Finance Club AssignmentGROUP-9PERSISTENT SYSTEMS-RATIO
ANALYSIS
Presented By-Mahesh Alapati(M009-14)Patil Pranav RanjanPiyush
JainGuneet KaurAnup Ranjan
(Note- There aren`t any listed Pure OutSourced Product
Development Companies ,So most relevant comparisions would be with
mid sized IT firms )Liquidity AnalysisIT companies typically have
high current ratios(Drived by Cash & Cash Equivalents , Current
Investments) as their CAPEX requirements are relatively very
low.Same is the case with Persistent Systems , It has been
maintaining Current ratio of 3+ from past 3 years primarily due to
high Cash & Cash equivalents component , Current Investments (
in mutual funds)Industry trend has also been in the similar lines ,
Biggies like TCS , Infy has current ratio of around 3, oracle has 6
where as midsized IT firms like Mindtree, Hexaware ,Cyient etc has
around 2 .However YOY , Persistent`s increasing cash &
investments component is denting the return on equity ,currently
its portion is equal to 12% of the market cap .The company should
look for lucrative inorganic growth opportunities / expansion
opportunities and try to reduce its revenue risk ( 80%+ revenues
are from north America which means any anti outsourcing policy or
abnormal currency movements can have deleterious affects on the
company`s earnings).Now that developed economies& relatively
less turbulence in emerging economies are coming into growth path
it should consider expanding into Asia Pacific and Europe regions
to leverage its strong balance sheet position .Cash Ratio &
Quick Ratio are also in the same linesQuick ratio across the
industryTCS ;3+ , INFY ; 4+ , Wipro -;2+,Tech M-;1.7 HCL-;1.5,
Persistent -;2.89 Prone to business cycles and currency risks ,
firms can maintain cash and investments as a buffer but to an
extent .Persistent is a midsized it firm with huge industry
potential worldwide so this high quick ratio is not justifiable for
it, it is a different scenario with biggies they have already grown
a lot and its difficult to further grow on their already huge base
so high liquidity ratios for them can be justified to an
extent.Leverage RatiosCompany has very negligible debt portion on
the books i.e 3.187 cr and most of the IT Players are virtually
debt free like Polaris, Mindtree , Hexaware , Mphasis , TCS , Infy
, Oracle etc due to the nature of their industy.One Advantage
besides guarding against currency risks and Geographic
Concentration Risks is that big ticket acquisitions , if found
worth , can be seamless.Disadvantage is that during economic boom
leveraged companies grow pretty fast and perform substantially on
profitability and roe fronts where as non leveraged firms cant beat
them in terms of growth / profitability.Cash Coverage ratio ,
interest coverage ratio etc tells the same story
Asset Utilization RatiosRatios in this space i.e Asset Turnover
, Receivables turnover ( For IT Firms Inventory ratios are not
applicable) would portray efficiency in the operations.
Evidently Persistent Systems has second highest Asset turnover
ratio and first in terms of receivables turnover ratios , which
clearly indicates that the operations are highly efficient.On
comparing past 2 years data of Persistent ,It is clearly on
improving pathReceivables Turnover Ratios in 2012 4.92 in 2013 5.18
, in 2014- 5.51Asset turnover ratio in 2012 0.979 , 2013 1.02 ,
2014- 1.08Profitability RatiosProfit Margins and ROA has been an
improving path from past 3 years ,Profit Margin14.93%14.49%
13.71%
Return On assets16.15%14.81% 13.88%
As the business models are different one can`t comment fairly ,
however Persistent`s profit margins are higher than many mid sized
IT Firms and importantly they are in growth path YOY which is quite
positive , With potential increase in share of IP Led products
division the company reap significant benefits in terms of
margins.
ROA has been increasing YOY for the company and it has second
highest ROA among reputed midsized IT peers,.
Return on equity2014 -20.392013 -22.32% 2012 - 18.90%
ROE has fallen almost by 200 basis points from last year due to
high cash and investments component i.e almost 1/3rd of the total
assets . Company must find avenues that has higher returns or else
distribute good portion as dividends.However it has decent ROE
numbers and infact second highest among the peers.
Market Price RatiosBefore further dwelling into these ratios ,
We would like to quote few insights about the companyThere arent
many Pure Outsourced product development companies like "Persistent
" in India and Persistent,most probably, is the biggest in this
space in India.
As per latest annual report 2014
1) The company is constantly increasing its place in IP Led
products business which has margins in the range of 50%+ ( In Q4
20% of revenues came from IP Led products)2) Campany has 83% repeat
business which signifies the client relationship & satisfaction
levels3) Being an IT Player it need not incur regular CAPex and
return on retained earnings will be wayforward for
growth4)Management indirectly indicated 15% sustained growth rate
in topline , which is quite a conservative estimate5)With huge
chunk of Investments and cash balance in the balance sheet(Around
420 cr) , if it wants it can embark on aggresive Inorganic growth
path6)Independent software vendors are increasingly focusing on
reducing "Time to market" factor ,Frequent upgradations , Low cost
value addition . which gives tremendous market potential for
persistent.Sustainable growth rate i.e as per theory, ROE*Retention
Rate = 20.19(1-0.22)=20.19*0.78= 15.74%Theoretically PEG Ratio for
persistent=17.65/15.74= 1.12 Industry P/E ratio is around 21.93
Company is profitable since inception and it is run by Dr. Anand
Deshpande who is a highly respected personality in Industry circles
and also a member of CIIIts corporate governance practices are
quite impressive and CSR Activities are IMPECCABLE , It has
won-
Here are some extracts from recent annual report-
This speaks volumes about their ethical standardsBusiness Unique
business model and largest company in Pure OPD play in the country
, Has huge potential worldwide.Management Quality and Ethical
ManagementValuation Trading at EV/EBIDTA of 9.64 and below Industry
Avg P/E , Strong Balance Sheet , One of the highest ROE , Mammoth
22.71% CAGR in Topline over past 5 years , 16.73% CAGR in bottom
line over past 5 years.By all means it is an attractive long term
buy
