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Strong execution continues

* PSYS reported better-than-expected operating performance in Q1. Revenues grew by 11.1% QoQ/44.8% YoY (5.6%/30.5% organic) to USD241.5mn, driven by robust growth in the Services business (13.5% QoQ). EBITM expanded by 30bps QoQ to 14.3%.

* Revenue growth was broad-based across BFSI (15.6% QoQ), Software, Hi-tech & Emerging industries (10.0%), and Healthcare & Life Sciences (6.9%). Order booking stood at the highest-ever TCV of USD394mn (1.6x book-to-bill).

* Services revenues grew by 13.5% QoQ to USD224.6mn on the back of 10.4% volume growth. The Services business has posted a 9.8% CQGR in the last eight quarters, and management remains confident about sustaining the growth momentum. IP-led revenues declined 12.6% QoQ due to lower royalty revenues.

* We have tweaked our FY23/FY24/FY25 EPS estimates by 1.1%/0.7%/0.3%, factoring in the Q1 performance. We maintain Buy with a TP of Rs3,900 (27x Jun’24E EPS), considering strong execution, favorable industry tailwinds, and a strong earnings trajectory (~23% EPS CAGR over FY22-25E).

What we liked? Broad-based revenue growth momentum in Services; EBITM beat despite supply-side issues; and the highest-ever order book (USD394mn; 1.6x book-to-bill).

What we did not like? Weak cash conversion (OCF/EBITDA c~20% in Q1).

Revenue growth momentum continues:

Revenues grew by 11.1% QoQ to USD241.5mn, driven by consistent growth in the Services business. Services revenue grew by 13.5% QoQ, aided by 10.4% growth in volumes and 2.8% growth in blended realization. Organic revenue growth for the quarter stood at 5.6% QoQ. IP-led revenues declined 12.6% QoQ due to lower royalty revenues. The deal environment remains robust, and management doesn’t see any material delay in decision making so far. However, it remains watchful of the evolving macro situation. Revenue growth was broad-based across BFSI (15.6% QoQ), Software, Hi-tech & Emerging industries (10.0%), and Healthcare & Life Sciences (6.9%). Within geographies, growth was led by India (14.2% QoQ), Europe (12.5%), and North America (10.9%). PSYS has seen steady improvement across client buckets. Order booking was the highest ever at USD394mn (1.6x book-to-bill) in TCV, including USD230.3mn of new business TCV. Management remains confident of sustaining revenue growth momentum, supported by broad-based demand, robust deal intake, a healthy deal pipeline, new logo additions, and steady progress in client mining. The company aspires to achieve a USD1bn revenue runrate in the coming quarters. The integration of recent acquisitions is on track and is going smoothly, and management expects cross-selling and upselling to play out in the coming quarters with many large joint deals in the pipeline.

Adj. EBITM expands 30bps QoQ amid supply-side challenges:

Adjusted EBITM expanded by 30bps in Q1 to 14.3%, 60bps above our expectations. The strong revenue growth momentum and favorable currency movements (+90bps) negated headwinds from an increase in travel and visa costs (-50bps), supply-side challenges and higher amortization charges (-30bps). The salary hike (wef July) is expected to impact margins by 250-300bps in Q2; however, better utilization, revenue growth-led operating leverage, optimization in subcontracting costs, flattening employee pyramid and favorable currency should partly offset it. Management is confident of defending EBITM in FY23 at closer to FY22 level (~14%), considering above margin tailwinds and benefits accruing from acquisition synergies in H2.

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