IDEA2WIN - Buy: Persistent Systems


CMP (NSE) 15:40, 23 May

3,785.25 86.42.34%




Information Technology

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Last updated on

03 Dec, 2021

Persistent Systems (PSYS) is a technology services company which was incorporated in May 1990. The company’s focus is on 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, solutions and a unique architecture to enable enterprises with digital transformation, (b) Alliance: Focus on long-standing and multi-dimensional 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.

Investment Rationale

Another stellar quarter for Services; IP rebounds: Overall revenues were aided by continued strength in the Services segment (+10.1% QoQ), while the IP-led revenues rebounded (+4.2% QoQ). Among verticals, BFSI (+8.9%) and Healthcare (+13%) showed strong growth, helped by deal ramp ups. Within geographies, Europe was soft due to the holiday season. We now forecast PSYS to deliver 29% Cagr in FY21-23ii (industry-leading), on strong deal ramp ups.

Stable margins despite wage hikes: 2Q margins at 13.9% (-20bps QoQ) were above IIFL estimates (13.4%) despite full impact of wage hikes (~230bps) during the quarter. We forecast EBIT margins to expand by 290bps over FY21-24ii, driven by levers like pyramid rationalisation, lower sub-con costs and optimising IP margins.

Outlook & Valuation:

In the past 4 quarters, PSYS has won deals worth 150% of FY21 revenues, executable in the next 12 months. Its headcount also grew, by 47% YoY in 2Q, and is a key leading indicator of growth for coming 12 months. A combination of improved revenue visibility (29% Cagr in FY21-23ii) and steady margin improvement over the next two years will drive 39% EPS Cagr over FY21-23ii. Our EPS for FY23ii-24ii rises by up to 7%, on higher revenues, while getting cut by 4% for FY22ii, to incorporate the recently-announced acquisitions and ESOP plan. Hence, our 12-mth TP rises to Rs5,058 based on 35x 2YF P/E (unchanged). We continue to believe that PSYS has the highest potential for earnings upgrades, even though we are 5-13% above Bloomberg consensus EPS for FY22ii-24ii. PSYS remains our top pick in the mid-cap space, with further scope for rerating.

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