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Structural pivot to high growth

We maintain BUY on Persistent Systems (PSYS) and assign it in our top picks, due to a solid 3Q (in-line), strong growth visibility supported by robust TCV bookings (including high ACV component), and a structural pivot towards high growth. The strong technology-led differentiation overlaid by improved client mining/bigger deals and focus on partnerships/sourcing will drive PSYS into industry-leading quadrant. With growth markers established around Technology services, acceleration in Alliance can be an added trigger as PSYS realigns with top customer around Red Hat, hybrid cloud (Cloud Paks) opportunities. Operational performance continues to improve with margin improvement despite two-month impact of wage hike and stronger cash generation/payout. Our upgraded target price of INR 1,900 values PSYS at 22x Dec-22E (21x earlier), supported by 26% EPS CAGR over FY21-23E and  >38% RoIC.

* 3QFY21 highlights: Revenue came in at USD 146mn, +7.4/12.9% QoQ/YoY. Within the segments, Technology Services posted +6.0/17.5% QoQ/YoY and Alliance business posted +12.1/-0.2% QoQ/YoY. Growth was led by Technology & Emerging vertical at +13.1% QoQ, and Healthcare & Life- sciences vertical at 6.3% QoQ while BFSI remained flat (-0.7% QoQ), given ramp down in large customers due to seasonality. Revenue from T1 improved 2.4% QoQ, contributing 18.5% of the revenue. EBIT margin stood at 12.7%, +60bps QoQ, which was negatively impacted by wage hike (- 200bps) and currency (-20bps), offset by revenue growth and operational efficiency. PSYS reported the strongest TCV of USD 302mn during the quarter.

* Outlook: We have factored in USD revenue growth at 12.3/16.7/13.3% with Technology Services growth at 17.5/18.7/14.9% and Alliance growth at - 2.0/+9.9/+7.7% over FY21/22/23E respectively. We estimate EBITDA margin at 16.1/16.8/17.2% over FY21/22/23E, resulting in FY21-23E EPS CAGR at 26.3%. At CMP, PSYS is trading at 21/17x FY22/23E.

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