Expecting healthy growth this year: Anand Deshpande, Persistent Systems

The market outlook is very good, says Anand Deshpande, MD & CEO, Persistent Systems. In an interview to ET Now, Deshpande also states that his company is very upbeat on the top line side of things. Edited excerpts:

ET Now: Firstly your first quarter has been little bit mixed. On the top line, what was the contribution from IBM-IOT alliance and from the earlier acquisitions of products as well?

Anand Deshpande: Overall, our revenue this quarter was 104.76 million which is a 4.3% quarter on quarter growth and at 33% year on year growth. In rupee terms, it was Rs 701 crore, which is a 40.2% year on year and 3.6% QoQ. I think most of the growth was actually in line with or is pretty good. We have had a very good quarter.

The revenue growth happened, of course, because of the IBM alliance that we had announced in March and also overall growth in some of the healthcare projects that we are doing around digital transformation and or partnership with Salesforce.

The market outlook actually is very good. We have had very good quarter with good tailwinds in terms of customers trying to tell us what they are looking at for the rest of the year.

Overall, very positive and upbeat on the market and the top line side of the things. On the bottom line side, quarter on quarter there is serial decline in terms of the profit margins that we share.

There are several reasons for that, one of them is of course the visa cost that factored in during the quarter.

Last quarter was on the Indian gap. If you look at either Indian gap to Indian gap or India is to India we will see a positive number on both if you look at the same accounting standard across the quarters.

In general, Q1 is a lower quarter for us as compared to the Q4 so that also contributes to a little bit of a decline in revenue.

If you look at it, year on year that decline in revenue seems or rather in profit it seems like a fairly large dip but that is in account for the IBM alliance where we have already guided the market that that is going to cost us about 2% in profitability on a yearly basis for the first year, so that is really the impact that you see on the profitability if you compare year on year.

ET Now: Some accounts and services, ISV segment are seeing a bit of pressure. But do you think these will get offset in quarter two?

Anand Deshpande: See overall we have already planned the fact that some our services accounts are going to be under pressure and challenge which is in line with what you hear from the other peers in the IT industry. However, we have anticipated this for a while and we have been investing in digital and next generation technology which should see significant growth quarter on quarter.

We have also invested in IP revenues which is now at 28% which should have when you look at it quarter on quarter but on a yearly basis, we should see fairly good growth on the IP revenue both coming in from the IBM alliance that we have announced around IOT and also some of the acquisitions of products we have done with Citrix and also with the one that we have from Aepona which is the Intel-IOT platform. So the IP revenue component should grow.

The enterprise component has done well and will continue to grow. The services revenue will be under challenge but that is a known thing and we have been working on that for the last couple of years.

ET Now: So besides the 200 bps diluted the impact of IBM alliance on margins this year what could be the impact of the wage hike in the second quarter and how much of this will be overcome through levers in hand?

Anand Deshpande: I think overall we have enough in the system to help offset most of the wage hikes. There will be a 3% cost of increased wages if you look at it on a quarter on quarter basis, however, when you look at that top line growth that we are anticipating some of the IP returns that we are expecting we believe that we can managed some margins to be comparable to what we had during this quarter.

It is still very early to state the margins at this time but we have enough happening in the business and top line growth will make up for the dips in margin side you would see because of wage hike.

ET Now: We already know how significant the IBM alliance is to your revenue growth this year what about the other verticals because we would like a sense of what kind of growth that you are working towards late teens in dollar terms?

Anand Deshpande: We have already guided the market that the IBM alliance that we have done last year is going to contribute roughly 15% of last year’s growth in terms of numbers almost $50 million roughly in terms of what the contribution of the IBM alliance is going to be for the year.

In addition to that we do expect fairly good year during the year in terms of the growth that we are expecting on digital and some of the IP revenues that we had acquired at the end of last year.

So this year’s growth should be pretty healthy, we do have a profit challenge that will come because of the IBM alliance that we have already shared with the market but most of that has already been factored in into this quarter and last quarter. You will see sustained improvement in profitability as you look at it year on year basis.

One thing I must point out is that if you look at our IP revenue now that contributes to almost 28% of our revenue and in that business typically the serious quarter on quarter growth rates are not the best measure for looking at IP.

If you look at it over a three-four quarter period at a time you will find that the IP revenue and the overall growth is going to come through some of the IP revenues. The profitability, when you get a good quarter on IP usually good but, however, if the quarter looks bad you will have impact on profitability.

Instead of looking at just as a quarter on quarter company if you look at this is a long term revenues and profits you should see long term benefits and that is quite evident if you look at our last four quarters as well.

ET Now: Top client growth is good but dependency as high as 18% has seen the Q1 revenue contribution so how much enhancement do you see, how are things looking amongst the other top 10 buckets?

Anand Deshpande: So, overall our top client numbers has definitely gone up if you look at it year on year and part of the reason is this IBM alliance that we did which is causing the top client number to go up.

We do see good growth in the accounts so you will see some more enhancements on that; that said we have very good results on some of our other customers as well those customers who generate our top revenues they have all gone up and that is as per a plan that we have where we are focusing on a few customers where we want to build executive and long term relationships.

So if you look at our numbers this year as compared to what they were last year I think the situation that we are in is very healthy and we made changes in the business and those are paying along. So I am not overly concerned about the concentration of the top client at the moment.

ET Now: Analysts are pencilling a 20 to 25% revenue growth with EBITDA margins of 16-17% are you confident of these numbers?

Anand Deshpande: Again, I do not want to comment specifically but I think the analyst are always very knowledgeable about what we do so I am sure I will leave it to them but all I can say is that the business is very healthy, we have made certain investments which are going to pay off in the long term.

Some of the markets that we are focusing on digital transformation and IoT are happening markets in the overall area, we have had challenges in the past in terms of our access to customers.

Some of the partnerships that we have set up have set us up very well for getting this access to customers, technology was never an issue with Persistent. I think we have invested and built out quite a few things so I think we are moving along a plan and yes we should see healthy growth on top line and in a year’s time you will see the contribution on profits as well.