Persistent Systems Ltd has come out with a public issue of 5.42 million shares. Of the total issue, 0.54 million shares are reserved for the employees, so the net issue size is 4.88 million shares. The promoter’s holding in the company before the issue is 43.3%, which will come down to 38.9% after the issue.
The fresh issue would help the company raise between Rs120 crore and Rs128 crore (depending on the lower and the upper end of the price band, respectively). Established in 1990, Persistent Systems has emerged as a key firm in the outsourced product development (OPD) services market. The company offers OPD services to its clients across the telecommunications, life sciences, healthcare, and infrastructure and systems verticals through its offshore delivery centres based in India.
For the year ended March, the company reported Rs593.8 crore of software related revenues and a net profit (before adjustments) of Rs66 crore. The company has over 230 clients as of now, with a majority of the revenues coming from the US market.
The company operates in the niche, high-growth $8.9-billion OPD market. the International Data Centre predicts a five-year compounded annual growth rate of 15.8% in revenues from the worldwide research and development/product engineering services market for the period 2009-13.
Persistent Systems designs, develops and enhances the functionality of its clients’ software products. Till date, it has played a key role in the release of more than 3,000 products of its customers. It experiences revenue stickiness from its clients on a given project compared with its peers, as its role is not limited to building a product but extends to providing related upgrades, maintenance and other support work. The company’s business model also reflects a better onshore-offshore mix compared with its peers and, therefore, helps it control its costs.
Graphic: Yogesh Kumar/Mint
The company has over 235 clients across the globe, including over 37 clients with total revenues of over billion dollars. It has four of the five largest independent software vendors as its clients. It has some Fortune 500 clients across its two key verticals, namely, the telecom and wireless vertical and the life science and healthcare vertical.
Currently, the company has impressive operating metrics in place. It has about 75% utilization level, which reflects how well its operations are managed. With just 215 onshore employees, the company’s onshore-offshore mix seems impressive and also augurs well for the management, which wants to control the margins.
The average revenue per employee is marginally above the peer group’s, reflecting higher billing rates.
Over the last two years, the company has invested and made inroads into other high-growth areas, such as cloud computing, analytics, enterprise mobility and collaboration.
The company has allocated over 5% of its resources for these new growth areas. It has a well-built technical team, which can monetise on any emerging opportunity.
Another key initiative of the company includes targeting its clients’ non-focused tail-end products (the ones that do not contribute to the profits).
We feel talent shortage could act as an obstacle for the growth of the company in the medium to long run. Aztech Technologies had faced a similar problem of talent shortage, while scaling up its business.
Persistent Systems reported a relatively high attrition level of around 13% for FY09. About 70% of the company’s software development staff has one to five years of work experience. Despite offering better profiles and an attractive entry-level package of Rs3 lakh, the company is expected to experience higher attrition levels once the industry demand picks up.
In terms of valuations, the stock is being offered at around 11.5-12.3 times its estimated FY10 earnings. This offering is almost marginally above the valuation of the peers that are trading at 10.9 times (the peer group average) their estimated FY10 earnings. However, there are no close competitors trading with a similar business model.
Given the company’s high growth rates historically and niche positioning in a fast-growing segment, higher premium pricing and solid client relationships, the slight premium over its peers is more than justified. We believe that the premium could widen further.