Persistent Systems: Better growth expectations in FY14

MUMBAI: The stock price of Pune based Persistent Systems has fallen by over 6% in the six trading sessions since its quarterly results on January 28. It came under selling pressure after the company reported a sharp sequential erosion in operating margin due to disproportionate increase in costs relative to sales growth. The management expects to recover profitability in the current quarter as the number of new employees, which had increased the cost in the December quarter, will now be billed with new projects coming on stream.

Persistent Systems, which offers product engineering solutions to clients largely in the North American market, reported 7.4% drop in the operating profit before depreciation (EBITDA) at Rs 82.4 crore for the third quarter from the previous quarter. The fall was despite a modest 1.9% sequential increase in revenue at Rs 333 crore. This resulted in a 260 basis points drop in EBITDA margin at 24.7%.

Nitin kulkarni, chief operating office, attributed the sharp fall in profitability to increased headcount that resulted in higher employee cost, and higher selling and administrative (SG&A) costs. "Expansion of our office in the Special Economic Zone and higher provisioning for doubtful revenue increased SG&A costs during the quarter," he said.

On the business front, the company continued the momentum during the December quarter. It added 20 new clients. The traction has helped it to restore the client base. After dipping to 273 a year ago from 302 in FY11, it has once again crossed the mark of 300. At the end of December, the total number of active clients was 309.

Social networking platforms and cloud computing are key growth drivers in the coming quarters, according to Kulkarni. Persistent has added over 350 fresh employees, which reflects the anticipation of better growth ahead. "Billing rates are stable and our clients are upbeat. FY 14 looks better than FY13," he said.