Maintain REDUCE on Persistent (PSYS) on in-line rev performance, even as dichotomy continued between TSU business and a shrinking Alliance unit. Despite growth drivers from strong platform partnerships (Salesforce, Appian, OutSystems), lower annuity component and Alliance transition are expected to keep the revenue profile volatile. Our TP of Rs 525, implies 12x FY22E (EPS ~1.5% change) and valuations are supported by strong B/S (low DSO despite increase and cash/m-cap at 37%).
* In-line revenue, Alliance dent offsets TSU growth. PSYS posted revenue at USD 127mn, -1.8/+7.4% QoQ/YoY as strong growth in services business was offset by a steep fall in IP-business. TSU grew +3.8/14.7% QoQ/YoY supported by Services growth of +2.2% QoQ and Digital growth at +7% QoQ. This was negated by Alliance business which dropped -18/-4% QoQ/YoY on steep decline in T1 account impacted by lower re-seller/royalty revenue. FY20 revenue stood at USD 502mn, posting +4.3% growth led by TSU growth at 11.5%.
* Building adjacencies to diversify Alliance business risk. PSYS’ T2-5 accounts continued its strong growth trajectory (16% in FY20), while T1 account (IBM) reached its lowest level since Alliance commencement in 4QFY16. Building capabilities in IBM’s Red Hat ecosystem and Dassault Systemes (expanded partnership in North Europe) will support diversification of Alliance business, but the transition remains a structural risk.
* Client mining challenges persist. Despite resurgence in TSU business, the transition to more annuity-based longer-duration revenue model is a workin-progress. This is predicated on the static rev/client metric and decline in >USD 1mn clients, as dependence on new logo remains high (a risk in the current environment). Within verticals, BFSI and Healthcare & Lifesciences outperformed supported by PSYS’ Salesforce practice which grew 13% QoQ and is estimated to have contributed ~50% to 4Q services growth.
* Pivot to lower share of IP-business a margin headwind. Operating performance was better than est. with EBIT% at 9.2%, +51bps QoQ led by better GM% on INR depreciation (+50bps QoQ impact), higher offshore-mix, improvement in TSU profitability and Accelerite recovery, offset by higher sub-contracting. Pivot to lower IP-led revenue ahead is likely to create structural headwinds compounded by near-term headwinds.
* Valuation and view. Factored 2.5% revenue decline and 120bps lower margin in FY21, with 4% growth in TSU, 20% decline in Alliance and flat Accelerite performance. Valuation discount to peers reflect portfolio risk and prior period underperformance (~4% earnings CAGR over FY15-20), despite a strong balance sheet position.
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