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Targeting USD 5bn revenue by FY31

Persistent System’s (PSYS IN) Q3 performance was strong on both revenue and margin. Revenue growth was aided by broad-based growth across verticals, and margin performance was helped by rationalization of costs and improved utilization. Deal wins improved and may help keep revenue growth momentum strong, going forward. PSYS maintained revenue guidance of USD 2bn by FY27 – It went one step ahead and is now targeting USD 5bn revenues by FY31. Growth levers for USD 5bn revenues are further mining of top-100 accounts, special focus on sub-verticals in three main verticals and continued partnership with hyperscalers to jointly develop AI solutions. PSYS also maintained that 200-300bps margin expansion is possible in the next 2-3 years. We do not see any risk to the USD 2 bn revenue, considering consistent strong performance in both revenue and margin. So, we raise TP to INR 6,090 (from INR 5,880), based on 40x FY27E EPS of INR 152. We recommend Accumulate.

Broad-based growth across verticals and geographies: PSYS reported strong growth of 4.6% QoQ in CC and 4.3% in USD, in Q3. In INR terms, growth was 5.7% QoQ and 22.6% YoY. Q3 growth was led by North America and Europe, as revenue from these markets rose 3.2% and 8.2% sequentially. RoW market recovered after weak growth in Q2 (up by 9.1% QoQ in Q3). Vertical-wise, BFSI and Healthcare aided growth, up by 4.9% and 4.3% QoQ respectively. TCV came in at USD 594.1mn, up 12% QoQ. LTM attrition was up 60bps QoQ to 12.6%. PSYS reported a net addition of 705 employees in Q3, taking its employee strength to 23.9K.

Margin improved, led by operating leverage: Q3 EBIT margin was up by 90bps to 14.9%. Headwinds for the quarter were furlough impact (-60bps), and lower earnout reversal (-100bps) – the absolute amount was INR 150mn. Tailwinds were improved utilization as also reduction in subcon cost (together +140bps), and depreciation in Rupee (+50bps). Additional tailwinds were 40bps and 20bps (pertained to lower ESOP costs). The management maintained that it is aiming for 200-300bps EBIT margin improvement in the next 2-3 years. Tailwinds are: i) pricing in terms of COLA adjustments ii) rightshoring of contracts and iii) rationalization of SG&A and sub con costs

Recommend Accumulate with TP raised to INR 6,090: PSYS continues to impress with strong broad-based growth. We expect strong growth momentum to continue, barring quarterly fluctuations. We are now building in ~19% USD revenue and 20% INR revenue CAGR in FY24-27E, taking the total revenue to USD 2bn in FY27E (similar to guidance). We believe that rationalization of costs with strong revenue growth may help operating leverage. We build in 27% EBIT CAGR over the same period, factoring in ~17%% EBIT margin in FY27E. With strong revenue and earnings in FY24-27E , probably the best in the industry, PSYS should command a premium multiple, in our view. PSYS is trading at 48x/37x FY26E/27E earnings. We recommend Accumulate with TP raised to INR 6,090 (from INR 5,880, led by strong 9MFY25 performance in revenue and margins ), based on 40x FY27E EPS of INR 147. Key downside risks are lower-thanexpected revenue growth and margin expansion not panning out as per expectations.

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