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Margin expansion key monitorable, valuation expensive…

About the stock: Persistent System (Persistent) offers cloud, data, product & design led services to BFSI, Healthcare & Hi Tech verticals

* Persistent has shown a healthy turnaround in dollar revenue growth of 13% YoY in FY21 and margin expansion of 248 bps

* Net debt free and healthy double digit return ratio (with RoCE of 20%)

Q2FY22 Results: Persistent reported robust Q2FY22 results.

* Dollar revenues increased 9.3% QoQ to US$182 million

* EBITDA margins increased 22 bps QoQ to 16.6%

* PAT increased 6.9% QoQ to | 161.7 crore

What should investors do? Persistent’s share price has grown by ~6.6x over the past five years (from ~| 599 in October 2016 to ~| 3,958 levels in October 2021).

* We now assign HOLD rating (from BUY earlier) on expensive valuations

Target Price and Valuation: We value Persistent at | 4,230 i.e. 42x P/E on FY23E

Key triggers for future price performance:

* Won a total contractual value of US$282.5 million of which annual contractual value is US$201.1 million (implying a book to bill ratio of 1.4x) and net new of US$81.4 million

* This, coupled with multi-year deal won by the company, will help improve its revenues growth. We expect dollar revenue to grow at 22% CAGR in FY21-23E

* Margin expansion of ~160 bps to 17.9% in FY21-23E

Alternate Stock Idea: Apart from Persistent, in our IT coverage we also like LTI.

* Industry leading growth and healthy margins prompt us to be positive on the stock

* BUY with target price of | 7,650

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