Persistent Systems Ltd’s initial public offering has done

At the issue price of Rs310, the company was valued at 11 times annualized earnings for the nine-month period ended December. At current levels, valuations are at about 14 times.

Persistent is largely focused on serving technology customers such as Microsoft Corp., Oracle Corp. and Google Inc. and is engaged in software development and testing of new software.

Graphic: Yogesh Kumar/Mint

Since MindTree is a much larger company and is diversified with over 50% of revenue coming from enterprise services, the upside to Persistent’s valuations will be capped unless the global business environment improves considerably from current levels. The concern for both companies is that risk to revenue is relatively high given their large exposure to the application/product development business.

In every downturn, spends by customers in this segment fall considerably. In the first nine months of FY10, Persistent’s revenue fell by at least 8% in dollar terms. The fact that it doesn’t have a large proportion of annuity revenue means that there’s no buffer.

For all these reasons, it makes sense for the stock to trade at current levels and perhaps even slightly lower than MindTree’s valuations. What works in the company’s favour is a great track record of growing its business. Excluding the drop in FY10, revenue has grown at a compounded average growth rate of 42% between FY05 and FY09, faster than the information technology industry’s growth rate during this period.

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