Buy Persistent Systems Ltd For Target Rs.6,550 Prabhudas Liladhar Capital Ltd
Steady performance, focus shifted to margins
PSYS reported revenue growth of 7.8% QoQ CC (vs. our estimate of 7.6%), aided by healthy growth within BFS and Hi-Tech verticals, attributed to a ramp-up of the large deal (USD650m). Healthcare growth was weak on account of underlying macro challenges in US payer segment. The weakness in deal TCV/ACV (+4.0%/+7.4% YoY) was a little disappointing, primary attributed to a slower decision-making and deferred deal closure, which is likely to get recovered in Q3. Otherwise TTM TCV/ACV reported a growth of 36.3%/22.0% YoY. EBIT margin of 15.0% missed our estimate by 60 bps QoQ, primarily due to wage hike impact (140bps QoQ) and incremental investments in licensing and software tools (+32% QoQ). The management was confident of achieving 16-17% EBIT margin for FY27E. With the compensation revision behind and the large deal (USD650m) achieving its full potential in Q3, the operating leverage should kick in to support margin improvement in H2. We are keeping our CC revenue growth estimates largely unchanged, while revising our EBIT margin downward to 16.0% in FY27E (earlier 16.3%). The underlying fundamentals remain strong while the valuations have stretched over the past few sessions. Hence, downgrading PSYS to ACCUMULATE (BUY earlier). We assign 32x to Sep’28E EPS to arrive at a TP of INR 6,550.
Revenue:
PSYS reported Q2 revenue of USD 488mn, up 7.8% QoQ in CC and reported terms, slightly above our estimate of 7.6% QoQ CC. Tech segment led the quarter with 13.3% QoQ growth, while BFSI growth was steady at 6.8% QoQ and the Healthcare segment remained flattish QoQ. Geography wise, North America grew 10.9% QoQ while Europe declined 10% QoQ & APAC remained flat.
Operating Margin:
Q2 operating margin came in at 15.0%, down ~100 bps QoQ below consensus & our estimate of 15.6%, impacted by headwinds of wage hikes implementation (-140 bps), lower utilisation rate (-20 bps) and investments in third party tools & licenses (-90 bps), partly offset by tailwinds from lower engineering expenses and favourable currency (+150 bps).
Deal Wins:
Total TCV deal wins in Q2 came in at USD 634mn (-45% QoQ) following a 6.5-years strategic deal win of USD 650mn in Q1, while new TCV wins came in at USD 367mn (-61% QoQ). ACV stood at USD 481mn (-10% QoQ), with new ACV at USD 262mn (-32% QoQ), returning to normalised level after a strong Q1.
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SEBI Registration number is INH000000933
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