>Persistent Systems (HSBC)

Initiate OW(V): Superior growth momentum

■ Uniquely positioned to benefit from growth in next-generation technologies; we expect industry leading growth to continue

■ Well established relationships with leading global technology companies offer increasing wallet share

■ Initiate OW(V) and TP of INR500, based on 13x PE FY12e

Superior growth outlook. Persistent, a recently listed company focused on offshore product development (OPD), is well positioned to benefit from the expected growth in next-generation technologies such as cloud computing, enterprise mobility and collaboration tools. The company has delivered industry-leading top line growth over the last five years (c42%) and we conservatively assume 23% annual sales growth over the next three years.

Relationships with global technology companies. Persistent’s clients include 37 companies with revenues in excess of USD1bn (with average R&D spend of c18%). This marquee client base gives it an early mover advantage of working with companies in high growth technologies and significant scope for cross-selling. We expect Persistent’s market share of the Indian OPD market to grow from c13% in 2009 to c15% by 2013 (from c8% in 2006). The outlook is also bright for its start-up clients (c25% of revenues), judging by the upbeat mood of the US venture capital market. Even if the macro-economic environment weakens, the smaller clients seem to be well capitalised as shown by resilient revenues from start-ups in FY10.

Forecasts and valuations. We forecast FY11-13 CAGR of 23% for revenue, 26% for EBIT and 18% for EPS (note that EPS growth will dip in FY12 when tax exemptions expire but bounce back thereafter). The stock is trading at 9.7x PE on our FY11e EPS. As earnings growth continues to surprise, we believe the stock should re-rate and trade at a premium to its peers. Initiate OW(V) with a target price of INR500, based on 13x PE FY12e EPS.

Risks. USD/INR currency, execution and macro-economic risk.

To read the full report: PERSISTENT SYSTEMS