CRISIL has assigned a CRISIL IPO Grade ‘4/5′ (pronounced ‘four on five’) to the proposed public offer of Persistent Systems Ltd (PSL). This grade indicates that the fundamentals of the issue are above average, in relation to other listed equity securities in India.

The grading reflects the company’s strong position in the outsourced product development (OPD) space by virtue of its ability to provide large scale services in specific parts of the software product development life cycle, such as software development, testing and support, and provide end-to-end product development services on a relatively smaller scale. The former is used by global software companies like Microsoft, Agilent, Covad, etc, while the latter is used by small and medium-sized software product companies who do not have the scale to set up captive operations in India. This has given the company a diverse customer base.

The grading also reflects the strong corporate governance architecture in the company, in part due to the presence of eminent independent directors on the company’s board for the past six years. The grading is tempered by the fact that the margin compression that the company has seen over the last three years is likely to continue in view of currency movements and wage inflation, as well as increased competition from IT Services companies such as Wipro and TCS, as a consequence of a likely slowdown in their traditional revenue streams. The possible withdrawal of tax concessions would also adversely impact the company’s return on equity after 2008-09.