* Dec’17 quarter revenue performance was in line with expectation. Alliance revenue increased by 12.5% qoq on the back of seasonal uptick in IBM IoT business while incremental contribution from PARX aided Digital business growth (up 9.2% qoq). Performance of Services and Accelerite business was soft.
* At 17.4%, EBITDA margin improved by 220bps qoq, aided by operational efficiencies and seasonal uptick in the IBM business. At Rs917mn, net profit increased by ~11% qoq/yoy each.
* Management targets double-digit revenue growth for FY19E on account of healthy traction in Digital business, especially in Healthcare and BFSI. Growth leverage will support margin improvement in our view.
* We raise earnings for FY19/20E by 5/4%. Valuations at 17.1x/14.8x FY19/20E are full and limit further upside. We assign REDUCE with TP of Rs740.
In-line revenue led by seasonal uptick in IBM IoT business; OPM improvement surprises positively
Dec’17 quarter performance was ahead of estimates, led by better than estimated OPM while US$ revenue growth at 3.8% qoq was in line with estimates. Revenue growth was led by the Alliance business (+12.5% qoq on the back of seasonal traction in IBM IoT business) and the Digital business (+9.2% qoq). The performance of Services and Accelerite businesses was weak, with a sequential revenue decline. We highlight that when peers had reported revenue challenges over the last 2 years, Persistent had continued to report double-digit growth but with margin contraction. In this backdrop, the company’s OPM improvement (EBITDA margin up 220bps qoq) is a welcome surprise (at 17.4% EBITDA margin is the highest in the last 7 quarters). The margin improvement was led by a 240bps improvement in gross margins while SG&A expenses increased by 20bps qoq. At Rs917mn, the net profit (+10.9% qoq, +11.9% yoy) was ahead of Emkay estimates on account of better than expected OPM and lower taxes.
Raise FY 19/20 EPS by 4/5%; REDUCE with TP of Rs 740
We raise earnings estimates for FY19/20E by 5/4%, as we incorporate the Dec’17 quarter performance and build in margin improvement. While the company has reduced its dependence on the Services business (witnessing structural challenges), the growth traction in the remaining portfolio is skewed, with Digital accounting for ~2/3rd of incremental revenue and muted performance by Accelrite and Alliance businesses. Valuations at 17.1x/14.8x FY19/20E are full and limit further upside. At the TP of Rs740 (based on 14x FY20E), the stock offers potential negative return of ~5%. Accordingly, we downgrade recommendation one notch to REDUCE (V/s HOLD earlier).
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