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Good 2Q but priced-in the premium valuation

* Revenue was in line, while EBIT margin beat was aided by conclusion of costs.

* Deal-win yoy growth trajectory improvement & commentary were reassuring.

* Earnings adjustments and trimming of valuation multiples drives our TP lower.

2QFY26 results summary

Persistent Systems’ (PSYS) 2QFY26 revenue at US$406.2m (up 4.2% qoq and 17.6% yoy) was in line with estimates while the EBIT margin beat was helped by conclusion of the cost of software licenses for a large customer (+80bp). Improvement in deal-win yoy growth trajectory was encouraging, and management commentary was upbeat, pending any material deterioration in the macroeconomic environment. Going ahead, 1) banking financial services (BFSI) and hi-tech could be growth drivers based on the ramp-up of existing deals and pipeline followed by healthcare, 2) wage hike (-180bp) would be key headwind to 3QFY26F EBIT margin partly offset (~80bp) by operating efficiency, while 3) utilization could be in the range of 83-85% vs. 88.2% currently.

Deal growth trajectory improvement reassures but sustainability key

TCV growth (up 17% qoq and 15.2% yoy at US$609.2m) was driven by renewals (up 40.6%/85.6% qoq/yoy at US$258.4m) while new component (up 4.1% qoq but down 10% yoy at US$250.8m) was soft, while sequential ACV growth (up 28.6%/16.4%/ qoq/yoy at US$447.9m) was led by both new (up 20.1%/16.4% qoq/yoy at US$254.4m) and renewals (up 11.5%/49.2% qoq/yoy at US$193.5m). Robust pipeline and conversion confidence, pending material deterioration in the macroeconomic environment, was encouraging but remains a key monitorable and is critical to sustaining the growth momentum.

EBIT margin improvement likely to continue

The EBIT margin at 16.3% (up 77bp/228bp qoq/yoy) beat our estimate by 42bp. Nil software license cost for a specific customer engagement and unlikely to recur (80bp), cross-currency movement (60bp) & planned offshoring (30bp) were tailwinds, while higher debt provisioning (50bp) and a decline in utilization (20bp) were key headwinds. Wage hike for all employees, effective 1 Oct 2026, could impact 3QFY26F EBIT margin by ~180bp, while the net impact could be lower driven by tailwinds from offshoring, utilization improvement and rationalization of sub-contracting expenses, SG&A and ESOP costs.

Maintain HOLD rating with a lower TP of Rs5,778 vs. Rs6,863 earlier

We introduce FY28F and now expect ~16% US$ revenue CAGR over FY25-28F, and ~21% PAT (Rs) CAGR. We shift our valuation methodology to P/E, vs. PE/G earlier, and discount FY28F EPS. We maintain HOLD rating and value Persistent Systems at 36x FY28F EPS to arrive at our lower target price of Rs5,778 (Rs6,863). The revision of multiple is to account for growth moderation, rising competitive intensity, and macroeconomic uncertainty. Upside risks: Strong bookings and M&A-led revenue acceleration. Downside risk: Client-specific challenges.

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