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Targets USD1bn revenue by FY25

* PSYS is on track to reach the USD1bn revenue milestone by FY25 (implies ~15.4% CAGR over FY21-25E) on the back of continued strong traction in the Technology Services business, anticipated recovery in the Alliance business and M&A.

* The Technology Services business is likely to sustain a 3.5%-5% CQGR in the medium term (4.4% in last 6 qtrs), aided by strong deal wins (2.1x book-to-bill in Q3), healthy deal pipeline, growing annuity revenue (3/4th of revenue) and cross-selling opportunities across the client base.

* PSYS has over USD250mn cash on the books and is actively pursuing M&A to augment its domain capabilities, digital offerings and expand presence in Europe. It aims to drive Europe revenue to 15%-18% of total revenue in 3-4 years from less than 10% currently.

* We raise earnings estimates by 9.8%/10.8% for FY22/FY23, considering strong revenue growth momentum and low amortization charges (430bps expansion over FY20-23E). We retain Buy with a revised TP of Rs2,200 at 24x FY23E earnings (earlier 22x), based on a ~27% earnings CAGR over FY21-23E and improving medium-term growth prospects.

Revenue growth acceleration underway: The company’s revenue growth trajectory is set to accelerate further in coming quarters on the back of continued strong traction in Technology Services and anticipated recovery in the Alliance business. Inorganic initiatives would further augment revenue acceleration as the company has over USD250mn cash on the books. PSYS aims to record USD1bn revenue by FY25 or earlier (~15.4% CAGR required over FY21-25). The Technology Services business has delivered a steady performance since Sandeep Kalra joined the company as President of the unit (wef May’19). PSYS has refocused on its core strengths in the OPD/PES to accelerate revenue growth. It has also strengthened its leadership team, recalibrated the sales incentive structure to drive crossselling (expanding services index across clients), expanded relationship with sourcing advisory firms, strengthen relationship with technology leaders like Salesforce to drive a sustainable performance. We believe that strong execution and capabilities augmentation through M&A can drive sustained superior revenue/EBIT growth for PSYS like EPAM (>25% CAGR over CY11-20).

EBITM expansion to continue in FY22: We expect PSYS to sustain its EBITDAM with an upward bias on the back of continued strong traction in the Services business, anticipated recovery in the Alliance business, focus on improving profitability in the CE/CLM business, and traditional margin levers like offshore shift, utilization, etc. PSYS reported EBITDAM of 17% in Q3FY21 (9MFY21 – 16.2%) and management is confident of maintaining 17% EBITDAM to balance growth/margin aspirations. However, gross margins would expand further (34.3%/34.0% in Q3/9M) and these savings will be invested back in S&M, capabilities, and geographic expansion. An anticipated dip in amortization charges would drive further expansion in EBITM and strong earnings CAGR (27% CAGR over FY21E-23E).

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