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Assessing Q3 Results in Light of Trump Tariffs & Macroeconomic Challenges

PSYS Revenue & EBIT slightly above estimates, PAT beats expectations.

* Revenue for Q3FY25 came at INR 30.6Bn up 22.6% YoY and 5.7% QoQ (vs consensus est. at INR 30.2Bn).

* EBIT for Q3FY25 came at INR 4.5Bn, up 25.5% YoY and 12.2% QoQ (vs consensus est. at INR 4.4Bn). EBIT margin was up 35bps YoY and 86bps QoQ to 14.9% (vs consensus est. at 14.5%).

* PAT for Q3FY25 stood at INR 3.7Bn, up 30.4% YoY and 14.8% QoQ (vs consensus est. at INR 3.7Bn).

Record $594.1M TCV deal on TTM basis drives ambitious growth plans: PSYS secured significant deals in Q3FY25, including a $150Mn+ 7-year transformation deal in BFSI, their largest to date. Other notable wins were in Software, Hi-Tech (a $50Mn+ 5-year deal), and Healthcare & Life Sciences, focusing on R&D transformation, engineering partnerships, and platform modernization, leveraging company’s SASVA platform. The TCV for the quarter reached $594.1Mn, with new bookings at $333.6Mn, and the ACV stood at $428.3Mn. Management is confident in their growth trajectory, targeting $2Bn revenue by FY27 and $5Bn by FY31. While ACV growth appeared modest, multiyear deals are expected to drive future revenue. The healthy pipeline, coupled with a focus on AI-led, platform-driven services, positions PSYS for continued success. Strategic partnerships and a focus on top clients further support a positive outlook.

Potential slowdown in IT spends amid Trump tariffs: PSYS may face revenue challenges due to uncertainty over the Fed's interest rate decisions and concerns about a potential US economic slowdown. With 80% of its revenue from North America, a dip in IT spending or delayed contract renewals from key sectors like BFSI, software, Hi-tech, and emerging industries could affect top line growth. Additionally, currency volatility poses a risk to profit margins. However, easing inflation and stable tariff policies could drive increased demand, helping US enterprises make more confident IT spending decisions

PSYS workforce, attrition, and EBIT outlook: As of Q3FY25, PSYS employed 23,941 people, with 20,661 based in India and 2,778 in North America. The company reported a TTM attrition rate of 12.6%, within acceptable limits. EBIT margin for Q3FY25 was 14.9%, up 90bps sequentially, driven by factors like higher utilization (87.4%), rationalized contractor costs, and a strong USD. Management aims for margin expansion of 200-300bps over medium term, focusing on pricing, SG&A optimization, and AI-led platform services, expecting the earnout reversal headwind to end by FY25.

View and Valuation: PSYS is committed to proactively staying closer to their clients and aiding them in prioritizing their technology spend towards cost optimization and transformation. We expect Revenue/EBIT/PAT to grow at a CAGR of 20.2%/26.9%/25.8% respectively over FY25E-FY27E. We upgrade our rating to HOLD to arrive at a revised target price of INR5,660. Considering PSYS's significant exposure to the US market, we have lowered our PE multiple to 40x (earlier 45x), based on the FY27E EPS of INR141.5.

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