Published on 6/08/2020 2:35:04 PM | Source: HDFC Securities Ltd

Update On Persistent Systems Ltd By HDFC Securities

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Our Take:

Persistent’s robust performance in Q4FY20 and Q1FY21 amid COVID-19 pandemic, healthy deal pipeline, and cautiously optimistic outlook indicates the near term COVID-19 pandemic’s disruption would not be as bad as the street had initially anticipated. A sustained deal momentum and no exposure to travel and hospitality sectors which are stressed due to the COVID-19 outbreak and to the energy sector which is under pressure due to lower crude oil prices helped the company report excellent numbers. With a good traction in the major verticals of banking, financial services and insurance (BFSI) and healthcare, the momentum is likely to continue. Company has a good pipeline of deals it is bidding for and hopes to maintain the momentum. Apart from winning new deals, the company has also been focusing on improving revenue per client. Over the medium term, Persistent should be a key beneficiary of the COVID-19 led increase in uptake in digital services, given its high exposure to salesforce consulting and verticals such as Technology, Healthcare, and BFSI. In a post Covid-19 world, we expect digital technologies to gain traction. Persistent is expected to be a key beneficiary of this digital acceleration. In addition, the focus of the new management on large annuity oriented deals along with increase in deal sizes and less reliance on top client could bring visibility on services growth in the long term.


Valuations & Recommendation:

Due to the COVID-19 crisis, the company is witnessing a trend of delays in certain deal ramp-ups as well as requests for price discounts and credit extension. However, Persistent is very cautious in accommodating these requests and does not expect any major impact due to the same. Further, considering multiple levers for cost rationalisation and higher utilization of the staff, we expect margins to see an improved trajectory in the medium term. A combination of better revenue visibility and margin uptick expected over the next few years offers an opportunity for investors. We feel investors could buy the stock only in the Rs. 894-902 band (16xFY22E EPS) and add further on dips to Rs. 810-816 band (14.5xFY22E EPS). Base case fair value of the stock is Rs 981 (17.5x of FY22E EPS) and the bull case fair value of the stock is Rs 1037 (18.5x of FY22E EPS) over the next 2 quarters. At the CMP of Rs 965 the stock trades at 17.2xFY22E EPS.


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