IDEA2ACT - Buy: Persistent Systems

Buy - PERSISTENT

CMP (NSE) 15:40, 21 Jun

2,565.35 25.351%

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Sector

Information Technology

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Reco. Price

1,990

Period

12-Months

Target Price

2,400

upside

%

Stop Loss

0

Last updated on

03 May, 2021

Persistent Systems (PSYS) is a technology services company helping clients build and manage software-driven businesses. Its business strategy is aligned around four key areas – A) Digital: Bringing together their technology partner ecosystem to enable enterprises with digital transformation B) Alliance: Focus on the long-standing and multidimensional relationship between PSYS and IBM C) Services: Focus on services for software and product development including agile and experience design D) Accelerite: Focus on products that include business-critical infrastructure software for enterprises, telecom operators and public sector 

Earning Momentum to Continue in FY22

Strong visibility of Revenue growth in FY22: We forecast PSYS to deliver sector-leading 20% US$ revenue growth (consensus at 16%) following a 13% growth in FY21 as:
  • In 2HFY21, PSYS has already won deals equal to 81% of FY21 revenues, executable in next 12 months
  • In order to grow at 20% in FY22, coupled with 30% renewal assumed for FY21 revenues; PSYS needs to win US$283mn of new deal ACV, they have already won 84% of that in 2HFY21
  • PSYS’ headcount grew 29% in FY21 vs. 13% revenue growth (sector-leading); a key leading indicator.

Margin Expansion likely in FY22: We forecast EBIT margins to reach 14.5% (consensus at 12.7%), led by:
  • Operating leverage in SG&A
  • Majority of hiring already done in FY21
  • Higher margins in Alliance portfolio led by growth recovery and cost cuts
  • Absence of Covid CSR (40bps) and IBM amortization (110bps).

Valuations are still in a comfort zone: PSYS is still trading at 23X on 1-yr fwd P/E while the stocks that have demonstrated consistent top quartile growth (e.g. LTI, COFO) have re-rated to 28X. As PSYS continues to deliver sector-leading growth, it has enough room to re-rate closer to these peers.

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Please refer to Research Disclaimer for additional recommendation parameter, analyst disclaimer and other disclosures.