Persistent Systems: Small enough to care, large enough to scale

15 May 2023 , 11:05 AM

Recommendation: Buy

Target Price: Rs. 5,330

PSYS has crossed US$1 billion revenues in FY23 and is aspiring to double revenues in 4 years. They are sweetly positioned with a size large enough to scale up, while still being small enough to offer focused services to customers. Management reiterated confidence in delivering industry-leading growth in FY24. While demand has weakened, a strong deal pipeline and differentiated Product Engineering capabilities provide better visibility versus peers. Margins have enough levers to expand by 200-300 basis points in the next 3-4 years. Analysts at IIFL Capital Services believe PSYS will continue to deliver best-in-class growth among mid-caps. Despite commanding a premium to peers, it remains their top mid-cap pick; having the highest potential to surprise on earnings.

Paving way for US$2 billion revenues in 4 years

PSYS has put in place strategy to double revenues in next 4 years. Proactive pitching for deals over RFPs, developing a Private Equity (PE) channel to tap new and large clients, targeting new-age companies that have not adopted offshoring yet, and investing in scaling their CTO organization to identify new disruptive trends — are some initiatives in this direction. All these changes have led to a sharp rise in large deal wins (25+) and client mining in past 3 years.

Capabilities are key differentiators

PSYS’ key capability differentiation is around Product development, Cloud infra and Security, Data and AI, Automation and their robust Salesforce practice. The company is well positioned to advise customers on multi-Cloud strategy. This is due to its strong relationships across hyperscalers, as reflected in the number of certified professionals, competencies and specializations across the Cloud ecosystem — where PSYS ranks higher versus most peers.

Margins can expand by 200-300 basis points

PSYS indicated that with scale, margins can potentially be expanded by 200-300 basis points over next 3-4 years. Some of the levers include a large number of freshers hired in FY23 that would become billable now, SG&A leverage, reduction in M&A related amortization costs as % of revenues over time, while hiring and wage hikes will be lower going forward. Risk: M&A, FX volatility.