Persistent Systems Ltd:Growth resilience and margin surprise in Q2: Buy - Anand Rathi Share and Stock Brokers
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Persistent was resilient in key metrics despite the top client sliding 21% q/q as it reported 5% q/q (organic) company growth. Tailwinds came from the IP-led business, which surprised, absorbing almost half of the fall. The EBIT margin rose 27bps q/q, absorbing 230bps of the wage-hike impact and was 72bps higher y/y. TCV touched $368m, up 30% y/y and net new TCV was up 53% y/y; no slowdown yet. Management intends to maintain growth; margins would improve as supply challenges seem to be behind. We revise estimates ~10% driven by TCVs and margins. Target increased to Rs.4,410 (23x FY25, earlier Rs.4,290).
Resilient growth despite steep drops in top client, TCV sustains. Persistent had $256m revenue, up 6% q/q incl. acquisitions, after absorbing a steep decline in the top client. TCVs suggest continued growth ahead, leading to our revised FY24 estimate. Book-to-bill was 1.4 (TTM average: 1.6), above peers. Most assignments are annually renewed (average tenure ~1.5 years); hence, Q2 ACV took the hit for ramp-downs, and still grew 3% q/q, 35% y/y. On the positive side, top-client concentration shrank to 9%.
Wage hikes behind, margin tailwinds ahead. The Q2 EBIT margin was 14.6%, up 27bps q/q, 72bps y/y, as high-margin IP revenue has started growing again after a while. The company doesn’t expect similar growth in IP but expects them to grow. On the services business, supply cost pressures seem to be past and rupee depreciation tailwinds are blowing. Hence, we expect better margins.
High H1 capex and receivables. Persistent in running on high capex with FY22 (~7% of revenue) and FY23 (~6%) to support headcount growth. Capex has come off the Q1 high but is still on the higher side. On receivables, DSOs (incl. unbilled) have risen, leading to less cash generated (H1 at 88% vs 3-yr avg 127%). No change in payment terms reported.
Maintaining a Buy. We raise our estimates ~10% on the good Q2 performance. We also introduce FY25e and roll forward our valuation with a revised target of Rs.4,410, suggesting 19% potential. The revised target is based on 23x FY25e. Risks: Slowdown in the US, M&A integration-related.
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