Q2FY24 Review: Persistent Systems: Relatively stronger quarter; deal wins rebound

20 Oct 2023 , 11:28 AM

Persistent Systems (PSYS) delivered 3.2% cc QoQ (+14.1% YoY in USD), in line with IIFLe. At 13.7% (-120bps QoQ), Ebit margins were also in line with IIFLe. At USD316mn of ACV (+16% QoQ), deal wins were the highest-ever; implying PSYS has won deals worth 28% of LTM revenues that are executable in next 12 months. Mgmt indicated that deal activity remains healthy and they benefitted from the spill-over of deal closures from Q1 into Q2. Headcount declined by 1% QoQ, as PSYS focused on increasing utilisation. Sequential growth was broad-based across client buckets. A combination of strong revenue visibility (15% Cagr in FY23-25) and upward margin curve over the next 2 years will drive 27% EPS Cagr over FY23-25. Analysts of IIFL Capital Services tweak their FY24-26 EPS and maintain 12-mth TP at Rs6,100, based on 27X on 2YF P/E. With the stock trading at 29.5x FY25 P/E, while the near-term upside could be limited, it remains a strong compounding story. Potential MSCI Index inclusion may be a near-term tactical catalyst. Reiterate BUY. 

Healthcare and Software led growth:

Growth was led by Healthcare growing 7% QoQ, followed by 3.8% QoQ growth in Technology. BFSI was flat QoQ, on weakness in certain sub-segments. After two quarters of super-normal growth from the top client, growth was broad based across client buckets in Q2. Deal wins were at an all-time high, providing visibility for near-term growth. Management remained confident of delivering top-quartile growth, on the back of strong deal wins and broad-based growth. 

Margins impacted by wage hikes, as expected: 

Q2 margins at 13.7% (-120bps QoQ) were in line with IIFLe, as full impact of wage hikes was partly offset by absence of visa costs, higher utilisation, lower D&A (as % of revenues) and subcontracting costs. PSYS reiterated their aspiration to increase margins by 200-300bps over the next 2-3 years, driven by scale benefits, employee pyramid rationalisation, client mining and larger deals. 

Valuation limits near-term upside: 

The stock is trading at 29.5X FY25 P/E, at a premium to mid-cap peers. This limits the near-term upside, despite PSYS continuing to deliver industry-leading EPS Cagr of 27% over FY23-25. However, potential MSCI Index inclusion could be a near-term trigger and PSYS remains a strong long-term compounding story. Analysts of IIFL Capital Services value PSYS on 27x 2YF EPS on top-quartile growth. Risks: Supply side challenges.