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Quick Pointers:

* Margin steady despite wage hike implementation & multiple headwinds during the quarter

* Won highest TCV ever of US$ 529 mn incl. net new wins of US$ 390 mn PSYS reported strong growth in Q2FY25, with revenue of US$345 million, up 5.1% QoQ in CC and 5.3% QoQ in USD terms, exceeding our estimate of 2.9% QoQ CC growth and consensus estimate of 3.9% QoQ USD growth. BFS and Healthcare segments drove growth despite ongoing weakness in Hitech sector. EBIT margin remained flat QoQ at 14%, vs our expectation of 70 bps decline and cons. est. of 30 bps QoQ decline. PSYS achieved its highest-ever TCV win of US$529 mn (previous high was US$521 mn in Q3FY24), with net new wins of US$390 mn. Additionally, ACV stood at US$348 mn, up 10.3% YoY, with net new wins of US$219 mn. The growth momentum continued in Q2 aided by continued ramp ups within Healthcare/Life vertical, which further got supported by strong momentum in BFSI. The critical and resilience aspects of the industries, and the nature of engagement with product and platform companies, are enabling it to participate in the non-discretionary areas. Although the growth within Software and Hi-Tech (41% of rev.) was muted in Q2, the gradual recovery should align to improving revenue profile of SaaS/ERP companies. The record high deal TCV (USD530 mn) with sharp improvement in NN component (+25% QoQ) warrant strong revenue visibility for the coming periods. The marque HiTech vertical has also witnessed incremental deal flows in Q2, but the deal complexity is reasonably high, which is making the deployment even slower, but otherwise the management seemed confident to balance the growth in each of three vectors. The management expects the furlough impact in H2 to be as similar as last year’s, while reiterated its aspiration to achieve USD2bn revenue by FY27. Considering the Q2 revenue beat and usual Q3 furloughs, we are passing on the benefits to H2 and revising our revenue growth by ~150bps for FY25E. At the same time, we are also cognizant of volume uptick in healthcare vertical in FY25E, which will get moderate through FY26E. Hence, we are broadly keeping our USD revenue estimates unchanged for FY26E/FY27E at 17%/19% respectively. On the margins front, the execution was remarkable, beating our estimates by 70 bps QoQ. The management indicated that it has multiple optimization levers with further headroom for improving utilization and optimizing subcon. Additionally, the S&M investments are largely in place, it would draw its attention to capitalize on those while right-shoring the resource deployment. We are revising our margins upward by 30bps in FY25E, while keeping the estimates broadly unchanged for FY26E/FY27E.

Valuations and outlook:

PSYS’ unique value proposition and its strong play around regulated verticals are keeping it more resilient in this adverse environment.

Additionally, the investments around hiring senior leadership team within key verticals have been instrumental in fueling client mining/hunting activities and closing large strategic deals. However, the valuation looks expensive with all positive are factored into the current price. We estimate USD revenues/earnings CAGR of 18%/22% over FY24-FY27E. The stock is currently trading at 38x FY27E, we are assigning P/E of 43x to FY27E with a target price of INR 5,810. We maintain ACCUMULATE. Beat on Revenue, Deal win at record high

* Revenue of USD345mn, up 5.1% QoQ CC USD & 5.3% QoQ in USD, vs our estimates of 2.9% CC QoQ, and consensus estimates of 3.9% QoQ USD growth

* Vertical wise growth was led by BFSI and Healthcare with 7.7% and 9.6% QoQ while, Hi-Tech growth was muted at 0.8%

* Geo wise, NA and Europe were up by 6.1% and 6.6% QoQ, respectively

* EBIT margin at 14.0% vs of our estimate of 13.3% & consensus estimate of 13.7%. However, there is an earn out reversal (H1 - INR 1,097m) in Q2 as well, hence implied Q2 Adj. margins at 10.2%

* Record high TCV win at USD529mn, up 14.3% QoQ while NN was up 25.4%. ACV came at USD 348 mn, up 3.3%, while NN ACV was up 10.3%

* Net Headcount declined by 280. Utilization incl. trainees increased by 300 bps QoQ to 84.8% while attrition increased by 10bps QoQ to 12.0%

* PAT came at Rs3.25bm (up 6.1% QoQ) in line of our estimate

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