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Industry leading valuation to limit further upside; reiterate Neutral

* Persistent Systems (PSYS) delivered 4QFY23 revenue of USD274.6m (+3.5% QoQ in CC/ +3.9% QoQ, ahead of our estimate of +3.0% QoQ in CC). 4Q growth was led by Services business (+5.5% QoQ), while IP-led business declined 14.6% QoQ due to seasonality. EBITDA margin was in line at 18.5%, as lower employee cost was offset by a spike in software royalty cost. PSYS added 1.9k employees in 4QFY23, despite moderating attrition (19.8%, down 180bp QoQ).

* We view PSYS’ 4QFY23 topline performance as positive, especially as the weak macro environment has resulted in cutbacks in discretionary spending. While this impacted growth adversely at a key Hyperscaler account (down USD3m QoQ), a rebound in its top account (up 30.5% QoQ) – post-declining for four quarters – more than offset the impact.

* Moreover, PSYS reported good deal TCV of USD422m despite a push back of a few deals to the next quarter. PSYS should sustain strong growth in its top account, where it won its first USD100m deal (of fiveyear duration). Management has indicated for a sustained growth in FY24E despite macro concerns, and it has maintained marginally lower quarterly growth expectation of 3-5% v/s 4-6% QoQ long-term aspiration. We remain closer to the lower end of the guidance due to high discretionary exposure but still see PSYS delivering FY23-25 USD revenue CAGR of 16%, at the higher end of our coverage.

* Strong topline growth should be complemented by operating leverage, partially tempered by higher third-party software component in new deals. Strong fresher additions and improving metrics would help it improve its EBITDA margin to 19.2% in FY25 from 18.2% in FY23, which will lead to an FY23-25 PAT CAGR of 23%.

* We raise our FY24/FY25 EPS estimates by ~5%-6% on strong performance. We value the stock at 26x FY25E EPS.

* PSYS is trading at a fair valuation of 24x our FY25E EPS, leaving little room for further upside despite the strong growth delivery. Hence, PSYS’ valuation appropriately factors in favorable growth along with the adverse demand environment in our opinion. We maintain our Neutral rating as we see limited upside from current levels.

Beat on revenue, strong NN TCV in 4QFY23

* PSYS’ USD Revenue/INR EBIT/INR PAT grew 26%/51%/25% YoY in 4QFY23.

* FY23 USD Revenue/ INR EBIT/ INR PAT grew 35%/56%/33% YoY.

* PSYS’ 4QFY23 USD revenue rose 3.5% QoQ in CC to USD274.6m (beating our estimate). Reported USD growth was 3.9% QoQ.

* PSYS’ 4QFY23 EBITDA margin stood at 18.5% (flat QoQ), in line with our estimate, led by better pricing and lower attrition. ? Adj. PAT grew 6% QoQ to INR2.5b v/s our estimate of INR2.7b; the miss was primarily attributed to higher FX loss of INR189m v/s gain of INR105m in 3QFY23.

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