This article is authored by MOI Global instructor Amit Chander, Partner at Baring Private Equity Partners India, based in Delhi.
Persistent Systems is a mid-tier IT services company based in India. It was founded in 1990 by current CEO Anand Deshpande, a first-generation technocrat entrepreneur. Unlike other Indian IT services companies, which were targeting Fortune 500 Enterprises in the US and offering application maintenance and support work, he focused on becoming a partner to technology companies in the US (Microsoft, IBM, SAP) and assisting them in their software product development from India, also referred to as Outsourced Product Development (OPD).
Anand has successfully led the company from a startup to a mid-size IT services player with revenue of USD 471 million in FY2018 and 9,000+ employees in offices across the world. The average ROE of the company for the last five years is ~25%.
Given its vantage point from servicing leading technology companies, it was able to spot the macro of technology spend shifting toward digital technologies earlier than its peers. However, it lacked the sales engine to engage with enterprise customers in their digital initiatives.
To plug this gap, it took a two-pronged approach, where it started acquiring end-of-life, low-priority IT products with a large customer base, giving it ready access to such customers and enabling it to showcase its capabilities by augmenting those products. At the same time, the company started increasing investments in sales and marketing by hiring senior sales professionals who came with requisite background in enterprise sales.
As a result, 21% of revenue comes from digital technologies, and it has 130 enterprise customers. The growth momentum from these initiatives has slowed in recent quarters, which has led to sharp correction in stock prices (down ~40% in January 2019 from 52-week highs). Post a modest pullback, this high-quality business is still valued at 6.4x EV/EBITDA based on March 2019 earnings (adjusted for ~$200 million in cash on the balance sheet). The company generates high free cash flow from operations. On a relative basis, the valuation is a 50% discount to its mid-cap IT peers.
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