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Strong operating performance

* PSYS delivered better-than-expected operating performance in Q4FY21. Revenue grew 4.6%/20.3% QoQ/YoY to USD152.8mn, ahead of our expectations, driven by continued traction in the Services business. EBITM expanded 50bps QoQ to 13.2%.

* Services revenues grew 8.6% QoQ to USD119.7mn on 10.5% volume growth, partly offset by a 1.7% decline in blended realizations. IP-led revenues declined 13.9% QoQ to USD22.8mn due to seasonality and lower IP resale revenue.

* Revenue growth was broad-based across BFSI (6.7% QoQ), Healthcare & Life Sciences (5.7%) and Technology Companies & Emerging verticals (2.9%). The company signed deals worth TCV of USD246.5mn in Q4, including USD137.7mn in new business TCV.

* We have increased earnings estimates by 3.3%/2.8% for FY22/23, factoring in Q4 beat and healthy deal intake/pipeline. PSYS is expected to deliver ~26% earnings CAGR over FY21-23E. Maintain Buy with a revised TP of Rs2,250 (earlier 2,200) at 24x FY23E EPS.

What we liked?

Continued revenue momentum in Services, EBITM expansion, strong deal intake (USD246.5mn TCV; book-to-bill 1.6x) and offshore shift (150bps QoQ ex-IP business).

What we did not like?

Weakness in realization rates (Onsite -1.1%/-3.9% QoQ/YoY; Offshore 0.0%/-5.1% QoQ/YoY) and uptick in attrition.

Revenue growth momentum continues:

Revenues grew 4.6% QoQ to USD152.8mn, aided by continued traction in the services business (8.6%) despite a decline in IP-led revenues (down 13.9%). Revenue growth momentum is likely to sustain on the back of strong deal wins (USD549mn TCV including new TCV of USD313mn in H2FY21), healthy deal pipeline and new logo additions. Deal intake was healthy in Q4 with TCV of USD247mn (net new TCV of USD138mn). Management expects Technology Services business to sustain 3-4.5% CQGR (4.9% in the last seven quarters) on strong deal intake. It believes book-to-bill will be around 1.2x-1.3x (~1.8x in H2FY21) and will support growth aspirations. Continued focus on large deals and improving win rate improve revenue growth trajectory and predictability. The alliance business is expected to return to sustainable growth path in FY22.

EBITM expands 50bps QoQ to 13.2%:

EBITM expanded by 50bps to 13.2% in Q4 on revenue acceleration, continued cost optimization initiatives, lower CSR spends (-30bps), offshore shift (linear business - 150bps) and lower amortization charges (-60bps), negating one month incremental impact of salary hike, one-time employee welfare allowance (USD0.6mn) and adverse currency movement (-40bps). Management is confident of sustaining EBITDAM at 16-17%, with an upward bias, driven by sustained revenue momentum, offshore shift and operational levers after factoring in normal salary hike (effective July 1) in FY22. Management has guided for ~50bps reduction in amortization charges from Q4 levels from the next quarter which should support EBITM expansion in FY22.

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