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Persistent posted yet another quarter of impressive revenue growth at 5.6% QoQ, above our est. of 5% QoQ. Growth was largely led by Healthcare followed by BFSI, while growth in Software, Hi-Tech, and Emerging Industries was again muted. Reported EBITM of 14% was a tad better than our expectations. But adjusted EBITM of 9.5% missed our estimate. Despite the weakness in adjusted EBITM in Q1, the mgmt. is confident of achieving flattish EBITM YoY in FY25, and has reiterated its medium-term target of a 200-300bps expansion in coming couple of years. The mgmt. is positive about sustaining revenue growth momentum backed by broad-based strong deal intake and deal pipeline. Growth is likely to be led by HLS, followed by BFSI and Hi-Tech. We tweak FY25-27E EPS by 0.2% to 2.2%, building in the Q1 performance. We hike target multiple to 36x (from 34x) to capture the strong revenue momentum and healthy deal intake. We retain REDUCE on the stock with TP of Rs4,150/sh at 36x Jun-26E EPS, as valuations remain rich even after a ~7% correction on 19-Jul-24.

Results Summary

Revenue grew 5.6% QoQ (similar in CC terms) to US$328.2mn, above our estimates. Reported EBITM declined by 40bps QoQ to 14.0%, but adjusted for one-offs, EBITM stood at 9.5%, lower than our estimate of 13.7%. Margin was impacted by visa costs (-60bps), higher subcontracting costs related to ramp-up of recently won deals (-210bps), and higher SG&A costs (-70bps) and partially offset by higher utilization (90bps), operating efficiencies (90bps), incremental benefits from reversal of earn out credit related to prior acquisitions (60bps), change in useful life estimates of computer and networking assets (40bps), and net employee benefit rationalization (10bps). Revenue growth was led by HLS (16.5% QoQ; ~70% of incremental revenue) and BFSI (5.9%), while Software, HiTech, and Emerging Industries saw a decline of 0.5% QoQ in revenue. Among geographies, North America (6.4% QoQ), Europe (5.6%), and India (2.4%) reported growth, while revenue for RoW (-10.3%) declined. What we liked: Strong revenue growth, healthy deal intake. What we did not like: Adjusted margin miss, weak cash conversion (OCF/EBITDA: 33.2%).

Earnings Call KTAs

i) The company announced wage hike wef Jul-24, with the gross impact expected at ~150-200bps, which will be partly negated by utilization, offshoring, and optimization of SG&A spends. ii) Europe revenue fell 7% YoY, partly due to decline in salesforce-related revenue and tail account rationalization linked with salesforce work. iii) The company's play in the AI domain has two broad vectors: AI for technology (transforming the way software is developed) and AI for business (transforming enterprises, from business model transformation, operational transformation and data, to insights and action, customer experience, and leveraging GenAI). iv) As Persistent embarks on a US$2bn journey, it has spawned two company-wide initiatives – revenue enhancement (focus on enhancing service offerings and approach in mining strategic accounts), and cost optimization (benchmarking policies wrt the industry’s best-in-class). Though some policies will provide one-time benefit, most are aimed at structurally balancing the cost base while enabling the right investment to fuel the company’s growth aspirations. v) Growth in Healthcare was backed by a large deal but was more broad-based. New leaders and continued investment in the sector grant confidence to the management about its growth journey in Healthcare. vi) One-off benefits (earn out credit reversal; reversal of long service accrual award; change in depreciation policy) of 450bps in Q1 EBITM.

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