By Sameer Pardikar
Persistent Systems (PSYS) continues to shine with a strong Q2 performance, reaffirming its position as a standout player in the IT services space. The company has delivered broad-based growth across verticals and geographies while maintaining impressive margins despite headwinds such as wage hikes.
As the company focuses on its strategic growth drivers and remains committed to its long-term goals, Persistent Systems looks well-positioned to continue its upward trajectory.
With significant deal wins, a diverse revenue stream, and clear margin expansion plans, PSYS is on the right path to achieving its ambitious targets for FY27. We recommend an Accumulate rating with a target price (TP) of INR 5,880, reflecting our confidence in its long-term growth prospects.
Broad-Based Growth Across Verticals and Geographies
One of the key strengths of Persistent Systems is its ability to drive growth across a wide range of verticals and geographies.
In Q2, the company reported a revenue increase of 5.3% in USD terms and 5.8% in INR terms, driven largely by its strong performance in North America and Europe, which saw revenue growth of 6.1% and 6.6% QoQ, respectively.
While growth in the Rest of the World (RoW) market was flat, PSYS’ expansion in critical sectors like BFSI (7.7% QoQ) and Healthcare (9.6% QoQ) more than made up for it.
Additionally, the company’s total contract value (TCV) for the trailing twelve months (TTM) reached USD 529 million, up 14% QoQ, showing strong demand for its services and a robust pipeline of opportunities.
This broad-based growth across multiple markets and sectors is a testament to Persistent Systems’ resilience and ability to capture opportunities in an evolving global IT landscape.
Resilience in Margins Despite Wage Hikes
A key concern for many companies in the tech services industry is managing margins amid rising costs, particularly wage inflation. However, Persistent Systems has managed to maintain flat EBIT margins (14%) in Q2 despite the headwinds.
The company faced multiple challenges, including wage hikes (-210 bps), policy rationalization (-130 bps), and ESOP costs (-60 bps). Nevertheless, these were offset by improvements in utilization (+120 bps), pricing improvements (+130 bps), and reductions in subcontracting costs (+70 bps), among other factors.
This ability to navigate costs while maintaining margins is crucial for the company’s long-term profitability.
Persistent Systems is targeting a 200-300 bps improvement in EBIT margins over the next two to three years, a goal that seems achievable given its strategies focused on pricing improvements, right shoring, and rationalizing SG&A and subcontracting costs.
If executed well, these initiatives could provide Persistent Systems with a competitive advantage and boost profitability.
Aiming High for FY27
Persistent Systems has set an ambitious target of achieving USD 2 billion in revenue by FY27, along with 200-300 bps of margin expansion.
These targets, while challenging, appear within reach given the company’s growth momentum and strategic focus on expanding its top 100 accounts, diversifying its customer base, and increasing efficiency.
We project a 17.6% CAGR in USD revenue growth and an 18.4% CAGR in INR terms for FY24-27, slightly conservative compared to the company’s USD 2 billion target. Still, this would take Persistent Systems’ revenue to USD 1.9 billion by FY27, which is commendable growth in itself.
Additionally, we expect EBIT margins to grow to around 17% by FY27, reflecting the company’s ability to drive operating leverage through cost rationalization and revenue expansion.
The Investment Case: Why PSYS Deserves a Premium
Persistent Systems has been one of the best-performing stocks in the IT sector, with a 32% run-up in the past few months. Despite this, we believe the company is still an attractive investment, as its strong fundamentals and growth prospects justify a premium valuation. With a 25% EBIT CAGR and strong revenue growth expected over FY24-27, Persistent Systems is likely to command higher multiples compared to peers in the industry.
At current levels, PSYS is trading at 57x and 44x FY25E and FY26E earnings, respectively. We believe that as the company continues to deliver strong growth, it should command a premium multiple. Our Accumulate recommendation is based on a target price of INR 5,880, reflecting 40x FY27E EPS of INR 147.
Risks to the Investment Case
While the outlook for Persistent Systems is promising, there are certain risks that investors should keep in mind.
Key downside risks include lower-than-expected revenue growth, especially if macroeconomic conditions deteriorate, or if there is a slowdown in the company’s key verticals such as BFSI or Healthcare.
Additionally, there is a risk that the expected margin expansion may not materialize as planned, which could impact profitability. However, given the company’s strong execution track record and strategic initiatives, we believe these risks are manageable and do not significantly detract from the long-term growth story.
Conclusion: A Strong Performer with Room to Grow
Persistent Systems has consistently delivered industry-leading growth, and its performance in Q2 reaffirms our positive outlook for the company.
With a balanced approach to growth, margin management, and strategic investments, PSYS is well-positioned to continue outperforming its peers in the IT services space. For long-term investors, Persistent Systems offers a compelling growth story with strong fundamentals, making it a solid addition to any portfolio.