Persistent Systems: Investing now to safeguard future

Recommendation: Buy

Target Price: Rs 5330

Analysts of IIFL Capital Services met with Sandeep Kalra, CEO and ED, Persistent Systems (PSYS), before they entered silent period, to understand the company’s overall outlook going into FY24. He reiterated their intention to deliver industry-leading growth in FY23 and FY24. While the macro environment may result in some moderation in FY24 growth vs FY23, the underlying drivers remain intact, and they remain confident to deliver strong growth in FY24. Exposure to hyperscalers is a combination of revenues from selling with and selling to them. Hence, despite slowdown in cloud companies, their revenues are relatively insulated. Deal wins are intact, despite some delays in decision-making pertaining to closure or conversion of TCV to revenues. Margins have significant room to expand in the medium term, as they scale up revenues.

Healthy growth visibility in FY24 backed by deal wins: 

While PSYS may exit FY23 at a healthy revenue growth rate, strong deal wins over the past few quarters provide decent visibility for FY24; even if deal-to-revenue conversion may slow down due to macro headwinds. Drag from the top 2 clients is behind, while the exposure to US regional banks is minimal. Newage companies are an opportunity pool as they face pressure to reduce costs amid weakening macro, leading to offshoring opportunities.

Investing in downturn; margins have room to expand:

PSYS indicated making investments across people and capabilities despite the uncertain environment, in order to safeguard future growth. Easing supply side and operating leverage are giving enough tailwinds to invest and still expand margins over the medium term. Their aspiration is to expand margins by 200-300 bps over long term, on their path to reach US$2bn revenues.

Remains top pick; reiterate BUY: 

Analysts of IIFL Capital Services believe that with industry- leading revenue and EPS Cagr over FY23-25 (17%/27%), PSYS may continue to command premium valuations vs peers. They remain up to 6% above consensus on their EPS estimates. At 23x FY25 P/E, the stock is trading at 10% premium to peers and offers 17% potential upside.