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Persistent Systems – India’s mid-tier AI-focused IT bet


Company Name – Persistent Systems Ltd (Persistent Systems)


Current Share Price – INR 3,929 (January 4, 2023)


Market Cap – INR 30,027 cr


 

1. What is interesting about the stock?

Imagine you are watching a movie or a live performance and the producer wants to evaluate your reactions to receive feedback. In the good old days, this was done with feedback forms that most people didn’t fill out, and others filled with not-so-honest feedback influenced by the last few minutes. What’s the solution?


Tackling live facial emotions and body language!


Persistent Systems developed a product for an entertainment giant for this. What did they do?


Product measured the impact of the performance by processing the video capture of the audience reaction. The product had two defined video processing pipelines and each pipeline automatically ingested and processed videos.


The two pipelines invoked in the product included:


Facial Sentiment Analysis


The videos were sent to the Google Vision APIs for face detection using Deep Learning. Another Deep Learning model quantified the emotion on each face recognized in the videos in a range of -50 and +50.


The results were then displayed on a timeline to show different emotions and their intensities. The client measured their performance’s impact by comparing their intended emotion timeline to the audience’s emotion timeline.


Action Detection Analysis


A Deep Learning based action detection model detected applause by considering the videos’ temporal information and processing a set of frames sequentially. Determining when and what part of the audience applauded gave an insight into their performances’ effectiveness and audience engagement.


[Source - https://www.persistent.com/client-success/entertainment-giant-leverages-persistents-solution-to-measure-their-audience-emotions-and-reactions-during-live-performances/]


Extraordinary! Many of us have Alexa or Google devices at home. Could they be used to analyze voice or video patterns? Creepy! Discussion for some other time.


Persistent Systems is an IT company, specializing in software products and technology services. Company develops digital engineering solutions for fueling transformation (sectors and capabilities):

Services contribute to ~92% of revenue with the remaining coming from IP-related products. IP-led revenue has come down from 17% in FY21 to the current level of ~8% in Q2FY23. Sector break-up of revenue is:

  • Software, Hi-Tech & Emerging Industries – 48%

  • BFSI – 33%

  • Healthcare and Life Sciences – 20%

Persistent Systems has a presence in USA, Europe, India, and Singapore. The geographical revenue split in Q2FY23 was:

  • North America 79%

  • Europe – 8%

  • India – 12%

  • Rest of the world – 2%

Company has more than 900 clients with the top client, top 5, and top 10 clients contributing to 9%, 27%, and 37% respectively in Q2FY23. The revenue contribution of the top client is coming down from 16% in Q2FY22 to the current level of 9%.


The Company works in partnerships with IT majors like AWS, IBM, Salesforce, Red Hat, Microsoft, Appian, Google, Snowflake, etc.


Persistent Systems made five acquisitions in FY22 to strengthen its capabilities:

  • Software Corporation International- for payment solution

  • Shree Partners- for Cloud and IT Management capabilities

  • Sureline Systems- to bolster Cloud Migration capabilities

  • Data Glove- to expand expertise in Azure-based Digital Transformation.

  • MediaAgility- for a dedicated Google business unit

One of the key challenges faced by the Company is attrition: ~24% in Q2FY23 vs. 12% in FY21. However, the attrition level has marginally come down in the last few quarters from ~27% in Q3FY22.

Why invest in Persistent Systems?

  • Healthy deal pipeline, with good contributions across the channel – trailing annual contract value of USD 1 bn

  • Partnerships with cloud companies like Google and Microsoft

  • Healthy ROE/ROCE with a cash balance of ~ INR 1,500 cr

2. Key Historical Financials

  • Revenue grew by 36% in FY22 and 52% in Q3FY23 on a YoY basis partly supported by a higher exchange rate

  • EBITDA margin has been increasing over the years to the current level of 18% in Q2FY23 – vs Infosys at 24-26%

  • Cash flow conversion is healthy with stable cash conversion days

3. What is my view on company valuation?


Share price has jumped 5x in the last 5 years with net profit increasing 2.5x, implying a significant increase in the share price is coming from P/E multiple increases.


Company trades at P/E (TTM) multiple of 37x vs LTTS at 37x, Tata Elxsi at 59x, Mphasis at 24x, Infosys at 27x, and TCS at 31x.


Persistent Systems’ net profit has grown at 17% CAGR over the last 5 years vs 8-9% of TCS and Infosys during the same period. This could explain some premium in the valuation multiple. But, most of the IT players have traded at a PEG ratio of 1.5-2x over the long term vs the current ratio of 2.4x of Persistent Systems (forward earning growth of ~20%).


On an overall basis, the Company looks interesting and can be evaluated further at lower levels.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • INR appreciation against USD

  • Recession fears in the US – potential impact on IT spending

  • Highly competitive market - strong competitors

 

About the Author


I have over 17 years of experience in equities with a detailed focus on autos, auto components, and media. I am an engineer and have an MBA from a premier institute in India.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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