Persistent Systems: Mid-Tier IT Services Firm at Discount

Amit Chander of Baring Private Equity Partners India presented his in-depth investment thesis on Persistent Systems (India: PERSISTENT) at Asian Investing Summit 2019.

Thesis summary:

Persistent Systems is a mid-tier IT Services company. The company has a revenue of USD 471 million. The company previously outperformed market growth, and reported higher profit margins than peers. The company has a five year average ROE of 25%. To benefit from shift in technology spend towards digital (USD 180 Billion market growing at 18.5%), the company has been investing in digital through acquisitions, alliance (with IBM) and organic efforts. As of FY18, the digital segment of the business grew by 43%, with 21% of its revenues now deriving from that business. Growth has slowed in recent quarters, leading to the stock price falling 40% and valuation to 6.4x EV/EBITDA on March 2019 earnings (adjusted for USD 185 Million cash, high cash flow generated from operations, nil debt). This is a 50% discount to its peers.

The company recently announced Chris O’Connor as the new CEO. Chris is a good fit as he was Head of Sales for the Internet of Things business at IBM (forefront of Digital). The current CEO owns 30% of the company. The company also announced a buyback at INR 750 (approximately 20% premium), with the anticipation of more buybacks in the future. There is low risk in the new leadership not being effective. The five- year base case calculation with modest growth, margin and multiple assumptions (11% Revenue, 17% EBITDA growth, 8.0x EV/EBITDA) is for 2.4x money.

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About the instructor:

Amit Chander is a Partner with Baring India – a spin out from ING Barings with USD 750 Mn in assets under management. He manages investments for the firm in public and private companies across multiple sectors (Healthcare, Technology and Financial Services) and over the last 14 years has built a strong performance track record having led investments of ~USD 200 Mn with top quartile returns and outperforming sector benchmarks.

Amit’s investment approach to pick multi-bagger stocks is predicated on combining top down research in focus sectors with bottom up fundamental analyses of companies and assessment of management teams for alignment of interest with minority shareholders. Portfolios are then constructed and optimized from a risk-return perspective from pools of such companies using value investing principles. He has been able to implement this approach systematically across cycles to generate a fairly distributed performance with minimal loss ratio. Amit was profiled in 2014 as among Top 5 Rising & Successful Fund Managers by leading Indian business daily Economic Times. As company spokesperson Amit also represents the firm in industry events and is quoted in media as a subject matter expert.

In his prior roles, he worked in financial advisory and business consulting with leading Indian and multi-national companies. As a manager with the world’s fourth largest and India’s most influential credit rating and policy advisory company, CRISIL (a subsidiary of Standard & Poor’s), he was involved in advising clients on equity divestments, financial restructuring, and business strategy. Subsequently he worked with Accenture – a leading global management consulting, technology, and outsourcing services company where he assisted clients on implementing technology-led large-scale business transformations ranging from e-governance to e-commerce.

Amit is an Engineering graduate from the Indian Institute of Technology (IIT), Delhi where he received the Director’s Silver Medal for being Rank #1 in his Department; he also holds an MBA from the Indian Institute of Management (IIM), Lucknow.