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Leading industry growth yet again…

Quick Pointers:

* Beat on both revenue & margins in Q2 result

* Strong deal wins of USD 609 mn after subdued Q1

The revenue performance (+4.4% QoQ CC) exceeded our estimates (+3.7% QoQ CC), margin at 16.3% was also above our estimates of 15.8% in Q2. The growth was broad-based across verticals and geographies, BFS and H&L reported healthy growth of 7.0% and 3.8% QoQ. With sharp uptick in NN ACV (+20% QoQ) along with healthy mix of NN wins (60% of ACV) provides strong revenue visibility in the coming year. Even the deal funnel distributed broadly across verticals, including sub-segments of H&L. With healthy deal pipeline, we believe the broad momentum within verticals should continue in H2 along with broader AI theme on “AI for Tech” and “AI for Business”. On margins, it fairly exceeded our estimates by 60bps QoQ, in Q2 but we expect limited headroom for margin improvement in H2 due to compensation revision. We are revising our FY26 revenue growth to 16.8% YoY CC (15.4% earlier) that translates to ~3.1% CQGR for the rest of the year, while keeping the revenue growth for FY27E/FY28E largely unchanged. We roll forward our estimates to Sep’27 and assign 40x to arrive at a TP of INR 6,280. Retain BUY.

Revenue: PSYS Q2 revenue of USD 406 mn, up 4.4% QoQ CC & 4.2% in reported terms came above our estimate of 3.7% QoQ CC growth. Growth was broad based across geographies & verticals. Key geography of North America & Europe grew by 4.2% & 7.7% respectively. Segment wise BFS continued its momentum with 7% QoQ growth while Hitech grew by 2.2% QoQ. Healthcare segment after 2 weak quarters grew by 3.8% QoQ in Q2.

Operating margin: Operating margins also exceeded both our and street expectations. PSYS reported an EBIT margin of 16.3% in Q2, an improvement of 80 bps QoQ versus our estimate of a 30-bps increase and consensus expectation of 20 bps. The margin expansion was driven by tailwinds from software license cost reduction (+80 bps), currency gains (+60 bps) and higher offshoring (+30 bps), partially offset by higher provisions for doubtful debts (-50 bps), lower utilization (-20 bps) and increased depreciation (-20 bps).

Deal Wins: Deal wins in Q2 were strong after subdued Q1. PSYS during the quarter won TCV of USD 609 mn, up 17% QoQ with NN wins of 58% while ACV wins came at USD 448 mn, up 16.2% QoQ with NN wins of 57%.

Valuations and outlook:

We estimate USD revenues/earnings CAGR of 17.9%/25% over FY25-FY28E. The stock is currently trading at 38x FY27E, we are assigning P/E of 40x to LTM Sep. 27E with a target price of INR 6,280. We maintain our BUY rating on stock.

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