Persistent System Limited

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ANALYSIS OF PUBLIC ISSUE OF PERSISTENT SYSTEM LIMITED

|Sr No |Particulars | |1 |Executive Summary | |2 |The Company  | |3 |Salient Features of Persistent Systems Ltd. Public Issue | |4 |Financial Planning at Persistent Systems Ltd. | |5 |Valuation of Persistent Systems Ltd. Public Issue | |6 |Timing of Persistent Systems Ltd. Public Issue | |7 |Assessment of Alternate Modes of Raising Capital for Persistent Systems Ltd. |

Executive Summary

➢ Persistent Systems Ltd. (PSL) was promoted by technocrats Dr. Anand Deshpande and Mr. S. P. Deshpande in 1990 as an outsourcing software product development company. The company provides product development services across the entire value chain of the product development to independent software vendors and telecom industry. The company has around 220 customers, of which top 10 account for around 41% of its revenues.

➢ Outsourced software product development (OPD) is an emerging segment in the outsourced software industry. OPD companies[pic] build software products for their customers. The US is a major market for OPD companies.

➢ IDC which defines R & D / PE services as the taking over of the R&D of a product company’s value chain (in part or full) by a third-party services organization, forecasts a 5-year CAGR of 14% for R & D / Product Engineering (PE) services, size of which will reach an estimated $65.7bn by 2013.

➢ PSL is a leading player in outsourced software product development services, with a track record of almost 2 decades. It designs, develops and maintains software systems and solutions, creates new applications and enhances the functionality of existing software products of customers. Over the last five years, the company has contributed to over 3,000 product releases for its customers.

➢ OPD services are differentiated from IT services in terms of client requirements, and involvement of time and money. As client requirements are fixed in IT services, time and money spent thereon are variables while it is the reverse in OPD services.

➢ The company’s hold on the niche product category is evident from its revenue growth at 40% CAGR over the last 3 years, which outperforming the leading IT players in India.

➢ PSL’s clientele comprises of several global software companies and fast-growing early-stage companies. Around 1/6th of its customers (37 nos.) have annual revenues of over $1bn. ➢ We view the company’s client and geographical concentration as concerns. Its top 10 clients account for 41% of its revenues while the US contributes 87% of total revenues. We note that the company could not remain insulated from problems in the US during FY09, since it reported a reduction in EBITDA margin and bottomline in spite of reporting topline growth. However, the company has bounced back in the period of 9 months to December 31, 2009, with margins returning closer to earlier levels, and robust bottomline in spite of increased tax liability.

➢ Another peculiarity of the company’s business model is its dependence on investments in gross block. Revenue growth is largely driven by investments in development facilities. Of its proposed investment of Rs175Cr in development facilities, it has already deployed Rs99Cr. With the balance Rs76Cr to be deployed primarily till FY11, we believe the company may see tremendous revenue growth in FY11 and FY12. Again, with...
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