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Strong operating performance, despite top-client weakness

PSYS reported better-than-expected operating performance in Q2. Revenue growth was broad-based across Software, Hi-tech & Emerging industries (8.3% QoQ; ex-top client 18.3%), BFSI (3.0%), and Healthcare & Life Sciences (4.7%). Management highlighted that client-focus has shifted towards cost optimization projects, given the prevailing uncertain macro conditions; this augurs well for large-deal opportunities. The company has not seen any material delay in decision-making so far, but remains watchful of the next quarter, given it being a short quarter. Order booking remained strong, with TCV of USD368mn (1.4x book-to-bill). The Services business has posted a 9.5% CQGR in the last eight quarters, and Management remains confident about sustaining the growth momentum on the back of continued strong demand, robust deal intake, healthy deal pipeline, new logo additions, and steady progress in client mining. IP revenue grew strongly in Q2 and partly explains the margin beat. We raise our EPS by 3.9%-5.1% for FY23E-25E, factoring-in the Q2 beat. We retain BUY with TP of Rs3,950 at 25x Sep-24E EPS (earlier Rs3,800), considering the strong execution, favorable industry tailwinds, and strong earnings trajectory (24.4% EPS CAGR over FY22-25E).

Result summary: Revenue grew 5.8% QoQ to USD255.6mn (CC 6.6%; organic 4.8%), above our expectations of USD251.9mn, driven by consistent growth in the Services business and strong rebound in IP revenue. Services revenue grew by 4.9% QoQ, aided by 4.4% growth in volume and 0.5% growth in blended realization. IP-led revenue sharply rebounded, growing 17.9% QoQ due to uptick in Accelerite revenue. EBITM expanded by 30bps sequentially, on account of operational efficiencies (+100bps), currency movement (+90bps), uptick in IP-led revenue (+80bps), and lower visa costs (+50bps), which were somewhat offset by wage hikes (-230bps), increase in doubtful debts provisions, higher amortisation charges and other expenses (-60bps). Net profit stood at Rs2.2bn, above our estimate, due to better operating performance. Revenue growth was led by Software, Hi-tech & Emerging industries (8.3% QoQ), Healthcare & Lifesciences (4.7% QoQ) and BFSI (3% QoQ). The top-client declined 21.3% QoQ. PSYS has seen steady improvement across client buckets. Order booking was at USD368mn (1.4x book-to-bill) in TCV, including USD228.3mn of new business TCV. Management is confident of expanding EBITM in FY23 compared with FY22, considering the H1 performance and benefits accruing from better utilisation, revenue growthled operating leverage, optimization in subcontracting costs, flattening employee pyramid, and favorable currency. What we liked: Broad-based revenue growth momentum in Services; strong rebound in IP revenue; EBITM beat, despite salary hikes; and moderation in attrition (23.7% vs 24.8% QoQ); What we did not like: Weakness in the top client.

Earnings-call KTAs: 1) The integration of recent acquisitions is on track and smooth; Management expects cross-selling and upselling to play out in coming quarters. 2) Demand environment remains healthy, but seeing increased focus on cost optimization programs. 3) Management expects the usual furloughs in Q3 as of now, although better clarity will emerge by early-December. 4) The company has not witnessed any material delay in decision-making so far, but remains watchful of the evolving macro situation in Q3, particularly given it being a short quarter. 5) LTM attrition for the quarter stood at 23.7% vs 24.8% in Q1; Management expects it to further moderate in H2. 6) Offshore realization rates steadily increased over the last 3 quarters, driven by better execution on fixed-price projects and enforcement of COLA clauses. 7) The company has hedges of USD195mn as of end-Q2, at an average exchange rate of Rs79.95/USD.

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