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From strength to strength

Company eyes USD5b by FY31; we keep one eye on margins

Persistent Systems (PSYS) reported 3QFY25 revenue of USD360.2m, up 4.3% QoQ in USD terms (est. 3.9%) and 4.6% in CC. EBIT margin stood at 14.9% (est. 14.4%). EBIT grew 12.2% QoQ/25.5% YoY to INR4.5b. PAT came in at INR3.7b (est. INR3.5b), up 14.8% QoQ/30.4% YoY. For 9MFY25, revenue/EBIT/PAT grew 20.3%/19.7%/21.5% vs. 9MFY24. We expect revenue/EBIT/PAT to grow by 24.2%/27.3%/22.9% YoY in 4QFY25. TTM TCV was USD594.1m, up 12% QoQ and 14% YoY (1.6x book-to-bill). We value PSYS at 55x FY27E EPS. Reiterate BUY with a TP of INR7,600.

Our view: Growth converging across verticals

* Revenue growth strong and broad-based: Unlike in previous quarters when the healthcare deal ramp-up was the key driver, revenue growth in 3QFY25 was broad-based. BFSI, Healthcare, and Hi-Tech all registered healthy growth of 4.9%, 4.3% and 3.7%, respectively.

* We expect FY26E growth to be of a similar flavour: While Healthcare ramp-down and short-term headwinds in the sector may lead to some slowdown, we expect BFSI and Hi-Tech to be the fastest-growing verticals for the industry overall and for PSYS as well.

* On track for USD2b in revenues by FY27, but the goal-post shifts to FY31: We are enthused by the management's continued guidance of achieving USD2b in revenue by FY27. This implies a CAGR of 19% over FY24-FY27, making PSYS one of the fastest-growing companies in the industry. We admire management’s focus and clarity of thought, though we seek more clarity on the FY31 revenue target of USD5b, which implies a CAGR of 25% over FY27-31.

* Margins, however, are a risk: Despite healthy 3% headcount addition, utilization stands at 87% and key margin levers are now maxed out. SG&A leverage still remains a key lever; however, we estimate only a modest margin expansion of 50bp over FY26E (another 20bp by FY27E) despite the management reiterating its target of 200-300bp margin expansion over the medium term.

Valuation and changes in our estimates

* We project a 19% USD revenue CAGR over FY24-27E for PSYS, which, combined with margin expansion, could result in a ~21%+ EPS CAGR. This places PSYS in a league of its own as a diversified product engineering and IT services player, justifying a premium valuation multiple.

* Our estimates are largely unchanged. The stock is currently trading at an admittedly expensive valuation. That said, owing to its superior earnings growth trajectory, on a PEG basis, we believe the valuation still has room for upside. We value PSYS at 55x FY27E EPS. Reiterate BUY with a TP of INR7,600.

Revenue and margins beat estimates; BFSI & Healthcare led growth

* 3QFY25 revenue stood at USD360.2m, up 4.3% QoQ in USD terms (above our estimate of 3.9% QoQ). It reported CC growth of 4.6% QoQ.

* Growth was led by BFSI (up 4.9% QoQ) and Healthcare (up 4.3% QoQ).

* EBIT margin at 14.9% was up by 90bp QoQ and above our estimate of 14.4%.

* TTM TCV was USD594.1m, up 12% QoQ and 14% YoY (1.6x book-to-bill; in line with average for the past two years).

* Net new TCV was down 14%% QoQ at USD333.6m. ACV stood at USD428.3m.

* Net headcount improved by 3.0% QoQ. Utilization was up 260bp QoQ at 87.4%. TTM attrition was up 60bp QoQ at 12.6%.

* The top-5 clients witnessed 2.3% QoQ growth, whereas the top 10 clients remained flat QoQ.

* EBITDA grew 11.9% QoQ/21.7% YoY to INR5.4b and EBITDA margin came in at 17.6%, above our estimate of 17.0%.

* Adj. PAT stood at INR3.7b (up 14.8% QoQ/30.4% YoY), above our estimate of INR3.5b.

Key highlights from the management commentary

* The sentiment is improving in certain business segments, with a buoyant outlook.

* All verticals have now achieved a quarterly revenue run rate of USD100m+.

* The company has set near-term revenue aspirations of USD2b by FY27 and USD5b by FY31. Key initiatives include: 1) doubling down on the top 100 clients, 2) expanding alternative service lines, such as Private Equity, and 3) developing 12-15 sub-vertical growth engines within three primary verticals.

* The layering of TCV is contributing to revenue growth, and the pipeline remains healthy.

* While there are signs of improvement, the company believes it is too early to declare a victory for these green shoots.

* Future margin improvements are anticipated through cost optimization, including pricing strategies to drive non-linear revenues and optimizing SG&A expenses.

* Utilization at 85% is comfortable. It increased to 87.4% in 3Q and is expected to be around that level for a few quarters.

* An interim dividend of INR20 per share was declared for the quarter.

Valuation and view

Our estimates are broadly unchanged. The stock is currently trading at an admittedly expensive valuation. That said, owing to its superior earnings growth trajectory, on a PEG basis, we believe the valuation still has room for upside. We value PSYS at 55x FY27E EPS. Reiterate BUY with a TP of INR7,600.

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