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Confidence booster for FY23

Persistent reported an overall 11.1% QoQ USD revenue growth (5.6% organic) with solid growth in the services business(+13.5% QoQ). Growth leverage and currency gains drove a 30 bps QoQ improvement in EBIT margins to 14.3% , ahead of estimates despite continued investments in hiring. Persistent continued the hiring spree as it added 3k+ employees (+16% QoQ). Record order bookings with TCV of USD 394 mn (+9% QoQ,+61% YoY) and strong hiring momentum provide confidence in near term growth trajectory notwithstanding the underlying macro concerns. Persistent remains on track to replicate growth outperformance through FY23 after emerging as growth leader through FY20-22. Persistent also remains confident of maintaining operating margins within a narrow range in FY23 aided by growth leverage and revenue mix notwithstanding industry wide supply side pressures and resumption of certain operating expenses. We fine tune our estimates and retain BUY with a revised TP of INR 4,200(V/s INR 4,320 earlier), based on a revised 28x June’24E EPS (V/s 29x earlier, at par with Tier I leader TCS.

* Strong operating performance yet again: Persistent reported a 11.1% QoQ growth in revenues to USD 241.1 mn (this included ~5.6% organic growth). YoY growth has improved every single quarter since 1QFY21.Growth was aided by strong show in Services (+13.5% QoQ) even as the IP revenues declined by 13% QoQ. EBIT margins improved by 30 bps sequentially to 14.3% aided by growth leverage and currency gains despite continued investments in hiring, higher amortisation charge and the seasonal increase in travel/visa expenses . We note that Persistent (along with Coforge) may be the only companies to show improvement in YoY margins in 1QFY23. Company continued the hiring momentum adding 3k+ employees at the net level (+16% QoQ) which included ~1,950 freshers as well as ~550 people from the MediaAgility acquisition In addition the company reported record order bookings TCV of USD 394 mn ( up both QoQ and YoY) with solid book/bill ratio. Reported LTM attrition cooled off a bit aided by strong hiring with company expecting more moderation through the course of FY23.

* Hiring momentum and bookings provides confidence in near term growth trajectory: Record order bookings as well as solid hiring (additional hiring of ~1,350 freshers in 2QFY23) provides confidence in near term growth visibility notwithstanding increasing street concerns from macro. Persistent suggests that it is continuously engaging with clients and partnering them in both revenue maximisation and cost optimisation initiatives. While it remains watchful, it suggests that the demand environment and pipeline/deal wins remain strong which should sustain growth visibility in the near term. While Persistent implements wage increments in 2QFY23, it expects to limit the margins within a narrow range for FY23 as a whole aided by growth mix and pricing strength notwithstanding industry wide resumption of travel/facility expenses.

*  Growth leadership on track; maintain BUY: Persistent’s 1QFY23 results provide confidence that the company is on track to sustain the growth leadership in FY23 similar to the trend seen through FY20-22. We fine tune our FY22-25E with slight adjustments to estimates and maintain BUY with a revised TP of INR 4,200 based on 28x June’24E EPS (V/s 29x earlier), in line with our target P/E multiple for Tier I leader TCS. We have backed a strong EPS upgrade cycle for Persistent through the last couple of years which has fuelled strong re-rating for the name and at the top of the Tier II peers. However given heightened expectations, the room for positive surprises and further upgrades remains limited. That said, Persistent’s performance is keeping the faith alive on superior growth performance with stable margins. PSYS remains our top pick amongst Tier II techs.

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