Many niche mid-sized offshore players have managed to latch on to spends from clients quite well over the past 12-18 months and have witnessed a significant revival in growth.

Persistent Systems is one such player which operates in the outsourced software product development space. It has been growing at a pace much faster than the industry over the past two-three years.

Growth across key segments such as telecom and infrastructure and systems, increase in revenues from the US and large-client additions are positives for the company.

Persistent has also witnessed substantial growth in IP-led revenues over the past one year. It has also managed to increase its billing rates significantly. The company has a healthy offshore-onsite mix which helps optimise costs.

At Rs 512, the Persistent share trades at 9 times its likely per share earnings for FY-14. This valuation is at a discount to the multiples enjoyed by other mid-tier IT companies such as Infotech Enterprises and KPIT Cummins, making it a reasonable entry point for investors with a two-year horizon.

In FY-13, Persistent's revenues rose 29.4 per cent to Rs 1294.5 crore, while net profits increased 32.3 per cent to Rs 187.6 crore. At 14.8 per cent, the company’s net margins are among the highest in the mid-tier IT space.

Persistent partners with companies such as IBM, Cisco, Salesforce, Microsoft and Oracle and develops some of their products. It offers testing, support and maintenance services too. The association with global partners and clients has helped the company developed its own IP.

Key Verticals Strong

The key segments that Persistent operates in grew well in FY-13. Telecom (25.3 per cent of revenues) has been able to grow much faster than the company’s overall revenue rate. What makes this growth impressive is the fact that most large and mid-sized companies are yet to see significant revival in this segment for the past couple of years.

Infrastructure and systems (64.3 per cent of revenues) and life sciences (10.5 per cent) too grew, albeit at a slower pace. The company has kept its focus by catering to a limited segment, which is important for niche providers to scale up meaningfully.

The vertical-mix is quite healthy and in keeping with its focus of operating in niche segments.

As with most mid-tier IT companies, North America contributes a bulk of overall revenues. It accounts for nearly 85 per cent of the overall pie and continues to expand at an impressive pace.

The other key improvement for Persistent has been in the area of IP-led revenues, which are not linked to headcount additions and, thus, aid margins. The company has witnessed a near doubling of IP revenues in FY-13 to 17.2 per cent of its overall revenues.

Persistent has had healthy large-sized client additions in FY-13. In the $3-million category, Persistent has added four new clients, taking total number of clients in this bracket to 15. It has also added three customers in the $1-3 million range.

Healthy parameters

In addition, the company’s top client increased its contribution to revenues in FY-13 by over four percentage points to 20.4 per cent.

These factors indicate a healthy blend in growth among existing and new clients. The company derives almost 65 per cent of its revenues from services delivered from offshore (mainly Indian) locations. This helps it maintain an optimal cost structure. Although manpower deployment onsite has increased over the last one year, the cost structure still remains quite stable.

Persistent has also managed to derive increase in billing rates in FY-13, with an increment of 3.5 per cent offshore and 5.5 per cent for onsite locations, indicating strong execution capabilities.

Risks

Attrition at 14.4 per cent in FY13 is not low. Any significant wage hikes given to reduce this churn may dent margins. Competition from many mid-tier as well as large players in the offshore product development space may create pricing pressure.

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