Investors looking out for an exposure to IT sector may consider Persistent Systems given its growth prospects

IPO details

Price Band: 157.2-168

issue size:

Rs 290-310crore

Date: MARCH 17 ? 19

PERSISTENT Systems is tapping the market to raise funds for expanding its development centers in Pune and Nagpur and to invest in hardware infrastructure. The IPO consists of 41.39 lakh fresh shares and 12.8 lakh existing shares to be sold by a long-time investor. Post-issue, the promoter group?s share will come down to 38.9% from 43.3%.

BUSINESS:

The Pune-based company caters to the $8-billion (around Rs 38,500 crore) offshoring outsourced product development (OPD) market. It provides customised services to global software product firms and start-ups. While majority of its revenue comes from services, an 8% comes from licensing products for which it owns intellectual property rights. It caters to telecom (24% in nine months ended December 2009), life sciences (13.3%) and infrastructure and systems.

FINANCIALS:

Persistent?s revenue has grown at a CAGR of 41.7% in the past four years. Its profit has increased by 18.4% during the period. In FY09, it suffered a drop in its revenue and profit due to global slowdown. In nine months ended December 2009, the company improved its operating margin by rationalising operating costs. While it?s expected to report lower revenue for FY10 compared to FY09 sales, it is likely to resume growth in the next fiscal. It collects outstanding sales in less than 60 days that is substantially lower than other tier II IT companies, which take 70-90 days.

VALUATIONS:

At the higher end, Persistent demands a P/E of 11.7 based on annualised profit of the first nine months of 2009 and post IPO equity. Being a pure play OPD company, Persistent has no listed peer. Other similar size IT peers trade at P/Es lower than 10.

GROWTH PROSPECTS:

OPD business is growing at a CAGR of 19%. Given the gradual revival in the demand for technology, new product development may see recovery. This may boost OPD as product companies would attempt to control costs associated with product development. This augurs well for Persistent.

CONCERNS:

If the tax exemption under STPI scheme is not renewed beyond FY11, Persistent?s tax as a percentage of profit before tax is likely to jump to 20-25% from less than 10% now. It may reduce its net margin by over 100 bps. To mitigate this impact, the company has decided to invest in its SEZ in Hyderabad. New projects will be executed from the SEZ unit, which would enjoy tax exemption. Given this, investors with a horizon of more than two years may consider this issue.