Tech services biz keeps the promise
* Persistent’s revenue performance was weak in the Mar’20 quarter, owing to the continuous challenges in the Alliance segment. Growth in the Tech Services remained decent, aided by the renewed focus here. EBIT margins improved by 50 bps sequentially to 9.2%.
* Management suggested it was already seeing several clients deferring new projects and requesting a price discount, which cumulatively could pressure the business in the near term. Notwithstanding that, the order booking in the Services business was the strongest in recent quarters and the pipeline also remains decent.
* The company’s senior leadership has taken 20-25% salary cuts as a temporary measure to protect margins. We note that cash generation improved in the Mar’20 quarter after the weakness in 9MFY20 on account of changes in the internal finance systems.
* We raise FY21/22E by 5%/2% on higher-margin assumptions but retain revenue estimates broadly. We introduce FY23E EPS at ~Rs60. We maintain Hold, with a revised TP of Rs550 (vs. Rs540 earlier) based on an unchanged 10x FY22E EPS.
What we liked? Strong performance in the Technology Services business; margins showing some improvement after falling sharply in the recent quarters.
What we did not like? Continuous disappointing performance in the Alliance business.
Revenues tad short on expectations, margins surprise positively:
Persistent reported revenues at US$127.1mn (-1.8% QoQ, 7.4% YoY), a tad lower than estimates (Emkay est:- 1% QoQ). Growth was led by the Services business as the Alliance business (-18% QoQ) continued to face pressure. EBIT margins at 9.2% were up 50 bps sequentially (vs. our expectations of a 40bps decline in margin QoQ). Profit at Rs838mn (-4.7% QoQ, -0.8% YoY) was ahead of Emkay estimates on account of better-than-expected operating margins. Growth in the Technology Services business was strong at 3.8% QoQ (after 6.3% growth in the Dec’19 quarter) and continued the streak of improvement through FY20, led by senior sales and leadership revamp. Management noted that some of the challenges in the Acclerite business during the Mar’20 quarter were also the result of a complete pause in activity due to Covid-19 for the reseller business.
Raise FY21/22E by 5%/2% on higher margins:
While we broadly leave our revenue estimates unchanged, we raise our FY21/22E earnings by 5%/2% driven by higher margin assumptions (9.7%/11.1% vs. 8.9%/10.5% earlier). We also introduce FY23E EPS at Rs60. We retain Hold, with a revised TP of Rs550, based on an unchanged target multiple of 10x FY22E earnings( vs. Rs540 earlier)
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