Snapshot Persistent Systems Ltd (PSL) was incorporated in 1990 and is engaged in the outsourced product development (OPD) business. It caters to the software product companies and provides assistance across the lifecycle of product development. In addition, they are one of the front-runners in hot areas of cloud computing, analytics, collaboration and telecom mobility. Investment Rationale Deep focus in niche area of OPD Offshore OPD market is growing at a CAGR of 9.1% and is expected to touch $16.1 bn in 2013 as per IDC. PSL is a pure OPD vendor having expertise across the value chain of product development and thus has a competitive advantage. Forerunner in newer technology PSL is one of the pioneers in giving services in new technology areas like Cloud, Analytics, Collaboration and Enterprise Mobility. All these are hot buzzing segments gaining specific priorities amongst mid-sized business houses worldwide as per IBM study. PSL derived almost 40% of its revenues from these emerging areas in FY11. Growth in IP led revenues PSL engages almost 4% to 6% of its employees in R&D. This has resulted in the company owning 14 IP’s (Intellectual Property) currently and many are in pipeline. We expect the share of IP revenue to increase to 17% in FY13E from 8.8% in FY11. This would result in the expansion of EBIDTA margins by 60 bps in FY13E. Growing in a slow growth environment PSL focuses on non-BFSI segment which currently is under chaos in the US and European countries. PSL’s focus in the telecom, Life sciences and Infrastructure segments cushions it from the Global slowdown. Valuation & Recommendation PSL, over the years has built a differentiated model focusing only in the OPD business and is investing heavily in the upcoming areas of technology. The next growth for the company would start coming from the IP led revenues where it would have a shared risks and revenue model on the pay per use concept. Amidst fierce competition from the bigger players, supply-side pressures and gloomy external environment, we believe PSL would emerge as a winner led by good visionary management. At CMP, PSL is trading at 9.7x and 7.8x its FY12E and FY13E expected earnings. We assign a 12x target P/E for FY12E earnings and arrive at a target price of Rs. 387 and assign a BUY rating on the stock.
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