Investor's Eye
[November 27, 2013] | | |
| Summary of Contents
STOCK UPDATE Persistent Systems
Recommendation: Hold
Price target: Rs950
Current market price: Rs872 Maintain Hold, with a revised price target of Rs950 We recently interacted with Rohit Kamat, chief financial officer (CFO) of Persistent Systems Ltd (PSL), to understand the current state of the business environment and also touched upon the upside opportunity to the margin profile of the company in the mid to long-term period. -
The management's comments on the demand environment continues to remain positive, backed by a secular cyclical recovery in its largest geography (US - 85% of its revenues) and a larger acceptability of emerging technologies - SMAC (social, mobility, cloud and analytics), more so on cloud and mobility (majority of PSL's SMAC revenues are attained from these two areas) and also strong momentum in the intellectual property (IP) led revenues, which comfortably places PSL to surpass the upper end of the Nasscom growth expectations (14%) for FY2014. More importantly, the management has more than 60% business visibility for FY2015E, given the confidence in spending from its larger clients. -
On the margin side, the management indicated several levers that will come into play for further improvement in the margin profile like utilisation, selling, general and administrative (SG&A) leverage and support from currency tailwinds. The management indicated at a margin corridor of 24-25% for the next two quarters. The company will continue to maintain best in class margins profile in the mid-cap information technology (IT) space. -
Since our initial coverage report on PSL dated September 28, 2012 at Rs414, the stock has already appreciated by close to 110%. Our conviction in the stock remains intact and we also admire the long-term growth potential of the company, which is driven by its strong domain expertise and quality management bandwidth. However, in the last one year the price-earnings (P/E) ratio has already been re-rated from 8.6x to 12x currently, which captures most of the positives. On the back of our interaction with the management on the earnings visibility, we have increased our earnings estimates for FY2014E and FY2015E and also introduced our FY2016E estimates. -
With a 24% earnings compound average growth rate (CAGR) over FY2013-2016E, strong cash balance (Rs131 per share) and lack of high quality investment options in the IT mid-cap space, barring a few, we believe PSL will continue to enjoy patronage among the long-term investors. Though, on the back of limited material upside in the near to medium-term, we maintain our Hold rating on the stock and roll over our target PER multiple to November 2014, and arrive at a revised 12 month price target of Rs950. Max India
Recommendation: Buy
Price target: Rs296
Current market price: Rs212 Max Life continues to outpace its peers Key points -
Max Life - going strong: As per the recent monthly business figures (of life insurance) released by the Insurance Regulatory and Development Authority (IRDA), the private players have posted a growth of 1.6% in annual premium equivalent (APE; collected premium adjusted for single premium policies) during H1FY2014. Max Life Insurance (MLI; subsidiary of Max India and major contributor to value in Max India's stock) has once again outpaced the industry growth rates and reported a sturdy growth of 11.6% in APE's during H1FY2014. Consequently, it has further strengthened its place among the list of top 5 private insurance companies in India. The performance is in line with the Max India's management guidance of over 10% growth in APE's in FY2014 and also striving to push the conservation ratio to about the 85% level. Focus on traditional products, lower dependence on non-par products coupled with a strong distribution channel contributed to the higher than industry growth. The company has rolled out an agency new work system to 77 branches which has enhanced the agent productivity. -
Operational efficiency to partly mitigate margin pressures: Max India's operational parameters like expense ratio (19.4% in Q2FY2014), conservation ratio (79% in Q2FY2014) are amongst the best in the industry, which will help to absorb margin pressures under the new regulatory regime. The company's bank assurance tie-ups (Axis Bank, Yes Bank) coupled with high productivity agency channel is likely to support growth and cost optimisation. -
Stability returning to the sector; positive for Max India: With the implementation of guidelines for traditional products, the life insurance sector has almost completed the full circle of regulatory reforms. The IRDA has given approvals for most of the products and expects to the company to swiftly clear the pending products which indicate a gradual return of stability in the sector. MLI has got the IRDA approval for about 80% of the products and therefore is likely to sustain the momentum. In addition, the healthcare business of Max India is showing strong tractions and may be another driver for expansion in revenues. Currently, the stock is trading at reasonable valuations of 1.5x FY2013 embedded value. We maintain a Buy rating with a price target of Rs296.
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Regards,
The Sharekhan Research Team | |
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