Buy Persistent Systems; target Rs 760: Reliance Securities

Reliance Securities has a buy call on Persistent Systems with a target price of Rs 760.

The current market price of Persistent Systems is Rs 607.80.

Time period given by the brokerage is one year when Persistent Systems price can reach the defined target.


Investment rationale by the brokerage
Appointment of new MD – a key stock trigger: Management highlighted an important development i.e. appointment of a new MD, as Persistent will be required to separate the positions of Chairman & MD (both currently held by Dr. Anand Deshpande). New MD will be an external candidate with a high sales focus, which we believe is critical in view of frequent disappointments and volatility on earnings over the past few quarters, owing to which the stock trades at a fairly low PE multiple of 11.3x FY20E EPS.

Improved business focus – positive sign: Persistent’s broader strategic focus is on software product development with major industry verticals including Healthcare and Life Sciences (LS), BFSI and Industrial & MFG. Its vision is to build a ‘software-driven organisation’ with a broader objective to drive results for clients through 4 initiatives - Data, Artificial Intelligence (AI) & Machine Learning (ML), Cloud, Security and Internet of Things (IoT). For building expertise, the partnership route is preferred - in Healthcare, Persistent has partnered with Partners Healthcare, a not-for-profit patient care entity, while in BFSI, it has partnered with Mambu, a cloud-native core banking solution provider.

Healthcare & life sciences - focus on digital healthcare: Healthcare & LS is a US$3trln industry in the US. Persistent is focusing on digital healthcare with a focus on Analytics, AI and Intelligence, giving actionable insights to clients from Big Data. Salesforce is Persistent’s core platform partner. It has formed a CoE with Partners Healthcare in the areas of preventive and chronic healthcare. Persistent is developing a healthcare platform with Partners for clinical research. The revenue model is licence-cum-services (80-90 per cent services) with revenue shared with Partners for licence, while 100 per cent of services revenue will come to Persistent. In Sept’18, Persistent acquired Herald Health, a company that has developed IP in providing user-friendly tools. This is another step to go in line with its Healthcare strategy to drive analytics, AI and Intelligence to drive improved client focus.

BFSI – digitally native: In BFSI, Persistent enables clients to build digital products and automate banking operations. One of the IT firm’s clients, ANZ gave a perspective on the work Persistent has done in Trade Finance, essentially digitising data of multiple forms containing the same data from different authorities. Other businesses like retail banking and lending are also looking at driving digital disruption. Persistent has partnered with Mambu, a cloud-native core banking solution provider.

Outlook & valuation: We are enthused with a renewed focus on specific growth areas and verticals, and appointment of new MD, which could be a key stock driver. We understand quarterly fluctuations are inherent in an IP-based business like this. However, we would prefer to see improvement in revenue predictability, which has not been the case over the past few quarters. Valuation at 11.3x FY20E EPS is one of the lowest in the industry. We maintain our BUY recommendation on the stock with a Target Price of Rs760.