 "Fifteen per cent growth for FY15 possible, but a bit hard: Anand Deshpande")
The third quarter numbers (October-December) for the Indian IT services have always been rather slow and tepid in terms of growth. But some of the mid-cap firms have gone against the tide.
After KPIT Technologies and Zensar Technologies saying Q3 has been a growth quarter, Pune-headquartered Persistent Systems too reported better numbers for the quarter. Anand Deshpande, CMD & CEO of Persistent Systems in an interview with Shivani Shinde Nadhe talks about growth drivers for this quarter, client spends in next few months and digital uptick. Edited excerpts…
Growth of 4.2 per cent in US dollars is good from a Q3 perspective what were the key drivers?
We had a flat Q1 growth, since then we have been pushing everyone to get good growth numbers, and I think that shows in this quarter. We have been trying to push the aspiration levels within the company, we are seeing good pipeline. And the overall activity level is very positive.
Where do you see growth coming from in the next few quarters?
If you break our business, our first line of business is the traditional business—outsourced product development. For the last six to seven quarters that business had been slowing down. But over the last 2-3 quarter we have seen some positive movement in this purely by better management and mining the client. One good positive today is that clients are decisive today, unlike 2008-09 where decision making was in a flux.
The second part of our business is about creating partnerships with technology players to get into the enterprise landscape. There we have been investing in sales and marketing. The third are of focus is going to be how we can sustain ourselves in the enterprise segment. We have created Enterprise Digital Transformation segment and now we want to take it to the next level.
Analysts are of the opinion that growth is coming at a cost of margins at Persistent. Do you agree?
The street looks at EBIDTA level when they talk to margins, but we prefer to look at profit after tax and profit before tax. And we have tried to maintain PBT at 20 per cent and PAT at around 15 per cent. The reason for this is, EBIDTA has an impact of currency movement. As for the impacts on margins this quarter, we had a one-off due to high employee related expenses. Primarily due to gratuity and the second employee related cost was, an ESoP fund that we have created for employees. Third impact was additional marketing cost.
The top client segment has seen drop in revenue. Comment
This client has been going through a challenging phase. They have been restructuring and refocusing on their business strategy and hence some of the units that we were doing business with saw some cuts. We will continue to see some cut in spends from them as they look at exiting from some projects/business units. But we see this as an opportunity too. As we may take over this business or do a revenue share split with them.
If you look around some of the large ISVs across the globe are restructuring as they align themselves to the changing technology changes.
Do you think the 15 per cent growth target for FY15 is achievable?
I think we will do better than Nasscom guidance (the industry body recently said that the industry may meet the lower end of its growth guidance of 13-15 per cent). We need to do 10 per cent in growth sequentially to be able to do 15 per cent growth. I do not think its impossible. It's possible but a bit hard. What makes me think its possible is the level of activity I see in the market, especially with growth back in the US and our ability to address them.
Your IP lead business grew just about 1.2 per cent q-o-q. Do you think the target of making IP revenue 25per cent of the firms revenue base is still viable?
The IP business had impact because of the slowdown in our largest client. But I think it is possible for us to reach that number. We are looking at acquisitions and hence it will grow.
We have a team in place that looks at opportunity and at any given time they have 10-15 options. But things did not materialize this time around.
A lot of ISVs are planning to close down some project or a business unit abd we are tracking that closely, and in talks with several of our clients. But this generally takes time. The second area of acquisition that we are looking is for capabilities in front end management. As we enter into the enterprise space we will need a lot of front-end investment. So any company that can give us this capability will be an opportunity.
Is there a number in terms of acquisition target you are looking at?
We do not have a number we have a strategy. In terms of finance we are comfortable. We have cash reserve of Rs 800 crore, we have option of using stocks and we are comfortable borrowing too.
After KPIT Technologies and Zensar Technologies saying Q3 has been a growth quarter, Pune-headquartered Persistent Systems too reported better numbers for the quarter. Anand Deshpande, CMD & CEO of Persistent Systems in an interview with Shivani Shinde Nadhe talks about growth drivers for this quarter, client spends in next few months and digital uptick. Edited excerpts…
Growth of 4.2 per cent in US dollars is good from a Q3 perspective what were the key drivers?
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The third quarter is generally a tough quarter due to furloughs and vacations, but we have done well. Our services revenue grew 4.9 per cent quarter-on-quarter, so this is clearly not a one-off or due to some IP led deal that ramps ups the numbers.
We had a flat Q1 growth, since then we have been pushing everyone to get good growth numbers, and I think that shows in this quarter. We have been trying to push the aspiration levels within the company, we are seeing good pipeline. And the overall activity level is very positive.
Where do you see growth coming from in the next few quarters?
If you break our business, our first line of business is the traditional business—outsourced product development. For the last six to seven quarters that business had been slowing down. But over the last 2-3 quarter we have seen some positive movement in this purely by better management and mining the client. One good positive today is that clients are decisive today, unlike 2008-09 where decision making was in a flux.
The second part of our business is about creating partnerships with technology players to get into the enterprise landscape. There we have been investing in sales and marketing. The third are of focus is going to be how we can sustain ourselves in the enterprise segment. We have created Enterprise Digital Transformation segment and now we want to take it to the next level.
Analysts are of the opinion that growth is coming at a cost of margins at Persistent. Do you agree?
The street looks at EBIDTA level when they talk to margins, but we prefer to look at profit after tax and profit before tax. And we have tried to maintain PBT at 20 per cent and PAT at around 15 per cent. The reason for this is, EBIDTA has an impact of currency movement. As for the impacts on margins this quarter, we had a one-off due to high employee related expenses. Primarily due to gratuity and the second employee related cost was, an ESoP fund that we have created for employees. Third impact was additional marketing cost.
The top client segment has seen drop in revenue. Comment
This client has been going through a challenging phase. They have been restructuring and refocusing on their business strategy and hence some of the units that we were doing business with saw some cuts. We will continue to see some cut in spends from them as they look at exiting from some projects/business units. But we see this as an opportunity too. As we may take over this business or do a revenue share split with them.
If you look around some of the large ISVs across the globe are restructuring as they align themselves to the changing technology changes.
Do you think the 15 per cent growth target for FY15 is achievable?
I think we will do better than Nasscom guidance (the industry body recently said that the industry may meet the lower end of its growth guidance of 13-15 per cent). We need to do 10 per cent in growth sequentially to be able to do 15 per cent growth. I do not think its impossible. It's possible but a bit hard. What makes me think its possible is the level of activity I see in the market, especially with growth back in the US and our ability to address them.
Your IP lead business grew just about 1.2 per cent q-o-q. Do you think the target of making IP revenue 25per cent of the firms revenue base is still viable?
The IP business had impact because of the slowdown in our largest client. But I think it is possible for us to reach that number. We are looking at acquisitions and hence it will grow.
We have a team in place that looks at opportunity and at any given time they have 10-15 options. But things did not materialize this time around.
A lot of ISVs are planning to close down some project or a business unit abd we are tracking that closely, and in talks with several of our clients. But this generally takes time. The second area of acquisition that we are looking is for capabilities in front end management. As we enter into the enterprise space we will need a lot of front-end investment. So any company that can give us this capability will be an opportunity.
Is there a number in terms of acquisition target you are looking at?
We do not have a number we have a strategy. In terms of finance we are comfortable. We have cash reserve of Rs 800 crore, we have option of using stocks and we are comfortable borrowing too.