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Building up on client profiles, margins surprise: Buy

Persistent had a steady quarter growing 5.3% q/q (organic) and the EBIT margin improving 27bps. It integrated two months of Media Agility and is now not looking at acquisitions as management focuses on integration. TCV touched $394m, up 61% y/y and net new TCV was up 56% y/y, reflecting no concerns on the macro side. Management intends to maintain the growth momentum with an upward margin bias, though Q2 will have a wage-hike impact. Hiring was strong and attrition eased a bit. No meaningful estimate change, but we lower our TP to Rs.4,290 (29x FY24, earlier Rs.4,980), reflecting the present volatile situation.

Remarkably better client metrics, TCV hits another high.

Persistent delivered another strong quarter; revenue touched $241.5m, up 11% q/q incl. acquisitions, and is likely to breach $1bn in Q2. Client mining notably improved; four clients in the $20m+ bucket and five added in $5m+ in the last four quarters. It has 130 clients total in $1m+, up from 83 in FY21. On TCV, its book-to-bill was 1.6 (TTM average: 1.6), ACV was up 39% y/y, suggesting continued growth.

EBIT margins surprise, more tailwinds ahead.

Persistent delivered 14.3% EBIT margins for Q1, up 18bps y/y, notably after absorbing overheads on account of acquisitions and higher talent costs over the last 12 months. Wage hikes are due in Q2 and the gross impact is ~250bps but management is confident of delivering eh same margins in FY23 as in FY22.

High capex, receivables transient.

Persistent had hugh capex in FY22 (~7% of revenue vs past 2.1% average) to support headcount growth. In Q1, it opened an office in Gurgaon, keeping expenses high, but expects a drop from Q2. In FY23, though, expenses may be high. On receivables, acquisitions are being integrated; hence, some slippage was there in Q1, expected to self-correct through the year. No change in payment terms.

Maintaining a Buy.

There is no meaningful change in estimates. The revised target of Rs.4,290 (from Rs.4,980 earlier), 29x FY24 EPS, reflects the present volatile situation and is in line with peers. The slight discount is on account of the lower FCF profiles in FY22 and FY23, largely offset by high growth. Risks: Slowdown in the US, M&A integration-related.

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