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Strong Hi-tech Growth; Margin Recovery Hinges on Scale-Up

Persistent’s Q2FY27 performance reflected a healthy growth in Software, Hi-tech & Emerging and BFSI, while EBIT margin declined 100 bps QoQ to 15%, impacted by wage hike, lower utilisation and amortisation cost associated with the USD-650 Mn large deal. Reported PAT was further affected by one-off Nagarro acquisition expenses. We have incorporated the large deal’s ramp-up impact but excluded Nagarro’s revenue contribution and margin impact from our estimate, given the acquisition is yet to close. We project margin to remain under pressure, with the dilution risk compounded by Nagarro’s potentially lower growth and margin profile; recovery will depend on revenue scaling up and cost-optimisation

We revise our TP, to INR 6,120 from INR 5,730, valuing the stock at 30x average FY28&29E EPS. PSYS trades at a ~20% premium to Coforge, despite a comparable growth profile, limiting scope for further multiple expansion. We assign ‘ADD’, with execution and acquisition integration key monitorables.

Revenue & Margin Beat; Bookings Disappoint

* Persistent reported Q2FY27 revenues at USD 487.6 Mn, up 7.8% QoQ and 20.0% YoY (vs CIE estimate of USD 471 Mn). In CC terms, revenue was up 7.8% QoQ and 20.8% YoY. INR revenue stood at INR 46,639 Mn, up 8.4% QoQ and 30.3% YoY (vs CIE estimate of INR 44,999 Mn)

* EBIT stood at INR 6,977.2 Mn, up 1.6% QoQ and 19.5% YoY (vs CIE estimate of INR 6,615 Mn). Operating (EBIT) margin came in at 15.0% for Q2FY27, down 100 bps QoQ and 134 bps YoY (vs CIE estimate of 14.7%)

* Adj. PAT (ex Naggaro acquisition expenses) for the quarter came in at INR 3,515.1 Mn, down 27.2% QoQ and 25.4% YoY (vs CIE estimate of INR 5,468 Mn). Profitability was affected by one-time cost of INR 1,853 Mn related to the Nagarro acquisition; excluding this cost, PAT margin stood at 10.2%.

Revenue Growth Remains Strong, while Deal Momentum Softens QoQ

PSYS reported a strong Q2FY27, with revenue growing 7.8% QoQ and 20.0% YoY to USD 487.6 Mn, primarily driven by large deal ramp-up and supported by broad-based growth across key verticals. Software, Hi-Tech & Emerging Verticals (+13.3% QoQ), BFSI (+6.8%), while HLS (-0.1%) remained soft. Q2FY27 Order book stood at USD 633.5 Mn in TCV (down 44.7% QoQ), while new order book stood at USD 367.1 Mn (down 61.4% QoQ). North America grew 22.5% YoY, while Europe declined 8.5%, reflecting two client-specific ramp-downs that management characterised as one-offs. Momentum in Software Reinvention Services, AI-led modernisation and vendor consolidation continues to support deal traction. We expect large deal ramp-ups, AI-led outsourcing and further vendor consolidation to sustain revenue momentum through FY27E, although conversion of bookings into revenue remains a key monitorable

Margin Compression from Wage Hike and Deal Cost; Recovery Hinges on Utilisation and Scale:

EBIT margin declined 100 bps QoQ to 15.0%, as wage hikes (-140 bps), lower utilisation (-70 bps to 85.8%) and higher amortisation of tools and licences (-90 bps) outweighed lower SG&A cost and favourable currency movements (+150 bps). The management reiterated its aspirational margin target of 16–17%, supported by AI-led productivity, scale benefits and cost-optimisation. While deal ramp-ups and operating efficiency is expected to aid recovery, the Nagarro acquisition is likely to weigh on near-term profitability, with ~USD 50 Mn in one-off cost, including USD 19–20 Mn incurred in Q2FY27. We expect margin to recover gradually as utilisation improves, large engagements scale up and acquisition synergies materialise.

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