Persistent’s IPO valuation looks attractive

The company’s EPS is expected to be Rs25 in FY10 with price-earnings of 11.92; its peers are currently trading at a P/E between a range of 10.99-15.97

Persistent Systems Ltd, a Pune-based software services company, will hit the markets with its initial public offering (IPO) on 17 March 2010 and there has been a positive call from brokerages on its issue so far.

During FY10, the company’s earnings per share (EPS) will be around Rs25 compared to Rs21.41 in FY09. The forward price-earnings would be Rs11.92 considering the upper band of Rs310 per share. Mid-cap IT companies like Infotech Enterprises, Sasken Communications and KPIT Cummins Infosystems Ltd are currently trading at P/E ratios of 15.97, 7.29 and 10.99, respectively.

“The issue is decently priced compared to its peers. We expect the EPS to be Rs25 to Rs26 (annualised) in FY10 because its nine-month EPS is around Rs21, and it would be around 11 times at a price of Rs310. The cash flow would be positive for most of the IT companies. If high net-worth individuals (HNIs) participate actively, and the qualified institutional buyer (QIB) portion receives good response, retail participation normally picks up on the last day,” said an analyst who tracks IT.

Persistent registered a net profit of Rs79.60 crore in the quarter ended December 2009, up 56% compared to Rs50.90 crore for the corresponding period last year.

A large proportion of its revenues also come from customers that operate in the telecommunication industry. In FY09, the company’s clients in the telecommunication industry contributed to 20.9% of its revenues. Due to its concentrated customer base, the company’s top ten customers accounted for 37.4%of revenues in 2009. CRISIL has assigned IPO ‘Grade 4’ to the issue, indicating ‘above average’ fundamentals. Enam Securities Pvt Ltd and JP Morgan India Pvt Ltd are the lead book running managers. The issue opens on 17 March 2010 and closes on 19 March 2010. The company is issuing 54.2 lakh shares at a price band of Rs290-Rs310. The issue size works out to Rs157.17 crore-Rs168.01 crore.

According to the prospectus, the IPO funds would be utilised to build development facilities, capitalise its subsidiaries for establishing development facilities and meeting fit-outs and interior design costs, hardware procurement and for general corporate purposes.

Persistent has clocked a healthy growth rate of 40% compounded annual growth rate (CAGR) during 2007-09, largely driven by an increasing trend of offshoring among independent software vendors (ISVs). However, in the first six months of 2009, the company faced pressure on revenues due to delay in product release/upgrade by a few large ISVs and closure of some small ISVs.

Persistent has won the 2008 NASSCOM Innovation Award and is recognised as one of the leading technology companies in the Deloitte Touche Tohmatsu Technology Fast 500 Asia Pacific 2009 survey, the prospectus said.

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