Investor's Eye
[October 18, 2012] | | |
| Summary of Contents
STOCK UPDATE Persistent Systems
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs552
Current market price: Rs428 Impressive performance led by the IP business Result highlights -
Strong all-round performance: Persistent Systems Ltd (PSL) reported impressive set of numbers for Q2FY2013 led by a strong growth in the intellectual property (IP)-led business up by 48.5% quarter on quarter (QoQ) to $11.3 million (18.9% of revenues), whereas information technology (IT) services business grew by 3% QoQ to $48.7 million. The growth in the IP-led business was much ahead of our expectations, whereas IT revenues were in line with our expectations. The total revenues were up by 9.4% QoQ to $60.1 million (ahead of our expectations of $57.3 million). In INR term, the revenues were up by 8.7% QoQ to Rs326.9 crore. -
The blended volumes grew by 3.2% QoQ, offshore volumes grew by 1.8% QoQ and onsite volumes were down by 1%. The blended pricing remained stable on a sequential basis (offshore up by 2.1% and onsite up by 0.6%). -
The EBITDA margin performance surprised positively with an improvement of 40 basis points QoQ to 27.2% (ahead of our estimates of 25.3%). The margins performance for the quarter was commendable as the quarter under review had the adverse effect of wage hikes and there was absence of currency benefits. The outperformance was primarily led by strong IP-led revenues and an improvement in the operational levers (utilisation up by 360 basis points QoQ). -
The foreign exchange (forex) loss increased by 32.4% to Rs16.1 crore, whereas treasury income increased by 10.3% QoQ to Rs8.2 crore led by a higher yield on investments. The net profit was up by 7.4% QoQ to Rs44.6 crore, broadly in line with our expectations of Rs44.1 crore but ahead of consensus estimates. -
IP-led business gaining mass: PSL's strategy of investing in the IPs has gained prominence and started yielding results. In the quarter, the IP-led business grew by 48.7% QoQ to $11.3 million led by a traction in recent portfolio addition from Openwave Systems' location business and the IBM deal coupled with an improving deal flow from the existing IP portfolio. On a year-on-year (Y-o-Y) basis, the IP-led revenues increased almost three-fold from $3.9 million in Q2FY2012 (7.6% of revenues) to $11.3 million (18.9% of revenues) in Q2FY2013. The management continues to see the IP-led business as a strong growth driver for the company and has indicated at surpassing the earlier expectations of 20% of overall revenues in the coming years (already contributing 14% of revenues in the last four quarters). -
Valuation: PSL's impressive operational performance and strong growth in the IP-led business has further cemented our positive stance in the company. Going forward, incremental growth in the IP-led business would provide further fillip to the already best-in-class margin profile of PSL. We have broadly maintained our estimates for FY2013E and FY2014E, though we believe there could be a positive upside to our estimates led by an acceleration in the IP-led revenues. At the current market price (CMP) of Rs428, the stock trades at 9.5x FY2012E and 7.9x FY2013E and FY2014E earnings respectively. We maintain our Buy rating on the stock with a price target of Rs552.
VIEWPOINT ACC Strong earnings growth, fails to meet Street's expectations Key points -
Earnings marginally below the Street's estimate: In Q3CY2012 the earnings of the stand-alone business of ACC grew by 51.5% year on year (YoY) to Rs253.9 crore. The earnings growth was healthy driven by higher revenues and margin expansion due to strong cement realisation (19.8% YoY). However, the quarter's net profit was marginally lower than the Street's estimate mainly on account of a higher than expected freight cost on a per-tonne basis (up 54.4% YoY) and a lower other income (down 46.2% YoY). -
Revenue growth supported by strong cement realisation: Despite a 5.1% decline in the volume YoY to 5.4 million tonne the net sales of the company grew by 13.7% YoY to Rs2,444.5 crore. The revenue growth was driven by a 19.8% growth in the average blended cement realisation YoY to Rs4,527 per tonne. The performance of the company in terms of volume growth was disappointing when compared with that of the other pan-India players like Ambuja Cements and UltraTech Cement mainly on account of ACC's relatively higher presence in the southern region where the demand environment is unfavourable. -
Strong realisation results in margin expansion: The operating profit margin for Q3CY2012 improved by 754 basis points YoY to 17.8% due to an increase in the cement realisation. On the cost front, the increased freight cost resulted in a 9.7% increase in the overall cost of production on a per-tonne basis. However, a sharp increase in the cement realisation offset the cost inflation and the EBITDA per tonne of cement improved to Rs805 as compared with Rs387 in the corresponding quarter of the previous year. -
CCI has imposed a penalty of Rs1,147 crore; ACC filed appeal against the CCI order: The Competition Commission of India (CCI) has imposed a penalty on around 11 cement companies for forming a cartel and managing cement prices at higher levels. As per the CCI order, ACC will have to pay Rs1,147 crore. However, based on legal opinion the company has appealed against the order before the Tribunal and accordingly not made any provision for the CCI penalty. -
Overhang in terms of royalty payment to parent company: According to media reports, ACC might have to shell out 2% of sales as royalty to its Swiss parent, Holcim. Its sister concerns like Holcim Indonesia, Holcim Philippines and Siam City are already charged nearly 2% on their annual sales as trademark fees and fee for access to technology and participation in worldwide exchange of ideas. If implemented, the move will be negative for the company. Outlook and valuation
The management expects the domestic demand for cement to improve in the coming months and help the company to deliver a better volume growth. The company is also taking necessary steps to improve its operational efficiency. As per consensus estimate, the earnings of the company are expected to grow at a compounded annual growth rate of 9% over the next couple of years. In terms of valuation, the stock is currently trading at enterprise value/tonne of $163, which is lower compared with that of the other pan-India players like Ambuja Cements and UltraTech Cement. At the current market price the stock is trading at a price/earnings of 17.3x discounting its CY2013 earnings estimate (Bloomberg consensus estimate). The stock is not under our active coverage and we do not have any rating on it. We see better value in the mid-cap cement companies as the valuation gap between the large-cap cement companies and the mid-cap cement companies has expanded increasing the upside potential of the mid-cap cement companies .
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