Q4FY23 Review: Persistent Systems: Steady ship amid uncertain macro

26 Apr 2023 , 10:51 AM

Persistent Systems (PSYS) delivered 3.5% cc QoQ (+26% YoY in USD), tad above IIFLe. Ebit margins were flat QoQ at 15.4%. With USD310mn of deal ACV, PSYS has won deals worth 30% of LTM revenues that are executable in next 12 months. Headcount addition ticked up QoQ, still growing 23% YoY, and is a key leading indicator of growth in FY24. Despite a tougher macro, management sees opportunities in the market. Deal pipeline remains healthy, although sales cycles are longer. Top 2 client revenue growth bounced back sequentially and management is confident of continuing the momentum. A combination of strong revenue visibility (17% Cagr in FY23-25) and an upward margin curve over next two years, will drive 28% EPS Cagr over FY23-25.

Broad-based growth trajectory continues: 

Growth was broad-based across verticals with BFSI growing 2.9% QoQ, Healthcare 4.4% QoQ and Technology 4.3% QoQ despite 15.6% QoQ decline in the India portfolio led by rationalising of IP-led tail accounts. Top client rebounded sharply (+30.5% QoQ), on the back of a large deal ramp-up. Services segment showed continued strength (+5.5% QoQ), while IP-Led revenues fell 14.6% QoQ. Analysts of IIFL Capital Services forecast PSYS to deliver 17% revenue Cagr in FY23-25 (industry leading), on sustained demand momentum and record deal wins.

Margins remain within expansion curve: 

Q4 margins at 15.4% (flat QoQ) were largely in-line, despite sharp decrease in IP revenues and higher pass-through expenses. PSYS aspires to increase Ebitda margins by 200- 300bps over the next 2-3 years, driven by scale benefits, employee pyramid rationalisation, client mining and larger deals. Headcount grew by 23% YoY as hiring ticked up QoQ; while LTM attrition declined to 19.8%

Valuation premium justified; maintain BUY: 

Stock is trading at 22.4X FY25 P/E, at a 19% premium to mid-cap peers, which analysts of IIFL Capital Services believe is sustainable, as PSYS continues to deliver industry-leading EPS Cagr of 28% over FY23-25. They value PSYS on 27x 2YF EPS as they continue to deliver earnings surprises. Risks: Supply side challenges.

Analysts at IIFL Capital Services fine tune FY24-25 EPS and maintain 12-month TP of Rs5,330, based on 27X on 2YF P/E. They reiterate PSYS as our top pick and with the highest potential to surprise on earnings; consistent delivery of sector-leading growth demands premium valuations.