Sell Persistent Systems Ltd For Target Rs. 5,630 By Elara Capital
Margin led by one-off benefit
Persistent Systems’ (PSYS IN) Q3 revenue was better, led by recovery in the healthcare vertical, while margin performance was helped by a one-time license fee. PSYS continues to maintain its annualized revenue guidance of USD 2bn by Q4FY27. Per our calculation, the ask rate to reach that target is 3.5% CQGR, which seems feasible considering recovery in healthcare and strong performance in BFSI and Hi-tech. PSYS maintains its aspiration to reach USD 5bn revenues by FY31, for which the growth rate needs to accelerate further. PSYS earlier seeks to improve margins aggressively over 2 years but now looking to balance revenue growth and margin expansion. We revise PSYS to SELL from Reduce with a higher TP of INR 5,630 (on an unchanged multiple).
Broad-based growth across verticals: PSYS reported a growth of 4.1% QoQ in CC terms and 4.0% in USD terms in Q3. In INR terms, growth was 5.5% QoQ and 23.4% YoY. In Q3, growth was led by North America and RoW, as revenue from these markets rose 6.2% QoQ and 34.6% QoQ, respectively. India and Europe markets were a drag on growth, declining 11.8% QoQ and 4.9% QoQ respectively. Vertical-wise, growth was led by healthcare, up 4.8% QoQ. BFSI grew 4.6% QoQ in USD terms, followed by Hi-Tech, up 3.0% QoQ. Total contract value (TCV) came in at USD 675mn, up 10.7% QoQ/13.5% YoY in Q3. Annual contract value (TCV) outpaced TCV growth, up 12.1% QoQ/17.2% YoY to USD 502mn. LTM attrition was down 30bps QoQ to 13.5%, while PSYS reported a net addition of 487 employees in Q3. The Board declared an interim dividend of INR 22 per share, with payout ratio of 78.7%.
Margin expansion led by one-off benefit: Q3 EBIT margin was up 40bps to 16.7%, led by a 30bps gain from favorable currency, 20bps from lower sub con costs, and 40bps from higher utilization, onsite pyramid rationalization and SG&A optimization. A one-time license fee contributed a further 150bps to margin improvement, though offset by 180bps of wage?hike impact, effective 1 October 2025, and 20bps impact from furloughs. PSYS recorded INR 890mn charge related to new Labor?Code provisioning, which hit PAT margins by 180bps. PSYS noted that it is not targeting aggressive margin expansion, preferring to reinvest gains to sustain growth
Revise to Sell from Reduce; TP raised to INR 5,630: PSYS continues to report a strong broadbased growth across all customer segments. Top 5/10/20 customers, which forms 33%to 54% of its revenue mix, reported 18-20% CAGR in FY22-25, while CQGR growth in past few quarters was around 5%. TCV, on the other hand, has been growing strong as well, now crossing USD 675mn in the quarter. This is likely to help maintain growth momentum.
We raise our revenue estimates by 1-3% for FY27E/FY28E, in line with Q4FY27 guidance. We also revise our earnings estimates upwards by 6-8% as we continue to build margin expansion in the next two years. Accordingly, we raise our TP to INR 5,630 (from INR 5,250), while we revise PSYS to Sell from Reduce given expensive valuation (the stock is trading at 52x and 44x on FY26E/FY27E).
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SEBI Registration number is INH000000933.
