Buy Persistent Systems Ltd For Target Rs. 6,450 by Motilal Oswal Financial Services Ltd
Steadfast quarter; good visibility ahead
FY27 growth targets reaffirmed; reiterate BUY
* Persistent Systems (PSYS) reported a 4QFY25 revenue of USD375m, up 4.2% QoQ in USD terms (est. +3.8%) and 4.5% in CC (est. +4.0%). EBIT margin stood at 15.6% (est. 14.8%).
* EBIT grew 10.9% QoQ/34.9% YoY to INR5.0b. Adj. PAT came in at INR3.9b (est. INR3.9b), up 12.2% QoQ/25.5% YoY. For FY25, revenue/EBIT/PAT grew 21.6%/23.8%/22.6% YoY in INR terms.
* We expect PSYS’s revenue/EBIT/PAT to grow 23.4%/38.7%/38.8% YoY in 1QFY26. TTM TCV was USD517.5m, down 13% QoQ but up 15.6% YoY (1.4x book-to-bill). We value PSYS at 45x FY27E EPS. Reiterate BUY with a TP of INR6,450.
Our view: Balanced 4Q and 15.6% exit margin set a strong FY26 base
* Stable quarter, well set for FY26 and FY27: PSYS delivered a healthy QoQ growth; while the healthcare vertical was flat, gains were evenly spread across BFS and hi-tech. PSYS has reconfirmed its USD2b FY27 target, implying an 18–19% cc CAGR over FY25–27.
* Expect margins to improve over FY26E: With 4Q exit margin at 15.6%, PSYS expects a ~100bp uplift in FY26E as one-off M&A earn-outs roll off. We err on the side of caution: incremental ramp-up costs from any mega deals secured in FY26E could possibly temper some of these gains, in addition to a 100bp headwind from the absence of “earn-out reversal credit” in FY25.
* Focus on platform services puts PSYS on the right side of the GenAI wave: PSYS has structured its AI strategy around real-time data integration, MLpowered domain models, and modular delivery via its Scalable AI-Services Value Accelerator (SASVA) platform. While it is currently difficult to quantify immediate revenue upside, PSYS remains at the forefront of platform services and believes this positions it well for the next wave.
Valuation and revisions to our estimates
* We project a 19% USD revenue CAGR over FY25-27 for PSYS, which, combined with margin expansion, could result in a ~23%+ EPS CAGR. This places the company in a league of its own as a diversified product engineering and IT services player.
* We maintain our estimates for FY26E while we revise our FY27 estimates upward by 4%, following the reaffirmation of PSYS’s USD2b revenue target for FY27. This implies a robust 18–19% CAGR over FY25–27 in CC. 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 45x FY27E EPS. Reiterate BUY with a TP of INR6,450.
Beat on revenue and margins; BFSI & Hi-tech led growth
* PSYS’s 4QFY25 revenue stood at USD375m, up 4.2% QoQ in USD terms (above our estimate of 3.8% QoQ). It reported CC growth of 4.5% QoQ vs. our estimate of 4% QoQ CC growth. For FY25, revenue stood at USD 1.4b, up 18.8% YoY.
* Growth was led by BFSI (up 6.1% QoQ) and Hi-tech (up 5.2% QoQ), whereas Healthcare was flat QoQ.
* TTM TCV was USD517.5m, down 13% QoQ and up 15.6% YoY (1.4x book-to-bill). The full-year TCV stood at USD 2.1b, up 17% YoY.
* EBIT margin at 15.6% was up 70bp QoQ, and was above our estimate of 14.8%. FY25 margin stood at 14.7%.
* The net new TCV was down 2.0% QoQ to USD329m. ACV stood at USD 198m.
* Net headcount improved 2.7% QoQ. Utilization was up 70bp QoQ to 88.1%. TTM attrition was up 30bp QoQ to 12.9%.
* EBITDA grew 8.7% QoQ/28.6% YoY to INR5.8b and EBITDA margin came in at 18%, above our estimate of 17.5%.
* Adj. PAT stood at INR3.9b (up 12.2% QoQ/25.5% YoY), in line with our estimate of INR3.9b. For FY25, PAT stood at INR 14b.
* The Board approved a final dividend of INR15/share for FY24-25.
Key highlights from the management commentary
* The macroeconomic environment remains uncertain, but PSYS is leading with cost optimization offerings.
* No client cancellations were reported. Strengthening of sales channels and active engagement with clients continues.
* Confident of achieving a USD2b revenue target by FY27.
* Growth drivers for FY26: BFSI and Hi-Tech, followed by Healthcare & Life Sciences.
* Exploring micro-verticals incubation in BFSI/HLS, or inorganic entry (via acquisition) into new verticals to support USD 5B aspiration by FY31.
* Hired leadership across sub-verticals and geographies to fuel vertical-led growth.
* Aspiring a 100bp YoY improvement in margins depending on growth and market conditions. Investments in SG&A will continue.
* Low discretionary exposure; well-positioned for vendor consolidation and costfocused initiatives. Recent vendor consolidation deal ramp-up led to higher third-party expenses.
* Payers and providers are under pressure due to lower federal funding.
* Puts and takes with DOGE initiatives led to certain customers being impacted; however, cost optimization opportunities emerged.
* Acquisitions will be used to scale to USD 5B ARR by FY31, focusing on Europe or micro-verticals in BFSI/HLS in the US to broaden horizontal solutions.
Valuation and view
* We maintain our estimates for FY26E while we revise our FY27 estimates upward by 4%, following the reaffirmation of PSYS’s USD2b revenue target for FY27. This implies a robust 18–19% CAGR over FY25–27 in CC. 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 45x FY27E EPS. Reiterate BUY with a TP of INR6,450.
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