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Consistent show all around Strong deal TCV ensures near-term visibility

* Persistent Systems (PSYS) reported 1QFY27 revenue of USD452.4m (vs. est. USD449m), up 3.8% QoQ in USD terms and 4.1% in CC (est. +3%). Adj. EBIT margin stood at 16% (est. 16.1%).

* Adj. EBIT grew 4.2% QoQ/32.7% YoY to INR6.9b. Adj. PAT came in at INR4.8b (est. INR5.5b), down 8.7% QoQ/up 13.7% YoY. PAT miss can be attributed to rupee volatility and receivables revaluation, leading to a loss of INR1,052m (vs a gain of INR11.9m in 4Q).

* For 1QFY27, revenue/adj. EBIT/adj. PAT grew 29.1%/32.7%/13.7% YoY in INR terms. We expect revenue/adj. EBIT/adj. PAT to grow 24.5%/20.7%/20.1% YoY in 2QFY27. TCV was USD1,146m, up 91%/120% QoQ/YoY (2.5x book-to-bill). We value PSYS at 35x FY28E EPS. Reiterate BUY with a TP of INR6,400.

Our view: Margins to remain under pressure in 2Q due to wage hikes

* 1Q revenue beat driven by large deal ramp-up and key client strength: Revenue growth was driven by the ramp-up of a large USD650m deal, with peak revenue of ~75-80% expected in 2Q. Growth was further supported by robust traction in the top hi-tech customer, reflected in 9.4% QoQ growth in the top-five customer bucket, partially offset by a 4.1% QoQ decline in the 6–10 customer bucket. We build in 4.5% QoQ USD revenue growth for 2Q.

* Margins soften on investments; FY27 guidance maintained: 1Q EBIT margin contracted 30bp QoQ to 16.0%, driven by front-loaded hiring to support the ramp-up of large deals, which led to lower utilization (-60bp), along with higher AI tooling costs (-20bp). Margins next quarter are expected to be impacted by wage hikes (~180bp gross), which would be partially offset by operational gains. For FY27, we expect margins to be range-bound at 16.2% and at the lower end of management’s stated guidance of 16-17%.

* Cash conversion temporarily impacted by one-offs: 1Q OCF/PAT stood at 24.2% (vs. ~77% in 4Q), impacted by USD23m of delayed collections (largely recovered in early 2Q) and USD10m of delayed tax refunds. Adjusting for these one-offs, OCF/PAT would have been ~83%. Management continues to target ~100% OCF/PAT for FY27 but has shifted its guidance to a TTM basis.

* Nagarro acquisition closure expected by early CY27: Management expects to complete the Nagarro acquisition by 4QCY26 or 1QCY27, which remains a key catalyst for expanding capabilities and strengthening the company's European presence.

Valuation and revisions to our estimates

* We now build in ~16% USD revenue CAGR over FY26-28E for PSYS, reflecting growth acceleration driven by the ramp-up of large deals and peak revenue conversion beginning 2Q onwards. We are not factoring in margin expansion in FY27 over FY26, as additional hiring, transition costs related to large deals, and AI investments/tool purchases are expected to keep margins under pressure.

* We cut our EPS estimates for FY27 by 4.5% to factor in the foreign exchange losses and trim EBIT margin estimates for FY27/FY28 by 30bp/20bp, respectively, as growth remains the priority for management. We value PSYS at 35x FY28E EPS and reiterate BUY with a revised TP of INR6,400.

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