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Best-in-class performance to continue in FY22E

Confidence intact on Alliance business growth; reiterate Buy

* We were impressed by PSYS strong performance in 4QFY21 – USD revenue growth of 4.6% QoQ (100bp above MOFLSe) and 16.9% EBITDA margin (down 10bp QoQ despite a one-month wage hike impact).

* Order bookings of USD246m (1.6x book-to-bill ratio) in 4QFY21 points to good growth visibility for FY22E, especially with management commentary that the TCV run-rate of over USD200m will result in a quarterly revenue growth of 4.5-5% in USD terms.

* PSYS has reported best-in-class growth in the TSU business (18.4% YoY) in FY21, despite an industry-wide impact from COVID-19 in 1H. With a strong demand commentary and deal momentum, we expect it to continue to deliver top tier IT Services revenue growth among our midcap IT coverage (over 17% CAGR in FY20-23E).

* On top of this, the management has guided at a strong rebound in its troubled Alliance business (flat revenue over the last eight quarters), as new deals and acceleration in its Cloud business with IBM should help it grow. A pickup in Alliance business should help PSYS deliver 18.6% USD revenue growth in FY22E, despite a higher FY21 base effect (12.9% YoY).

* The management has guided at 17% EBITDA margin in FY22, which should complement its strong revenue delivery and lead to 34% PAT growth. It should be able to improve its margin – we estimate 100bp EBITDA margin improvement YoY – despite factoring in a normal wage hike cycle in FY22E. We estimate a 28% PAT CAGR over FY20-23E.

* We upgrade our FY22E/FY23E EPS estimate by 7%/9% as we gain further confidence on growth and margin momentum. We reiterate our Buy rating on PSYS.

Broad based beat on Services-led growth

* Revenue in USD terms grew 20.3% YoY (v/s our estimate of 19.2%) to USD152.8m, EBIT grew 70.9% (above our estimate of 59%) to INR1.5b, and PAT grew 64% to INR1.4b (v/s our expectation of 39%) in 4QFY21.

* The same in FY21 stood at 13%/55%/32% YoY.

* In USD terms, revenue grew 4.6% QoQ to USD152.8m, above our estimate of 3.6%.

* Growth was led by 8.6% QoQ growth in Services, but was partially offset by a 13.8% decline in IP (seasonality).

* TSU grew 8.3% QoQ, while Alliance declined 7.3%.

* EBITDA margin stood at 16.9%, down 10bp QoQ, but 20bp above our estimate, despite a one-month wage hike impact.

* PAT stood at INR.1.4b (up 13.9% QoQ), 18% above our estimate, on higher operational and other income.

* The company reported strong headcount additions of 1,242 QoQ, while utilization levels fell 200bp.

* Attrition inched up to 11.7% TTM (up 140bp QoQ).

* TCV in 4QFY21 stood at USD246.5m (down 18% YoY), with 56% new TCV. ACV declined 21% QoQ to USD200.7m.

* Growth was led by 10 non-top accounts, which grew at 5.9% QoQ, above the company growth rate.

* OCF stood at INR7,359m (up 109% YoY) in FY21, indicating an OCF/EBITDA ratio of 108%. FCF stood at INR6,078m (up 120% YoY), indicating an FCF/PAT ratio of 135%.

Highlights from the management commentary

* Growth was broad based across verticals, but was largely led by Healthcare, BFSI, and Life Sciences. Within practices, Digital Engineering, Cloud, Security, and Data posted strong growth.

* The Alliance segment declined during 4QFY21 due to seasonality. However, it is expected to bounce back on the back of good order bookings. The management is confident of profitable growth in this segment.

* PSYS reported a TCV of USD246.5m. Over the past 5-6 quarters, it has signed several multi-year deals, and the management is confident that TCV of USD200m would result in 4.5-5% average sequential growth.

* The management is fairly confident of achieving industry-leading growth in FY22. It guided at EBITDA margin of ~17%.

Improving growth profile at an attractive valuation

* Historically, execution challenges and volatility in the IP portfolio have led to inconsistency in the company’s performance. However, we have noticed steady progress on the execution front after the change in management/strategy.

* This is evident from the robust performance of the Services segment over the past few quarters, notwithstanding the COVID-19 disruption.

* We expect a higher emphasis on annuity revenue to address the performance consistency issue to some extent.

* The company’s robust performance in FY21, a healthy order book, and a strong deal pipeline indicates an encouraging near-term outlook. The management’s guidance to defend margin is a key positive.

* The stock is currently trading at 22x FY23E EPS. Our target price is based on 25x FY23E EPS.

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