Persistent Systems- Performance highlights: Angel Broking,

For 2QFY2012, Persistent Systems (Persistent) reported numbers that were almost in-line with our as well as street expectations on the revenue front; however, it outperformed the street as well as our expectations on the operating and profitability front. Though management has maintained its PAT guidance for FY2012 of having it at least flat yoy despite the surge in tax rates to 31% from 7% in FY2011, but its commentary has turned highly cautious. Persistent is into pure-play offshore product development (OPD), which is highly discretionary in nature and, thus, poses a huge risk for the company if any slowdown kicks in the economies. We recommend Neutral on the stock. Quarterly highlights: For 2QFY2012, Persistent reported revenue of US$51.5mn, up 3.1% qoq, majorly led by volume growth. In INR terms, revenue came in at `238.2cr, up by whopping 6.4% qoq. Despite giving wage hikes, EBITDA margin grew by 112bp qoq to 19.0%, aided by higher INR revenue growth due to qoq depreciating INR, lower SG&A expenses and wage hikes not applicable for the full employee base. PAT came in at `32.4cr, aided by higher other income due to tax-free dividend of `1.2cr, which led to lower tax outgo as well. Outlook and valuation: Persistent, due to its niche focus on OPD, is exposed to a high amount of risk if any slowdown kicks in the developed economies. This, along with the cautious commentary by management, poses a downside risk to management’s guidance of 29% yoy revenue growth in FY2012. Thus, we have trimmed our USD revenue growth estimates for FY2012 to 24.1% from 30.0% earlier. Over FY2011-13E, the company is expected to record USD and INR revenue CAGR of 18.9% and 19.4%, respectively. On the EBITDA margin front, we expect margin to dip to 19.9% for FY2012 and remain at 20.0% in FY2013 from 20.4% in FY2011, as we do not expect higher growth in high-margin IP-led revenue (due to its lumpy nature). Thus, over FY2011-13E, we expect the company to record EBITDA and PAT CAGR of 18.2% and 2.5%, respectively. We value the stock at 9x FY2013 EPS, which gives us a target price of `330, and recommend Neutral on the stock.