Q3FY24 Review: Persistent: Systems: A cut above the rest!

23 Jan 2024 , 02:33 PM

Persistent Systems (PSYS) delivered 3.1% cc QoQ (+13.7% YoY in USD) — a tad above IIFLe of 2.9%. At 14.5% (+80bps QoQ), Ebit margin was also a tad above IIFLe of 14.3%. Deal wins hit a new record of USD392mn ACV (+20% YoY); implying PSYS has won deals worth 34% of LTM revenues that are executable in the next 12 months. Mgmt indicated that the deal wins were aided by year end renewals and proactive deal pitching, while the overall demand environment was little changed from Q2. Headcount increased by 2% QoQ, even as utilisation rates continued to inch up. The Board approved a stock split in the ratio of 1:2. Strong revenue visibility (16% Cagr in FY24-26) and an upward margin curve over the next two years will drive 30% EPS Cagr over FY24-26. Analysts of IIFL Capital Services raise their FY24-26 EPS by up to 2% and their 12-month TP rises to Rs8,500, based on 35x (was 33x) on 2YF P/E. With the stock trading at 40x/33x FY25/FY26 P/E; while the near-term upside could be limited, it remains a strong compounding story. BUY. 

Ramp-up of deal wins in Healthcare drives growth: 

Growth was led by Healthcare (+16.4% QoQ), while Technology (+0.1%) and BFSI (-0.5%) were impacted by seasonality. Top client (-6.1%) revenues were impacted by a planned decline, while other client buckets saw healthy growth. Deal wins were at an all-time high, aided by year-end renewals and proactive deal pitching. PSYS has further strengthened senior leadership during the quarter, as growth remains as the top priority for the company. 

Margins improve despite seasonality: 

Q3 margins at 14.5% (+80bps QoQ) were tad above IIFLe of 14.3%, as headwinds of furloughs and higher onsite mix were more than offset by higher IP revenues and operational improvement. PSYS reiterated their aspiration to increase margins by 200- 300bps over the next two to three years, driven by scale benefits, employee pyramid rationalisation, client mining and larger deals. 

Valuation limits near-term upside: 

The stock is trading at 40X/33x FY25/FY26 P/E at a premium to mid-cap peers, which analysts of IIFL Capital Services believe limits near-term upside, despite PSYS continuing to deliver industry-leading EPS Cagr of 30% over FY24-25. However, PSYS remains a strong long-term compounding story. Analysts of IIFL Capital Services value PSYS on 35x (was 33x) 2YF EPS on top quartile growth. Risks: Supply side challenges.