Q1FY24 Review: Persistent Systems: In line quarter, growth still industry leading

24 Jul 2023 , 02:37 PM

Persistent Systems (PSYS) delivered 2.9% cc QoQ (+17.1% YoY in USD), in line with IIFLe. Ebit margins at 14.9% (-40bps QoQ) was tad below IIFLe. Deal wins moderated to USD272mn of ACV (-12% QoQ), although PSYS has still won deals worth 25% of LTM revenues that are executable in next 12 months. Management indicated that the lower deal wins were on account of delayed decision-making and some of them spilling over to Q2, and deal pipeline remains healthy. Headcount addition moderated to 7% YoY, as PSYS focused on increasing utilization. Top client revenue growth was strong for a second straight quarter. A combination of strong revenue visibility (15% Cagr in FY23-25) and an upward margin curve over next 2 years will drive 27% EPS Cagr over FY23-25. Analysts of IIFL Capital Services lower their FY24-26 EPS by ~3% and reduce 12-mth TP to Rs5,500 (was Rs5,650), based on 27X on 2YF P/E. They reiterate PSYS as their top pick and believe consistent delivery of sector leading growth justifies premium valuations. Reiterate BUY.

BFSI leads growth despite macro uncertainty: 

Growth was led by BFSI growing 6.2% QoQ followed by Technology growing at 3.3% QoQ. Healthcare revenues declined 2.7% QoQ, on weakness in certain subsegments. Top client (+13% QoQ) revenues had a second straight quarter of double digit sequential growth. Deal wins moderated on slower decision making, which management believes can last for a couple of quarters. PSYS indicated that the top priority remains to deliver healthy growth.

Margins steady, wage hikes to impact Q2 margins: 

Q1 margins at 14.9% (-40bps QoQ) were tad below IIFLe, as benefits from lower direct expenses and improved utilization were offset by visa costs and higher D&A expense. PSYS has rolled out wage hikes effective July, which are likely to impact Q2 margins. PSYS aspires to increase Ebitda margins by 200-300bps over the next 2-3 years, driven by scale benefits, employee pyramid rationalization, client mining and larger deals.

Valuation premium sustainable; maintain BUY: 

Stock is trading at 24.5X FY25 P/E, at modest premium to mid-cap peers, which analysts of IIFL Capital Services believe is sustainable, as PSYS continues to deliver industry-leading EPS Cagr of 27% over FY23-25. Analysts of IIFL Capital Services value PSYS on 27x 2YF EPS on consistent delivery of industry leading growth. Risks: Supply side challenges.