{LONGTERMINVESTORS} Stock Update-Persistent Systems, UltraTech Cement

April 25, 2016   Stock Update Persistent Systems Reco: Buy PT: Rs820 CMP: Rs718 On the right path; maintain Buy   Key points IBM-IoT partnership uplift revenue growth: For Q4FY2016, Persistent Systems Ltd (PSL) has reported a better-than-expected revenue of $100.4 million (vs our estimates of $94 million), with a revenue growth of 12.0% QoQ. The strong revenue performance was driven by 57% (or approximately $10.8 million) Q-o-Q growth in the IP-led revenues to $28.3 million, which was primarily attributed to around $7.2 million revenue from the recent IBM IoT partnership (full quarter revenue booking). The IT service revenues were marginally up by 0.7% QoQ to $72.1 million, driven by volume growth of 0.4% and 0.3% increase in realisation. On an organic basis revenues were up by 4.0% sequentially. Margins performance disappoints, expect to recover in the next six to eight quarters: The gross profit margin (GPM) declined by 310BPS during the quarter on the back of 20.2% Q-o-Q rise in total direct expenses, owing to cost attached with IBM IoT alliance. As a result, the EBITDA margins shrank by 290BPS to 15.9% in Q4FY2016, attributed to 220-BPS effect for IBM investments along with 50BPS for non-recurring expenses incurred during the quarter. However, the net profit for the quarter was up by 4.3% QoQ to Rs80.8 crore, aided by higher other income (up 107% QoQ, led by sale of investments of Rs13.5 crore) and lower tax provision (tax rate was down by 300BPS QoQ). On the operating metrics front, the enterprise revenues were up by 1.8% QoQ after two back-to-back quarters of double-digit growth and revenue contribution from its top client was up by 63.5% QoQ (led by IoT alliance). The net headcounts addition during the quarter was 298, taking the total to 9,264 and attrition level declined by 70BPS to 16.4%. See improved profitability in IBM-IoT alliance over next few years: (1) The management reiterated that IBM IoT partnership will augment around $50-55 million (15% of FY2016 revenues of $352 million) to the company's revenues in FY2017, though the revenue growth will be lumpy (Jan-March quarter will be softest and Oct-Dec will be strongest); (2) Investment in this alliance could affect the company's operating profit margin (OPM) by 200BPS in FY2017 in the worst case, though the management expects a gradual improvement in margins in the next six to eight quarters, once the alliance reaches stable period; (3) The acquisition of two product lines of Citrix was closed on February 20, 2016. The revenue was consolidated for one month during the fourth quarter; (4) Enterprise revenue growth traction remains strong, will bounce back in the coming quarters; (5) Will do more local hiring in foreign geographies, visa cost will be similar to last year; (6) Will move away from low-margin business in traditional space in the coming quarters. Maintain Buy with a price target of Rs820: With legacy business under stress, PSL is rightly building capabilities and investing in the areas of newer technologies and enterprise digital transformation. Though, in the near term there could be volatility in the earnings performance, in the long term, we see a sustainable growth with improved profitability. We continue to remain positive on PSL, and have broadly maintained our estimates for FY2017-18. We have maintained our Buy rating on the stock with an unchanged price target of Rs820.   UltraTech Cement Reco: Hold PT: Rs3,580 CMP: Rs3,277 Weakness in cement prices offsets demand uptick and cost efficiencies   Key points Weak realisation offsets volume and cost benefits: For Q4FY2016, UltraTech Cement (UltraTech) reported a revenue growth of 4.9% YoY to Rs6,435.9 crore on account of capacity additions (6MT added since April 2015) and improvement in capacity utilisation (71%), while weak cement price affected blended realisation (down 8.7% YoY). The savings through lower power and fuel cost (decline in pet coke price and usage of low-cost fuel) was offset by lower realisation leading to decline in its blended EBITDA per tonne (down 9.2% YoY to Rs946 per tonne). Further, lower interest expense and lower tax rate led to the adjusted net income growth of 2.5% YoY. Cement price volatility remains key concern for near term: The eastern region has seen a robust growth in infrastructure and housing demand while the other regions have seen infrastructure spending only with no major improvement in housing and rural demand. The management has guided for 7-8% demand growth for FY2017 driven by infrastructure spend and revival in retail demand after a good monsoon. However, the uncertainty over cement price and increase in the price of pet coke (trading with upward bias, the impact may be felt from Q2FY2017 onwards) will be the key monitorable for FY2017. However, cost efficiency (impact of new grinding and waste heat recovery) and base effect may lead to better operating performance for UltraTech. Maintain Hold with unchanged price target of Rs3,580: The weakness in cement prices over the past couple of months along with weak rural, housing demand and upward price trend in pet coke is likely to pose near-term challenges for the sector. Though UltraTech remains among our preferred picks in the cement sector, due to its leadership position and healthy balance sheet, we see limited upside to our price target and consequently maintain our Hold recommendation. Currently, the stock is trading at an EV/EBITDA and EV/tonne of 13.9x and $194/tonne respectively of its FY2018E earnings. We have maintained our price target of Rs3,580.     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. Regards, Sharekhan Fundamental research team www.sharekhan.com

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