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Growth outlook already baked into the price

Growth momentum continues; led by strong business mix

* Persistent Systems (PSYS) delivered 3QFY24 revenue of USD300.6m, up 3.1% QoQ in CC terms, in line with our estimate. Deal win TCV was at a record high (USD 521m), aided by strong wins and renewals in North America. EBITDA margin at 17.7% (up 90bp QoQ) beat our estimates; the improvement was attributed to seasonality in IP business and SG&A optimization.

* PSYS’s 3QFY24 revenue performance was positive, although the growth was skewed toward Healthcare and Life (up 16% QoQ); the other two verticals reported muted growth. Despite a seasonal furlough, the deal TCV recorded yet another quarter of strong growth, up 8.8% QoQ (vs +26% QoQ in 2Q), translating to 1.7x BTB.

* 3Q revenue growth was aided by IP seasonality and earlier deal ramp-ups in Healthcare; however, the healthy deal pipeline and strong conversion should lead to a balanced growth in 4Q. Additionally, the insulated service mix and lower dependency on discretionary spends are also leading to strong renewals and conversion, unlike its peers. The management was confident of delivering a top-quartile growth, while remaining cautiously positive on the macro outlook. We believe, the strong deal wins and continued momentum in its growth vectors are the strong foundations for FY25E/FY26E growth. We are building in USD revenue CAGR of 16% over FY24E-FY26E.

* PSYS saw a sharp margin improvement of 90bp on account of strong annuity-based (IP) revenues and SG&A optimization. The management was confident of achieving further improvement in margin, led by enhanced productivity, resulting from previous fresher and lateral hires. Additionally, it anticipates leveraging SG&A optimization from its earlier strategic investments. PSYS further reiterated its aspiration of 200-300bp EBITDA margin improvement over the next two to three years. We expect EBIT margin at 15.2%/16.1% in FY25/FY26, which will lead to FY24-26E PAT CAGR of 22%.

* The stock is currently trading at a rich valuation of 36x FY26E EPS, leaving little room for further upside, despite the strong growth delivery. We believe PSYS’ valuation appropriately factors in the favorable growth along with the adverse macro environment. We value the stock at 37x FY26E EPS. We reiterate Neutral as we see limited upside from the current levels.

Strong execution on margins; recorded highest-ever deal TCV

* Persistent Systems’ 3QFY24 revenue stood at USD300.6m (in line with our estimate), up 3.1% QoQ in CC terms. It reported USD growth of 3.0% QoQ. 23 January 2024 3QFY24 Results Update | Sector: Technology Persistent Systems 23 January 2024 27

* Growth was again led by the healthcare sector, which was up 16.4% QoQ vs 7.0% QoQ reported in 2Q. Hi-Tech and BFSI segments experienced a growth of 0.1% and a decline of 0.5% QoQ, respectively.

* In terms of regional performance, North America & APAC grew 3.7% and 4.0% QoQ, respectively, while Europe was weak, down 3.5% QoQ.

* 3Q saw the highest ever TCV of USD 521m, up 9% QoQ and 18% YoY (1.7x Book to Bill).

* Net headcount was up 494 (up 2.3% QoQ); utilization was up 90bp QoQ at 81.5%; TTM Attrition moderated further to 11.9% (down 160bp QoQ)

* EBITDA margin stood at 17.7%, up 90bp QoQ. It was above our estimate of 17.0%, clocking a sharp recovery from 2Q wage hike impact.

* Adj. PAT stood at INR 2.9b (up 8.7% QoQ), above our estimate of INR 2.7b on account of a margin beat.

* The company has proposed a stock split of 1:2. The board has declared an interim dividend of INR 32 per share.

Key highlights from the management commentary

* The demand environment remains fluid with account mining and new deal wins serving as the major drivers for growth. Both existing and newly acquired accounts played a significant role in driving top-line growth in 3Q. While there are sees some green shoots on the discretionary spends, it is not yet substantial.

* North America has witnessed strong deal wins in 3Q, aided by robust deal pipeline. About 75% of the deal TCV is attributed to North America and it has witnessed a higher number of renewals that lead to stronger ACV and TCV in 3Q.

* The robust healthcare growth in 3Q is driven by the substantial contribution from medical devices, with pharma and healthcare provider businesses taking the lead in the US region. Additionally, the company has made strategic investments in the payer domain, which is expected to get materialized over the course of time.

* The improvement in margin was led by seasonality in the IP business, contributing an 80bp increase (includes +30 bp rise in utilization). Additionally, there was a +60 bp improvement attributed to SG&A optimization. However, this was partially offset by furloughs and ramp-ups in the onsite mix (led to increase in subcon).

Improvement in growth already priced in; maintain Neutral

* While its peers have struggled to deliver positive growth and outlook, PSYS has maintained its growth momentum with sharp execution on margins during the quarter.

* The deal TCVs were strong in 3Q and it is building a strong foundation for growth in FY25/FY26. The company’s: 1) strong performance in recent years, 2) healthy order book, and 3) strong deal pipeline indicate an encouraging demand trend.

* The stock is currently trading at 36x FY26E EPS. Our TP is based on 37x FY26E EPS. We reiterate our Neutral rating as we believe the positives have already been captured and the stock offers limited upside from its current levels.

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