Buy Persistent Systems Ltd For Target Rs.7,360 By Prabhudas Lilladher Ltd
Margin surprises positively, Platform strategy pays off
The revenue performance (+4.1% QoQ CC) exceeded our estimates (+3.2% QoQ CC), aided by broad-based growth across verticals. The company’s participation in complex areas of data and AI-led product engineering translates into better growth opportunities. The growth visibility looks encouraging for 9MFY26 ACV at USD722m (+18% YoY), while New Business ACV stood at USD256 (+18% YoY). The early investments in IPs and accelerators are paying off well in the form of deriving better productivity and scaling tailored solutions, Sasva (AI-powered platform) helps optimize project cycle and pass productivity benefits. The management maintained its aspiration to achieve revenue milestones of USD2b and USD5b by FY27E and FY30E, respectively. On margins, despite having wage hike (impact of ~180bps) in Q3, the company was able to absorb the impact through one of the IP-led deals, that constructs in a way it assumed upfront revenue recognition. We are largely keeping our revenue estimates unchanged at 17.9%/18.9% YoY CC in FY27E/FY28E, while revising our margins upward by 60bps each in FY27E/FY28E due to beat in Q3. We assign 40x to FY28E EPS to arrive at a TP of INR 7,360. Retain BUY.
Revenue: PSYS reported Q3 revenue of USD 422.5 mn, up 4.1% QoQ CC, ahead of our expectation of 3.2% QoQ CC growth. Growth was broad-based across segments, led by BFSI, which continued its strong momentum with 4.6% QoQ growth, taking the CQGR over the last seven quarters to ~6.5%. Healthcare and Hi-Tech also sustained healthy momentum, growing 4.8% and 3.0% QoQ, respectively. Geographically, growth was driven by North America, which grew 6.2% QoQ, while Europe declined 4.9% QoQ, marking a revenue decline after six consecutive quarters of sequential growth.
Operating margin: Operating margin performance was better than expected, as PSYS not only absorbed headwinds from wage hikes (-180 bps) and furloughs (- 20 bps), but also delivered a ~40 bps QoQ improvement in adjusted EBIT margins. Margin tailwinds included favorable currency movement (+30 bps), lower subcontractor costs (+20 bps), higher utilization, pyramid optimization and SG&A efficiencies (collectively +40 bps), and a benefit from AI tools and platform-led pricing (+150 bps).
Deal Wins: Deal momentum remained strong in Q3, with TCV wins of USD 674.5 mn, up 10.7% QoQ, of which NN wins accounted for ~55%. ACV wins stood at USD 501.9 mn, up 12.1% QoQ, with NN contribution of ~51%. PSYS secured multiple large deals during the quarter, including a USD 100 mn+ TCV BFSI deal with a Tier1 US bank and a USD 50 mn+, five-year healthcare deal in pathology and laboratory automation, enhancing medium-term revenue visibility.
Valuations and outlook: We estimate USD revenues/earnings CAGR of 18.4%/21.5% over FY26E-FY28E. We are assigning P/E of 40x to FY28E earnings & arrive at a target price of INR 7,360. We maintain our BUY rating on stock.
Strong all-round performance
* Revenue of USD 423 mn, up 4.1% QoQ CC & 4% QoQ in USD, above our estimates of 3.2% QoQ CC
* Segment-wise growth was broad based with BFSI, Healthcare & Hitech reporting sequential growth of 4.6%, 4.8% & 3% QoQ respectively
* Geography-wise growth was driven by North America which grew by 6.2% QoQ while Europe declined by 4.9% QoQ
* Adj. EBIT margin came at 16.7%, up 40 bps QoQ above our estimate of 15% & consensus estimate of 15.4%
* Reported TCV wins of USD 674 mn, up 10.7% QoQ while NN was up 5.2% QoQ. ACV came at USD 502 mn, up 12% QoQ while NN ACV was up 0.6% QoQ
* Net Headcount increased by 487 with net addition of 469 Software employees. Utilization incl. trainees increased by 20 bps QoQ to 88.4% while attrition declined by 30 bps QoQ to 13.5%
* Adj. PAT came at INR 5.3 bn (up 12.1% QoQ) above our estimate INR 4.5 bn
* Declared interim dividend of Rs. 22 per share
Please refer disclaimer at Report
SEBI Registration number is INH000000933.
