What is the Absolute Future Outlook of Persistent Systems?

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Overview

What is the Future Outlook of Persistent Systems

Persistent Systems is a global solutions company delivering digital business acceleration and enterprise modernization for businesses across industries and geographies.

The company provides technology solutions to Banking, Industrial, Healthcare and Hi-Tech Industry clients across 20+ countries. Persistent has an annual revenue of $ 501 million and has a client base of more than 1000+ across the globe.

The company’s shares have 52 weeks price band of INR 740-420 and a total market capitalization of INR 38 billion which makes it a Mid-Cap company. The shares have a P/E ratio of 11.6 and a dividend yield of 2.64%

Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 categories and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022.

The categories are as follows.

  1. Economic Moat
  2. Business Model and Management
  3. Growth Ratios
  4. Profitability Ratios
  5. Cash Flow Ratios
  6. Liquidity and Solvency Ratios
  7. Efficiency Ratios
  8. Valuation Ratios
  9. ROE (Du Pont Analysis)
  10. Future Prospects

(All units are INR Millions except ratios and per share data)

1.Economic Moat (★ ★ ★ ☆ ☆)

The company operates in IT and Technology services business where market dominance comes from scale, workforce, technology and clientele. Persistent Systems has a workforce of more than 11,000+ people operating out of the 37+ offices across the globe. The company has 1000+ active clients and operations in more than 17 countries in the world.

They also have a 30-year legacy of leadership in software engineering and digital transformation business and has completed 14 acquisitions over 10 years across the US, UK, France, Switzerland, Germany, India and more.

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The scale, however, is smaller as compared to the other tech giants and IT services companies in the world. Hence the company does not have any significant economic moat as the industry is prone to technological disruptions. Therefore this category gets 3 stars Persistent Systems fundamental analysis.

2. Business Model and Management (★ ★ ★ ★ ☆)

Persistent Systems is a global solutions company delivering digital business acceleration and enterprise modernization for businesses across industries and geographies.

The company primarily caters to 4 segments Banking and Financial Services, Healthcare and Life Sciences, Industrial and Hi-Tech. In BFSI the company provides Digital Credit Union solutions, Digital Banking platforms, Insurance Underwriting and Claims Automation and have Technology partnerships with MAMBU, AWS, Gojoko and Appian.

The company is also focused on new technologies and have strengthened their partner ecosystem.

Persistent now has more than 2,000 professionals in containerization and Kubernetes, including a new Cloud Pak deployment practice to help clients migrate workloads across IBM Cloud.

They also have partnered with Dassault Systemes to increase their Digital Capabilities in Europe. The company brings industrial OEMs and suppliers to the Dassault Systèmes 3DEXPERIENCE platform. This overall shows a good business model focused on agility and technology.

Dr Anand Deshpande is the Founder, Chairman and Managing Director of Persistent Systems since its inception and is responsible for the overall leadership, strategy and management of the Company.

Mr Sandeep Kalra is Executive Director and President of Persistent Systems. In this role, he is responsible for setting the strategic direction and managing the sales, delivery functions for the Technology Services business.

Overall the management is qualified and stable along with interested in shareholder’s wealth creation. Therefore this category gets 4 stars Persistent Systems fundamental analysis.

3. Growth Ratios (★ ★ ★ ★ ☆)

Persistent Systems Fundamental Analysis and Future Outlook

The revenue has shown a growth of 21% CAGR over the last 10 years. The operating income and net income has also grown at 15% and 13.2% CAGR respectively. 

This also shows decline in profitability for the company. The working capital is also positive and has shown a linear growth. Capital expenditure has remained flat even with an increased scale. Therefore this category gets 4 stars Persistent Systems fundamental analysis.

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4. Profitability Ratios (★ ★ ★ ★ ☆)

Persistent Systems Fundamental Analysis and Future Outlook

The gross margin has been declined over the years even with stable wage inflation. This indicates that the company has increased its cost of services delivered and is not able to pass it down to customers.

The other margins along with return on assets have been stable. However, the margins can decline due to the Covid-19 effects on global businesses. Therefore this category gets 4 stars Persistent Systems fundamental analysis.

5. Cash Flow Ratios (★ ★ ★ ★ ☆)

The net income margin has seen a slight decrease over the years and with the Cap-Ex as a percentage of sales has declined. 

Also Watch: Persistent Systems – A 30 Year Journey of Innovation

This also shows that growth is driven majorly by inorganic means through partnerships and acquisitions. The free cash flow as a percentage of net income has been positive over the years.

The free and operating cash flow growth has been fluctuating but this is the nature of the business. Overall the company has shown a good cash flow position. Therefore this category gets 4 stars in Persistent Systems fundamental analysis.

6.Liquidity and Solvency Ratios (★ ★ ★ ★ ★)

The company does not have any debt in its capital structure therefore the financial leverage and debt to equity ratio has been flat over the years. 

The profitability margins have also been stable over the years hence there is no significant concern to the solvency of the company. The current and quick ratio has increased over the years and is way above the minimum threshold which shows a good liquidity position.

Therefore this category gets 5 stars in Persistent Systems fundamental analysis.

7. Efficiency Ratios (★ ★ ★ ★ ☆)

The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.

Persistent Systems Fundamental Analysis and Future Outlook

Persistent Systems Fundamental Analysis and Future Outlook

Overall the business efficiency has improved significantly over the years and this is because of the scale of the businessThe payable period has increased from 23 to 29 days and the receivables days have also declined. The cash conversion cycle has seen a steady decrease from 51 days to 38 days and it still remains positive. Therefore this category gets 4 stars in Persistent Systems fundamental analysis.

8. Valuation Ratios (★ ★ ★ ★ ★)

The company traded at an almost stable valuation since 2010 even with improving growth prospects and clientele. However, the growth is mostly organic in nature and hence market may value the shares at any significantly higher multiples in the near future. Therefore this category gets 5 stars in Persistent Systems fundamental analysis.

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9. ROE 5 way Du Pont Analysis (★ ★ ★ ★ ☆)

The leverage ratio has been stable and the asset turnover has improved steadily over the years. 

The interest burden ratio has remained at 100% due to no interest-bearing debt in the capital structure of the company. The operating margin has seen a slight decline and the tax efficiency has remained stable. 

Overall the Return on Equity has declined slightly for the company with increased equity base. Therefore this category gets 4 stars in Persistent Systems fundamental analysis.

 

10. Future Prospects (★ ★ ★ ★ ☆)

Some insights for the coming years from the analysis, management discussions and con calls are as follows.

  • The company is optimistic about performance in the coming quarters, even if there is the COVID-19-led uncertainty in the market. The Management expects a near U shaped recovery over the next few quarters and can defer some CapEx to next year.
  • Due to the Lockdown and the halt in Indisurtial business, the company is witnessing a trend of delays in certain deal ramp-ups along with requests for price discounts and credit extension. The management has not been easy on credit extension in the past as well.
  • Within the Services business, all the verticals – BFSI, Healthcare, Life Sciences, and Tech –are largely unchanged. New order pipeline from these lines of business is not expected to be critically hit.

Overall the company remains one of the good investments in the Technology sector with a healthy deals pipeline and strong balance sheet. Therefore this category gets 4 stars in Persistent Systems fundamental analysis.

Overall Fundamental Rating:

PERSISTENT SYSTEMS SHARES (3.4/5)

Therefore it is a 3-star stock

★ ★ ★ ★ ☆

 
Persistent Systems Shares  
Economic Moat ★ ★ ★ ☆ ☆
Business & Management ★ ★ ★ ★ ☆
Growth Ratios ★ ★ ★ ★ ☆
Profitability Ratios ★ ★ ★ ★ ☆
Cash Flow Ratios ★ ★ ★ ★ ☆
Liquidity & Solvency ★ ★ ★ ★ ★
Efficiency Ratios ★ ★ ★ ★ ☆
Valuation Ratios ★ ★ ★ ★ ★
ROE (Du Pont Analysis) ★ ★ ★ ★ ☆
Future Prospects ★ ★ ★ ★ ☆
Overall Fundamental Rating ★ ★ ★ ★
Persistent Systems Fundamental Analysis

 

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Cover Image: K2 Venture Capital

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Billion Dollar Valuation shares thorough research into the Fundamentals of the businesses listed in India. With their insightful write-ups, they uncover a lot on the table.
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