Persistent Systems Banks On Artificial Intelligence, Cloud To Drive Growth

Persistent Systems Ltd. plans to focus more on artificial intelligence, cloud, security and Internet of Things as growth slows in its traditional software services business.

It’s looking to transform into a technology company providing new-age digital services, the management said at the company’s analyst meet. The Pune-based firm is optimistic about newer technologies like blockchain and machine learning.

Persistent Systems said it will continue to invest in Accelerite, its U.S.-headquartered subsidiary offering services like big data, cloud, security, IoT, among others. It reiterated its outlook to improve margin by around 100 basis points in FY19 on constant-currency basis.

“For a firm that was early in identifying the digital opportunity and signed a promising IoT deal, seeing growth slow down to single digits when larger peers are accelerating is a sign of severe execution weakness,” brokerage firm CLSA wrote in a note after Persistent Systems posted its earnings for the September-ended quarter. Persistent Systems will have to find a different source of differentiation and should be viewed as another midcap IT firm with an execution problem, it said.

One of the biggest investor concerns for the company has been slower growth compared to peers despite an early start in digital services, Surendra Goyal, an analyst with Citi, said in a note. The management, however, remains optimistic on execution and improvement in quarters ahead.

The software services company said it will focus on verticals of healthcare and life sciences, banking, financial services and insurance and industrial and manufacturing. It also plans to build its own Internet Protocol and partner with other global companies to drive growth. Persistent Systems, which is looking to close a few acquisitions, said it will take a call on cash on its books post the third quarter.

The changes could be positive over the longer term but could lead to attrition related risks in the near term, said Morgan Stanley analyst Gaurav Rateria, adding that the risk-reward favorable and expects a gradual recovery in revenue growth but strong performance on margins. Despite niche and differentiated service offerings, Rateria said, the company faced issues on sales execution and a key challenge remains client mining.

However, Sandip Agarwal of Edelweiss believes that Persistent is capable of riding out these execution challenges.

The company said that the new managing director will be appointed at the next board meet. Anand Deshpande, the incumbent, will step down as managing director while retaining the post of chairman of the company. According to SEBI rules, companies are required to split the positions of chairman and managing director by April 2020.

Persistent Systems has a “Buy” rating from 73 percent of the analysts covering the stock and the Bloomberg consensus target shows a potential upside of 25 percent on the stock over Dec. 11 closing. The stock trades at a valuation of 11 times its FY20 price to earnings, which according to Citi, Edelweiss and Morgan Stanley is cheap.