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Fortifying the growth momentum

Persistent has seen a remarkable turnaround in revenue growth performance through FY21 and FY22E as the company took corrective action to focus back on the services strength starting FY20. Net outcomes have been quite impressive-(1) PSYS has led Tier II peers on growth through FY20-22E (and likely to sustain that growth momentum in FY23E) and (2) operating margins have improved for 8 successive quarters now (<9% in Dec’19 quarter to 14% in Dec’21 quarter). PSYS continues to impress with its execution and has recently upped the ante on inorganic initiatives to fill the gaps in the product/client portfolio. While noting that acquisitions carry integration risks, we like PSYS’s strategy of having a blend of upfront and retention/performance payouts as it retains the acquired management to deliver the targeted revenue and margin synergies. We incorporate the financial impact of Data Glove and Mediaagility acquisitions which drive an increase in revenue/EBITDA estimates although EPS estimates see 1-4% dilution on account of amortization expenses, lower other income and interest expenses for FY22-24E. We continue to back PSYS for growth momentum but note that street has adequately rewarded the company as reflected in ‘top of the pack’ valuations, thereby leaving little room to disappoint.

Impressive turnaround on operating performance through FY20-22E: Persistent’s performance had suffered through FY16-19 due to its ambition to create its own IP/Products business. A ‘Back to basics’ approach has helped in Persistent being able to capture its fair share of demand momentum in the Digital Engineering segment. Persistent has led peers on revenue growth through FY20-22E with favourable arithmetic’s heading into FY23. We are more encouraged with the broadening of growth as reflected in strong client metrics performance as well as growth in top accounts (Top client had been declining in absolute terms between FY17-21, but all set to cross prior peak revenues in FY22E). Growth leverage has been backed by improving margin trajectory (EBIT margins have improved through each of the past 8 quarters) benefitting from improving revenue mix and higher utilisation even as the company has hired aggressively and has faced similar industry wide pressures on supply..

Upping the ante with inorganic bets: Apart from the consistent operating performance, the company has upped the ante on inorganic bets in recent times in order to bolster existing capabilities (acquisitions of Data Glove & Mediaagility) or capture high growth markets(SCI acquisition). While acquisitions do carry integration risks in general, we believe that the structuring in the form of retaining key personnel of acquired businesses and the pay-out being a mix of upfront and retention/performance linked is likely to help.

Growth leadership now reflected in premium valuations: We incorporate the acquisitions of Data Glove and Mediaagility in our estimates driving upgrades on revenues/EBITDA but 1-4% dilution on FY22-24E EPS due to amortisation and lower other income/interest expenses. We back Persistent for growth momentum but also note that ‘top of the pack’ valuation multiples leave no room for disappointment. Our order of preference amongst Tier II techs is PSYS>MPHL(Both rated BUYs)>LTI>ZENT>Coforge>MTCL(All rated HOLDs)

Impressive turnaround in revenue growth momentum

Persistent has seen a remarkable turnaround in revenue growth performance after underperforming peers through FY16-19 when the management was focussed on building out a Products/IP business. ‘Back to basics’ approach under the new leadership that joined in FY19 has resulted in Persistent winning it’s fair share of the high growth Digital Engineering segment given it’s strong credentials. Persistent outperformed peers on revenue growth in FY21 and has sustained the growth leadership through FY22 as well. Given favourable arithmetrics, Persistent is likely to sustain the growth trajectory into FY23 as well.

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