. price (`) 863 105 2,465 196 130 143 920 395 30 593 1,585 1,230 385 Upside (%) 19.7 23.5 9.8 20.2 35.3 32.6 8.4 8.9 28.2 8.8 11.2 31.5 13.5 FY2015E EBITDA (%) 20.7 19.2 27.7 18.5 15.2 19.1 19.2 17.4 9.1 25.0 27.9 18.1 20.6 FY2015E P/E (x) 11.7 7.3 12.3 7.5 6.6 9.1 9.2 8.7 4.3 9.2 16.2 8.1 11.9 FY2012-15E EPS CAGR (%) 19.6 9.5 7.9 14.5 21.8 2.3 19.8 3.3 (7.1) 18.7 17.4 10.7 7.9 FY2015E EV/Sales (%) 1.3 0.9 2.0 0.4 0.4 0.8 0.8 0.6 0.1 0.9 3.1 1.4 1.3 FY2015E RoE (%) 21.5 22.1 19.3 13.1 18.8 20.1 18.9 13.6 11.9 16.5 27.9 19.1 18.4

Source: Company, Angel Research

Company background
Persistent is a leading player in the global outsourced software product development (OPD) market and has service offerings across various stages of product lifecycle. The company primarily focuses on the infrastructure, telecom and lifesciences industry segments. It has over 18 years of experience working with software product companies and has developed and released more than 3,000 products till now. The company has invested and plans to continuously invest in new technologies and frameworks in the areas of cloud computing, analytics, enterprise collaboration and enterprise mobility.
April 22, 2013

Persistent | 4QFY2013 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 1,295 731 56.5 563 43.5 96 7.4 132 10.2 335 25.9 78 257 6 263 75 28.7 188 188 46.9 FY2014E 1,445 833 57.7 612 42.3 104 7.2 144 10.0 363 25.1 87 277 18 18 314 92 29.5 221 221 55.3 FY2015E 1,617 935 57.8 682 42.2 116 7.2 162 10.0 404 25.0 97 307 14 18 339 102 30.0 237 237 59.3

April 22, 2013

Persistent | 4QFY2013 Result Update

Balance sheet (Indian GAAP, Consolidated)

Y/E March (` cr) Liabilities Share capital ESOP outstanding Reserves and surplus Hedge reserves Total shareholders' funds Borrowings Deferred payment liability Total liabilities Assets Gross block - fixed assets Accumulated depreciation Net block Capital work-in-progress Total fixed assets Investments Deferred tax assets, net Other non-current assets Current assets Sundry debtors Cash and bank balance Other current assets Loans and advances Less:- Current liab. & prov. Current liabilities Provisions Net current assets Total assets 148 32 255 644 75 74 448 762 88 78 438 848 100 101 618 1,084 114 113 768 1,284 128 126 962 1,502 136 192 106 158 89 100 250 203 137 72 192 238 241 93 247 265 350 104 276 297 494 116 309 371 188 183 48 232 156 1 457 228 229 52 281 6 26 611 289 321 51 372 12 11 15 731 368 363 51 414 12 19 20 871 454 416 51 467 12 19 17 991 551 439 51 490 12 19 18 40 3 580 16 639 5 644 40 707 747 15 762 40 801 841 1 7 848 40 978 1,018 65 1,084 40 1,178 1,218 65 1,284 40 1 1,394 1,435 1 65 1,502 FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E

April 22, 2013

Persistent | 4QFY2013 Result Update

Cash flow statement (Indian GAAP, Consolidated)

Y/E March (` cr) Pre tax profit from operations Depreciation Pre tax cash from operations Other income/prior period ad Net cash from operations Tax Cash profits (Inc)/dec in Current assets Current liabilities Net trade working capital Cashflow from operating (Inc)/dec in fixed assets (Inc)/dec in investments (Inc)/dec in deferred tax assets Inc/(dec) in deferred liab. (Inc)/dec in other assets Cashflow from investing Inc/(dec) in debt Inc/(dec) in equity/premium Dividends Cashflow from financing Cash generated/(utilized) Cash at start of the year Cash at end of the year (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 (112) 35 (77) 189 (120) (8) 58 (5) (75) (1) 9 (19) (11) 104 138 241 (67) 26 (41) 266 (140) 3 (137) (21) (21) 108 241 350 (77) 27 (50) 285 (120) (1) (121) 1 1 (21) (19) 144 350 494 FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E 113 34 146 11 158 9 149 116 42 158 34 193 11 182 171 61 232 26 258 55 203 257 78 335 6 341 75 266 277 87 363 37 400 92 308 307 97 404 32 436 102 334

April 22, 2013

Persistent | 4QFY2013 Result Update

Key ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BVPS Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS Cash EPS Dividend Book value Dupont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover (Sales/Assets) Leverage ratio (Assets/Equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (fixed assets) Receivables days Payable days 2.7 73 120 3.0 69 86 3.1 66 50 3.3 67 50 3.3 67 50 3.4 67 50 17.5 45.7 18.0 15.2 18.7 18.7 20.2 26.5 16.9 23.7 33.0 18.4 21.5 31.8 18.1 20.4 32.5 16.5 0.9 1.1 0.2 0.9 1.0 18.0 0.9 1.3 0.1 1.0 1.0 18.7 0.7 1.1 0.2 1.2 1.0 16.9 0.7 1.0 0.2 1.2 1.1 18.4 0.7 1.1 0.2 1.1 1.1 18.1 0.7 1.1 0.2 1.1 1.0 16.5 32.1 41.4 0.6 178 34.9 45.5 5.5 187 35.4 50.7 4.5 210 46.9 66.5 4.5 255 55.3 76.9 4.5 305 59.3 83.6 4.5 359 17.0 13.2 3.1 0.1 3.0 12.5 2.8 15.6 12.0 2.9 1.0 2.4 11.6 2.4 15.4 10.7 2.6 0.8 1.9 8.0 2.2 11.6 8.2 2.1 0.7 1.3 5.0 1.6 9.9 7.1 1.8 0.8 1.1 4.3 1.2 9.2 6.5 1.5 0.8 0.9 3.4 0.9 FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E

April 22, 2013

10

Persistent | 4QFY2013 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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

Persistent No No No No

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

Ratings (Returns):

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

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

Neutral (-5 to 5%)

April 22, 2013

11