25 april 2016 persistent systems - india news,...

25 April 2016

4QFY16 Results Update | Sector: Technology

Persistent Systems

BSE SENSEX S&P CNX CMP: INR718 TP: INR775(+8%) Neutral 25,679 7,855 Bloomberg PSYS IN Equity Shares (m) 80.0 M.Cap.(INRb)/(USDb) 57.4 / 0.9

52-Week Range (INR) 817 / 563 1, 6, 12 Rel. Per (%) -3/14/10 12M Avg Val (INR M) 95 Free float (%) 61.5 Financials & Valuation (INR b) Y/E Mar 2016 2017E 2018E Net Sales 23.1 30.7 36.1 EBITDA 4.2 5.0 6.1 PAT 3.0 3.4 4.1 EPS (INR) 37.2 42.3 51.7 Gr. (%) 2.3 13.7 22.3 BV/Sh (INR) 211.0 239.6 254.6 RoE (%) 19.5 19.3 21.5 RoCE (%) 19.3 18.2 20.4 P/E (x) 19.3 17.0 13.9 P/BV (x) 3.4 3.0 2.8

Estimate change

TP change

Rating change

Revenue beat offset by stress on margins IBM IoT alliance drives revenue beat…: Higher-than-expected revenue from

PSYS’ deal with IBM on its Watson IoT platform led to a revenue-beat in 4Q (12% QoQ v/s 6% expected). Organically, flat ISVs QoQ and lower growth from Enterprise (1.8% QoQ) offset 10%+ QoQ growth in IP-led revenues. Organic growth was 3.1% QoQ excluding the IBM deal and part-integration of Citrix.

…and sharp decline in profitability: EBITDA margin plummeted by 290bp to 16% - 220bp explained by IBM deal, where in costs are front-ended. The rest of the decline resulted out of hiring of trainees, S&M expenses and consultancy charges – a negative surprise given IP-led organic growth.

Margin recovery in FY17 looks a stretch…: Costs associated with the IBM deal are expected to weigh upon margins to the tune of 200bp in FY17. Recouping profitability is a key focus, substantiated by PSYS’ intent to let go off some of its low-margin business gradually. While it has levers like utilization at its disposal, we expect these to offset visa and wage hike impacts in 1H.

…and in FY18 depends on IBM’s performance: The IBM deal has alleviated some of the revenue growth pressures on PSYS that were emerging out of a lack of pick-up in ISV segment. This, coupled with momentum in Enterprise, lends strong visibility of revenue growth over FY16-18E (21% revenue CAGR). While IoT alliance provides potential of earnings accretion in the year beyond, it will be a function of IBM’s performance in Watson IoT sales. At 18x FY17E and 14x FY18E, valuation upside at PSYS would be constrained by IBM dependency and pressures on profitability over FY17/18. Our target price of INR775 (post 7/6% earnings cut in FY17/18E) discounts FY18E earnings by 15x. Neutral.

Quarterly Performance (Consolidated)

Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Ashish Chopra ([email protected]); +91 22 3982 5424 Sagar Lele ([email protected]); +91 22 3982 5585

Persistent Systems

25 April 2016 2

4QFY16: Revenue beat led by IP growth PSYS’ 4QFY16 revenues grew 12.0% QoQ to USD100.4m (estimate of 6.3% QoQ).

The revenue growth included ~USD8m from the IBM-Watson IoT deal and part integration of recently acquired Citrix. The contribution from the IoT deal was for a tad more than two months, and would see full-impact in 1Q. Excluding these two, revenue growth would be ~3% QoQ.

Revenue from ISVs was flat, and growth was soft in Enterprise (+1.8% QoQ). IP revenue grew by 57.2% QoQ. Excluding the IBM Watson IoT and Citrix, IP revenue growth was ~13% QoQ.

Exhibit 1: Commencement of revenue from the IBM Watson IoT deal reflect in revenue growth

Source: Company, MOSL

Volumes in the linear business declined by 0.5% QoQ, with onsite volumes

increasing by 0.5% and offshore volumes declining by 0.7% QoQ. Onsite billing rates are 3.4x that at offshore for PSYS. Onsite pricing was down

1.0% QoQ at USD14,574 per person month (PPM) while offshore pricing was up 1.4% QoQ to USD4,275 PPM.

In Rupee terms, revenue was INR6.8b, +14.4% QoQ, compared to our estimate of INR6.4b (+8.7% QoQ). Average realized currency rate during the quarter was INR67.42, v/s our estimate of INR67.53.

Exhibit 2: IP-led revenues saw pick-up even excluding the addition of IBM Watson IoT


EBITDA margin was 15.9%, -290bp QoQ, v/s estimate of 18.5%. Gross margin fell

by 310bp to 35.7% and SGA was down 30bp QoQ to 19.8%.

63 68 70 73 73 76 80

80

79

83 90 100

1.5

8.6

2.2 3.9

0.0

5.0 4.2

0.6 -1.8

5.5 8.1

12.0

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

4QFY

16

Revenue (USD m) Revenue Growth QoQ (%)

9.5

13.1

12.4

14.2

14.5 15.0 15.1 14.5 14.5 13.4

18.0 28.3

-12.4

37.4

-4.8

14.4 2.1 2.9 1.0 -4.1 -0.1 -7.1

34.1

57.2

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

4QFY

16

IP business revenue (USD m) QoQ growth (%)

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25 April 2016 3

Exhibit 3: EBITDA margin lower than expected led by costs associated with the IBM deal


EBITDA margins during the quarter, declined by 290bp QoQ. Of this, 220bp was on account of the costs associated with the IBM deal, which includes one-time expenses of ~50bp. The other 70bp decline was led by operational reasons – hiring of trainees, S&M expenses and consulting charges.

The negative impact of these factors offset the benefit of higher IP revenue and recoveries in receivables leading to lower provisioning for doubtful debts.

Exhibit 4: Utilization improved QoQ, remains a lever going forward


Forex losses during the quarter were INR36m v/s gains of INR42m in 3QFY16, and versus our estimate of INR27m.

However, Other Income at INR210m, was higher than INR160m in 3QFY16 and our estimate of INR91m because of maturity of FMPs.

Effective tax rate during the quarter was 21.4%, lower than our estimate of 25.5%. Consequently, PAT at INR808m was above our estimate of INR786m.

Segment-wise performance: IP-led growth in 4QFY16 Revenue growth in ISVs was flat for yet another quarter. ISVs continue to be

under pressure with a four-quarter CQGR of -0.1%, despite addition to revenue growth by the acquisition of RGEN in 2Q.

Enterprise however saw a pause in traction as it grew by 1.8% QoQ. Traction in this segment was robust over the last two quarters; 14.1% QoQ in 2Q, and 16.2% QoQ in 3Q.

IP revenues grew by 57.2% QoQ, holding on to the traction seen in 3QFY16. In 3Q, excluding the acquisition of Aepona, IP revenue grew by ~15.5% QoQ post three consecutive quarters of decline. During 4Q, excluding revenue from the IBM Watson IoT deal and the part-integration of Citrix, IP revenue grew by ~13% QoQ.

21.7 26.0 27.7 27.0 21.8 20.6 20.1 20.2 19.4 18.7 18.8 15.9

8.9 8.8 8.1 7.6

8.9 9.0 9.4 9.9 10.2 9.9 9.7 9.1

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

4QFY

16

EBITDA Margin (%) S&M (%)

68.8 70.3 71.8 67.7 65.9

68.4 72.9 73.2 71.6

74.6 72.8 73.6

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

4QFY

16

Offshore Utilization %

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25 April 2016 4

Exhibit 5: IP-led growth in 4Q – even organically

Industry Classification Contri. to Rev. (%)

Growth - QoQ (%)

4 Qtr CQGR (%)

ISV 45.8 0.0 -0.1 Enterprise 26.0 1.8 7.9 IP Led 28.2 57.2 18.2


Growth during the quarter was driven by North America (19.1% QoQ) and RoW (12% QoQ), while Europe remained under pressure. RoW (mainly India and APAC) has been a volatile segment for PSYS over the last few quarters.

Exhibit 6: RoW remains volatile

Geographies Contri. to Rev. (%)

Growth – QoQ (%)

4 Qtr CQGR (%)

North America 86.1 19.1 5.4 Europe 6.7 -4.0 3.7 RoW 7.2 12.0 5.8

Source: MOSL, Company

Top client grew for the fourth consecutive quarter, after four successive quarters of decline, and was a key positive during the quarter, indicating a sustained growth trajectory. 2-5 clients grew by 2.1% QoQ and 6-10 grew 0.6% QoQ. Non-top 10 accounts grew by 1.0% QoQ.

Exhibit 7: Top client growth a function of the IoT alliance

Client Metrics Contri. to Rev. (%)

Growth - QoQ (%)

4 Qtr CQGR (%)

Top Client 25.4 63.5 17.9 Top 2-5 Clients (%) 15.4 2.1 2.4 Top 6-10 Clients (%) 8.8 0.6 5.0


Takeaways from management commentary Strong deal wins during the quarter: PSYS signed some multi-year multi-million

dollar deals during the quarter. Although Enterprise grew by 1.8% QoQ, marking a slow-down compared to previous quarters, revenue growth is expected to return to momentum going ahead.

~USD50m from the IBM deal in FY17: PSYS derived ~USD8m from the IBM Watson IoT deal in 4QFY16. It expects ~USD50m of revenue from this deal in FY17. However, revenue won’t be spread uniformly across the four quarters and lumpiness can be expected.

Margin impact of ~200bp in FY17: FY17 is expected to face the regular headwinds of visa expenses and wage hikes. Moreover, the front-ended costs associated with the IBM Watson IoT deal are expected to further impact margins. The company is expecting the margin impact to be restricted to 200bp as there are ample levers in place. Apart from utilization as a lever, reduction of certain low-margin business is also a potential lever. Projects that are onsite-heavy, have unfavorable pricing terms, or that have lower margins would be gotten out of in order to boost overall margins.

Realization likely to improve going ahead: PSYS has seen a dip in realization lately on account of lower profitability in R-Gen and because of a few customers where rates are low (for long term business). However, with a changing business

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25 April 2016 5

mix, the company is moving away from Time and Material billing. This is expected to give better leverage to improve margins going ahead.

Portfolio of ISV customers changing: PSYS has been witnessing slower growth in ISVs on account of the pressure faced by pre-internet companies that are its clients. The company is seeing an active shift in revenue from pre-internet companies to Digital-born companies or to newer technologies, enabling a healthier ISV portfolio, which has the potential to drive strong growth in the longer term.

Change in estimates Revenue from the IBM Watson IoT deal commenced during 4QFY16 and added

~USD8m in revenue. The deal is expected to bring in revenue of ~USD50m in FY17. However, costs associated with the deal are expected to be front-ended.

To cushion the negative margin impact from this deal, the company has several traditional operational levers. Apart from these, certain low-profitability business would be cut down to give further impetus to margins.

To factor in lower revenue from the IBM Watson IoT deal (~USD52m versus USD60m earlier) in FY17, and the cut-down of low-margin business, we have cut our revenue estimates by 3.4/3.2% for FY17/18E.

The margin miss in 4Q, coupled with pressures from the deal in FY17 (in addition to headwinds from visa costs and wage hike) leads us to cut our EBITDA margin estimates by 90/70bpp for FY17/18E. We expect EBITDA margins to decline by 180bp in FY17, and expand by 90bp in FY18.

Consequently, we have cut our earnings estimate by 6.7%/5.9% for FY17/18E.

Exhibit 8: Change in estimates Revised Earlier Change FY17E FY18E FY17E FY18E FY17E FY18E INR/USD 68.0 70.0 68.0 70.0 0.0% 0.0% USD Revenue - m 451.9 515.1 467.9 532.0 -3.4% -3.2% USD revenue gr. (%) 28.5 14.0 35.0 13.7 -650bp 30bp EBITDA Margin (%) 16.2 17.0 17.0 17.7 -90bp -70bp EPS - INR 42.3 51.7 45.3 54.9 -6.7% -5.9%


Valuation and view: Remain positive on business; Neutral on valuations In Tier-II IT, we prefer PSYS’ business fundamentals, given the following factors:

One of the few Tier-II companies with the potential to grow revenues above the industry given the focus on Enterprise Digital Transformation.

Unlikelihood of obsolescence in its chosen segments over the medium to long term; and multi-year relationships, with marquee clientele in the ISV space.

Credible experience in agile product development and iterative approach to Product Engineering – two very relevant trends in today’s market

Strong balance sheet and adequate pricing power in the set of offerings PSYS’ arrangement with IBM for its IoT Watson product may weigh on the

company’s performance in FY17, but has the potential to be significantly earnings accretive beyond the next year. It lends strong revenue visibility from PSYS’ top client; and a healthy growth in Watson’s IoT product sales would have a direct bearing on PSYS’ revenues and profitability.

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25 April 2016 6

Based on the business model, financial performance and presence in potentially high growth areas, there is a case for PSYS to be values at a premium multiple to its tier-II peers. Including the likely changes in financial performance on account of the deal, we expect PSYS to grow its revenues at a CAGR of 21% over FY16-18 and earnings at a CAGR of 18% over the same period. Although the concern around revenue growth has been addressed by the new IBM deal, margins have taken a clear hit, and are expected to keep them burdened despite the aggressive use of some of the levers.

The stock trades 17.0x / 13.9x FY17E / FY18E Earnings. We expect valuations to remain under pressure till margin pressures ease out, and clarity on Watson IoT sale emerges, given that dependency of PSYS’ margins is on IBM’s performance. Our revised price target of INR775 discounts FY18E earnings by 15x, which implies 8% upside to CMP. Neutral.

Key triggers Better-than-estimated margins from aggressive exercise of levers Sharper growth in IBM Watson IoT Stability in large ISV accounts Key risk factors Continued revenue sluggishness in ISV segment (ex-IBM) Pressure on margins from higher S&M to sell products / investments in latest

collaboration with top customer Decline in discretionary activity

Exhibit 9: 1-year forward PE band


Exhibit 10: 1-year forward PB band


Exhibit 11: Comparative valuation Company Mkt cap Rating TP Upside EPS (INR) P/E (x) RoE (%) FY16-18E CAGR (%) (USD b) (INR) (%) FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E USD rev. EPS Mphasis 1.5 Neutral 520 6.3 34.2 36.5 40.7 14.3 13.4 12.0 12.7 12.9 13.8 7.2 9.2 Mindtree 0.9 Neutral 775 7.3 35.9 41.8 50.0 19.5 16.7 14.0 27.4 26.8 26.7 15.1 18.0 KPIT Tech 0.5 Neutral 165 8.6 13.7 15.4 17.9 11.1 9.9 8.5 19.0 17.6 17.2 6.6 14.0 Cyient 0.8 Buy 550 19.6 32.2 36.6 42.5 14.3 12.6 10.8 17.2 17.2 17.5 11.8 14.9 Hexaware 1.1 Neutral 250 1.6 12.9 15.1 17.5 19.0 16.3 14.0 28.9 31.0 33.8 14.8 16.4 NIIT Tech 0.5 Neutral 610 23.2 44.0 50.3 56.2 11.2 9.8 8.8 18.4 18.2 17.8 7.8 13.0 Persistent Sys. 0.9 Neutral 820 7.8 37.2 42.3 51.7 19.3 17.0 13.9 19.5 19.3 21.5 21.0 17.9


15.8

24.6

12.4

6.7 5

10

15

20

25

30

Apr-

10

Dec-

10

Aug-

11

Apr-

12

Dec-

12

Aug-

13

Apr-

14

Dec-

14

Aug-

15

Apr-

16

PE (x) Peak(x) Avg(x) Min(x)

3.0

4.5

2.3

1.2 1.0

2.0

3.0

4.0

5.0

Apr-

10

Dec-

10

Aug-

11

Apr-

12

Dec-

12

Aug-

13

Apr-

14

Dec-

14

Aug-

15

Apr-

16

PB (x) Peak(x) Avg(x) Min(x)

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25 April 2016 7

Story in charts

Exhibit 1: Aggressive foray in IP-led revenues...


Exhibit 2: … and strong traction in Enterprise business…


Exhibit 3: …have offset sluggish ISV business (~46% of rev)


Exhibit 4: Access to market is key to scale – beefed up front-end hiring in recent quarters


Exhibit 5: Turnaround in linear revenues is key to 20%+ growth…


Exhibit 6: …and continued IP traction is crucial to profitability uptick


9.2 14.9 18.3 40.9 49.3 59.1 74.2

61.1

22.8

123.8

20.5 19.9 25.7

FY10 FY11 FY12 FY13 FY14 FY15 FY16

IP led revenues (USD m) Growth (%)

14.4 16.9 18.4 19.3 19.3 22.1 25.6 26.1

17.4

8.9 5.0 0.3

14.1 16.2

1.8

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

4QFY

16

Enterprise revenues (USD m) QoQ (%)

60.3 58.3 57.9 57.8 57.0 57.2 51.3

45.8

1QFY152QFY153QFY154QFY151QFY162QFY163QFY164QFY16

ISV Revenues (%)

119 128 139 150

202 212 208 224 216 208 203 201

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

4QFY

16

Sales personnel

170.2 207.4 237.8 274.1 308.5 351.7 451.9 515.1

34.2

21.8

14.7 15.2 12.6 14.0

28.5

14.0

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Revenue (USD m) Growth (%)

1,397 1,431 1,876 2,493 2,906 2,974

3,382 4,135

20.4

23.4

25.9 25.8

20.7

18.0 16.2

17.0

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

PAT (INR m) EBITDA margin (%)

Persistent Systems

25 April 2016 8

Operating metrics Exhibit 7: Operating metrics

3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 Verticals (%) Telecom & Wireless 18.0 15.3 18.5 16.7 16.0 16.3 14.9 13.2 16.2 13.5 Infrastructure & Systems 68.9 71.6 68.4 69.9 70.4 69.4 70.8 72.4 70.1 74.1 Life Sciences & Healthcare 13.2 13.1 13.1 13.4 13.6 14.3 14.3 14.4 13.7 12.4 Geography (%) North America 83.1 85.4 85.9 86.1 84.7 85.4 84.4 86.2 85.3 86.1 Europe 6.0 6.1 6.5 6.3 7.1 6.8 6.3 6.8 6.3 6.7 RoW 10.9 8.5 7.6 7.7 8.2 7.8 9.3 7.0 8.4 7.2 Industry Classification (%) ISV 60.3 58.3 57.9 57.8 57.0 57.2 51.3 45.8 Enterprise 19.8 22.1 23.1 24.1 24.6 26.6 28.6 26.0 IP Led 20.0 19.6 19.0 18.1 18.4 16.2 8.4 28.2 Revenue Mix (%) Services: Onsite 20.5 21.4 23.1 24.5 25.1 26.2 26.8 29.5 29.8 26.3 Services: Offshore 61.7 59.0 56.9 55.9 55.9 55.7 54.8 54.3 50.1 45.5 IP Led 17.8 19.6 20.0 19.6 19.0 18.1 18.4 16.2 20.1 28.2

Client Metrics (%) Top Client 19.8 21.1 20.8 19.0 17.5 16.5 18.1 17.6 17.4 25.4 Top 2-5 Clients 17.1 18.3 17.9 17.1 17.5 17.6 17.9 17.8 16.9 15.4 Top 6-10 Clients 10.3 9.1 10.3 8.9 9.2 9.1 9.6 9.3 9.8 8.8 Clients billed Prod. Eng. & Platforms 253 261 260 281 273 268 277 311 337 319 IP Led 380 358 347 376 349 326 310 299 291 353 Customer Engagement Size USD3m+ 16 15 14 14 14 14 15 17 19 18 USD1-3m 34 36 38 41 41 48 52 46 44 42 Repeat Business 82.7 85.2 86.7 83.6 84.1 85.6 88.7 86.2 82.0 82.1 DSO 63 63 69 65 65 64 67 68 69 62

Employee Metrics

Technical People 7,109 7,349 7,271 7,447 7,664 7,861 7,810 7,905 8,334 8,618 Sales & BD 139 150 202 212 208 224 216 208 203 201 Others 354 358 403 408 424 421 428 432 429 445 Total 7,602 7,857 7,876 8,067 8,296 8,506 8,454 8,545 8,966 9,264

Billable Person Months 15,517 16,155 16,139 16,015 16,031 16,063 16,138 16,066 16,718 16,631 - Onsite 1,152 1,246 1,283 1,403 1,518 1,551 1,623 1,854 2,097 2,108 - Offshore 14,365 14,909 14,856 14,612 14,513 14,512 14,515 14,212 14,621 14,523 Linear Utilization % 72.9 69.2 67.7 70.3 74.3 74.7 72.9 76.1 74.5 75.2 Onsite Utilization % 85.9 86.9 88.0 89.7 88.6 89.2 84.7 87.4 86.6 85.9 Offshore Utilization % 71.8 67.7 65.9 68.4 72.9 73.2 71.6 74.6 72.8 73.6 Attrition (%) 13.2 13.4 14.0 14.1 14.7 15.5 16.4 17.1 17.1 16.4

IP Led Person Months 2,260 2,343 2,419 2,496 2,620 2,672 2,880 3,021 3,526 4,082 Yield (USD/p.p.m) 3,934 3,927 3,915 4,123 4,264 4,272 4,134 4,346 4,428 4,849

Billing Rates (USD/p.p.m)

Onsite 14,510 14,355 14,905 14,864 14,862 15,159 15,321 15,075 14,717 14,574 Offshore 4,179 4,241 4,219 4,271 4,201 4,199 4,146 4,251 4,217 4,275


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25 April 2016 9

Financials and Valuation

Key assumption Y/E March 2011 2012 2013 2014 2015 2016 2017E 2018E INR/USD Rate 45.6 48.2 54.4 60.9 61.3 65.8 68.0 70.0 Revenues (USD m) 170.2 207.4 237.8 274.1 308.5 351.7 451.9 515.1 Services Revenue (USD m) 155.4 189.1 196.9 224.8 249.4 277.4 308.2 349.9 IP Led Revenues (USD m) 14.9 18.3 40.9 49.3 59.1 74.2 143.6 165.2 Total Headcount 6,360 6,628 6,970 7,857 8,506 9,264 10,904 11,560 Net Addition 1,698 268 342 887 649 758 1,640 656 Per Capita Ptoductivity (USD) 26,766 31,290 34,121 34,881 36,272 37,959 41,439 44,561 Linear Utilization (Blended %) 71.0 72.1 74.1 70.9 71.7 74.7 74.6 75.3 Income Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016 2017E 2018E Net Sales 7,758 10,003 12,945 16,692 18,913 23,123 30,726 36,059 Change (%) 29.1 28.9 29.4 28.9 13.3 22.3 32.9 17.4 EBITDA 1,583 2,337 3,352 4,303 3,906 4,171 4,976 6,147 EBITDA Margin (%) 20.4 23.4 25.9 25.8 20.7 18.0 16.2 17.0 Depreciation 424 611 783 1,026 939 965 1,028 1,018 EBIT 1,159 1,726 2,569 3,277 2,967 3,206 3,949 5,129 Interest 0 0 0 0 0 0 0 0 Other Income 344 256 61 150 932 750 591 421 Extraordinary items 0 0 0 0 0 0 0 0 PBT 1,504 1,981 2,630 3,427 3,900 3,956 4,540 5,550 Tax 108 551 754 934 993 983 1,158 1,415 Tax Rate (%) 7.2 27.8 28.7 27.3 25.5 24.8 25.5 25.5 Min. Int. & Assoc. Share 0 0 0 0 0 0 0 0 Reported PAT 1,396 1,431 1,876 2,493 2,906 2,974 3,382 4,135 Adjusted PAT 1,396 1,431 1,876 2,493 2,906 2,974 3,382 4,135 Change (%) 21.3 2.5 31.2 32.9 16.6 2.3 13.7 22.3 Balance Sheet (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016 2017E 2018E Share Capital 435 400 400 400 800 800 800 800 Reserves 7,036 8,005 9,783 11,823 13,255 15,593 17,814 18,978 Net Worth 7,471 8,405 10,183 12,223 14,055 16,393 18,614 19,778 Debt 0 7 14 32 25 26 26 26 Deferred Tax -60 -107 -190 -260 -315 -233 -233 -233 Total Capital Employed 7,441 8,376 10,646 12,389 13,885 16,312 18,533 19,696 Gross Fixed Assets 4,543 6,090 6,951 8,545 9,408 10,951 12,151 12,451 Less: Acc Depreciation 2,281 2,892 3,449 4,468 5,331 6,589 7,618 7,872 Net Fixed Assets 2,261 3,197 3,502 4,077 4,076 4,363 4,533 4,579 Capital WIP 605 528 1,174 307 40 265 265 265 Investments 2,500 123 173 823 2,116 1,348 1,348 1,348 Current Assets 3,677 6,189 7,690 9,966 11,201 14,857 18,073 19,436 Inventory 0 0 0 0 0 0 0 0 Debtors 1,582 2,033 2,509 3,028 3,586 4,275 5,681 5,973 Cash & Bank 1,000 3,290 3,677 5,028 6,036 6,260 7,803 8,819 Loans & Adv, Others 1,095 866 1,503 1,910 1,579 4,321 4,588 4,644 Curr Liabs & Provns 1,602 1,660 1,893 2,785 3,549 4,521 5,686 5,932 Curr. Liabilities 1,206 879 845 1,574 1,793 3,293 4,376 4,601 Provisions 396 781 1,048 1,211 1,755 1,228 1,310 1,331 Net Current Assets 2,075 4,528 5,797 7,181 7,653 10,335 12,386 13,504 Total Assets 7,441 8,376 10,646 12,389 13,885 16,311 18,533 19,696

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Financials and valuation Ratios Y/E Mar 2011 2012 2013 2014 2015 2016 2017E 2018E Basic (INR) EPS 17.1 17.7 23.5 31.2 36.3 37.2 42.3 51.7 Cash EPS 22.2 25.5 33.2 44.0 48.1 49.2 55.1 64.4 Book Value 96.2 108.2 131.1 157.3 180.9 211.0 239.6 254.6 DPS 2.8 3.0 4.5 6.0 10.0 11.0 12.0 12.0 Payout (incl. Div. Tax.) 16.1 16.9 19.2 19.3 27.5 29.6 28.4 23.2 Valuation(x) P/E 0.0 40.5 30.6 23.0 19.8 19.3 17.0 13.9 Cash P/E 0.0 28.1 21.6 16.3 14.9 14.6 13.0 11.1 Price / Book Value 0.0 6.6 5.5 4.6 4.0 3.4 3.0 2.8 EV/Sales 0.0 5.2 4.0 3.0 2.5 2.1 1.5 1.3 EV/EBITDA 0.0 22.4 15.5 11.6 12.2 11.6 9.4 7.4 Dividend Yield (%) 0.0 0.4 0.6 0.8 1.4 1.5 1.7 1.7 Profitability Ratios (%) RoE 20.1 18.0 20.2 22.3 22.1 19.5 19.3 21.5 RoCE 16.2 14.5 17.9 21.9 24.4 19.3 18.2 20.4 Turnover Ratios (%) Asset Turnover (x) 3.8 3.7 3.9 4.4 4.6 5.5 6.9 7.9 Debtors (No. of Days) 75 75 75 75 75 75 75 75 Inventory (No. of Days) 0 0 0 0 0 0 0 0 Creditors (No. of Days) 0 0 0 0 0 0 0 0

Net Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Cash Flow Statement (INR Million) Y/E Mar 2011 2012 2013 2014 2015 2016 2017E 2018E Adjusted EBITDA 1,583 2,337 3,352 4,303 3,906 4,171 4,976 6,147 Non cash opr. exp (inc) -81 -260 181 0 0 0 0 0 (Inc)/Dec in Wkg. Cap. -460 27 260 -403 -207 -859 -508 -102 Tax Paid -108 -551 -754 -934 -993 -983 -1,158 -1,415 Other operating activities 0 0 0 0 0 0 0 0 CF from Op. Activity 935 1,553 3,038 2,965 2,705 2,329 3,311 4,630 (Inc)/Dec in FA & CWIP -971 -1,470 -1,735 -734 -670 -1,477 -1,198 -1,064 Free cash flows -37 83 1,304 2,232 2,035 852 2,113 3,566 (Pur)/Sale of Invt -939 2,378 -50 -650 -1,292 768 0 0 Others 0 0 0 0 0 0 0 0 CF from Inv. Activity -1,910 908 -1,785 -1,384 -1,963 -709 -1,198 -1,064 Inc/(Dec) in Net Worth 19 38 128 96 -118 426 0 -1,810 Inc / (Dec) in Debt 0 7 8 18 -7 1 0 0 Interest Paid 0 0 0 0 0 0 0 0 Divd Paid (incl Tax) & Others 90 -19 -346 -398 -24 -312 -570 -740 CF from Fin. Activity 109 25 -211 -284 -149 115 -570 -2,550 Inc/(Dec) in Cash -866 2,486 1,043 1,297 593 1,735 1,543 1,016 Add: Opening Balance 1,866 804 2,634 3,731 5,443 4,525 6,260 7,803 Closing Balance 1,000 3,290 3,677 5,028 6,036 6,260 7,803 8,819

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Corporate profile Exhibit 1: Sensex rebased

Source: MOSL/Bloomberg

Exhibit 2: Shareholding pattern (%)

Dec-15 Sep-15 Dec-14 Promoter 38.5 38.5 38.9 DII 26.4 11.8 11.1 FII 12.9 16.6 27.7 Others 22.2 33.1 22.4

Note: FII Includes depository receipts Source: Capitaline

Exhibit 3: Top holders Holder Name % Holding Saif Advisors Mauritius Ltd A/c Saif India IV FII Holdings Ltd 5.3 PSPL ESOP Management Trust 5.2 ICICI Prudential Value Discovery Fund 3.0 Nordea 1 Sicav Emerging Stars Equity Fund 2.7 HDFC Trustee Company Ltd A/c HDFC Mid Capopportunities Fund 2.4

Source: Capitaline Exhibit 4: Top management

Name Designation

Anand Deshpande Chairman & Managing Director

Amit Atre Company Secretary

Source: Capitaline

Exhibit 5: Directors Name Name Anant Jhingran Kiran Umrootkar Pradeep K Bhargava Prakash Telang Roshini Bakshi S K Bhattacharyya Mritunjay Kumar Singh

*Independent

Exhibit 6: Auditors Name Type Deloitte Haskins & Sells LLP Statutory Joshi Apte & Co Statutory

Source: Capitaline

Exhibit 7: MOSL forecast v/s consensus EPS (INR)

MOSL forecast

Consensus forecast Variation (%)

FY16 37.2 37.3 -0.2 FY17 42.3 43.8 -3.5 FY18 51.7 51.8 -0.1

Source: Bloomberg

Company description Persistent is a global company specializing in software product and technology innovation, partnering with pioneering start-ups, innovative enterprises and the world’s largest technology brands. The company staffs over 8,000 employees and clocked revenues of USD274m (FY14). It has a clear focus on new initiatives that are witnessing greater demand and will drive the next wave of growth in technology - Cloud, Mobility, Data Analytics and Collaboration.

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