Persistent Systems Ltd. share price target

Persistent reported 1.8% QoQ decline in revenues as US$127mn (in line with our estimates) as Alliance Business de-grew 28% QoQ, partially off-set by 3.8% QoQ growth in Services (Technology+ Digital) Segment. OPM for the quarter improved 50bps QoQ to 9.2% (our estimate: 8.1%) led by lower volumes in reseller business in Q4. Technology & Digital segment (collectively 74% of revenues) continue to drive topline growth with 2.2% and 7% QoQ growth. PSYS expects these segments to outperform based on positive client interactions,...

Persistent reported a mixed set of Q4FY20 numbers. While revenues in dollar terms dipped 1.8% QoQ, EBIT margins improved 50 bps. In addition, PAT declined 4.7% QoQ mainly due to lower forex gain. The decline in revenue was mainly due to 24.3% decline in IP led revenues. The...

Additionally, we expect a higher emphasis on annuity revenue to address the performance The companys robust performance in 4Q (barring IP), healthy deal pipeline, and cautiously optimistic outlook indicate the near term COVID-19 disruption would not be as bad as we initially anticipated. Over the medium term, Persistent should be a key beneficiary of the COVID-19- led increase in uptake in digital services, given its high exposure to salesforce consulting and verticals such as Technology, Healthcare, and BFSI. In 4QFY20, revenue (USD) / EBIT (INR) / PAT increased 7%/-4%/-1% YoY v/s our Technology Services Unit (TSU) reported strong growth of 4.2% QoQ despite the disruption from COVID-19 during the quarter. In 4QFY20, revenue (USD) / EBIT (INR) / PAT increased 7%/-4%/-1% YoY v/s our Technology Services Unit (TSU) reported strong growth of 4.2% QoQ despite the disruption from COVID-19 during the quarter.

The spread of Covid-19 has led to lockdowns in many countries globally and could have adverse economic implications. In addition, the recent fall in crude prices could also have an adverse impact of fiscal health of oil producing countries. As a result, IT companies, which have considerable exposure to verticals such as oil, energy & utilities; banking & capital markets; manufacturing and travel & transport could see an adverse impact from the ongoing crisis. Companies like Wipro, Infosys in large cap and MindTree, NIIT Tech, Sonata software, Cyient, Accelya Solutions among...

PSYS' recent trends have been a tale of two cities with the TSU segment accelerating to mid-teens growth (vs. high single-digit avg. over 10 qtrs), while Alliance & Accelerite units continue to be choppy. PSYS' S&M re-alignment towards client mining, cross-sell and large deals as well as delivery rejig has resulted in strong uptick in TSU. Large opportunity exists to stabilise the volatility in Alliance portfolio (leadership change), but it may be gradual even as T1 account concentration continues to decline. Margins have bottomed-out and are expected to improve with oplev, stability in Alliance and SG&A efficiencies. Expect 10.5/12.5% CAGR in USD rev/APAT over FY20-22E. Key risks include worsening working capital and continued volatility in Alliance business. We maintain BUY on Persistent Systems (PSYS) following an in-line rev. TSU business is on an upswing (sustainable), Alliance business is work-in-progress and margins have bottomed-out. Our TP is Rs 745, at 13x Dec-21E (10-yr avg.) with moderate increase in est (~3%).

31 January 2020 Despite the weakness at the top client, revenue growth and margins were largely in line with our estimates. The positive outlook on all key verticals and the healthy deal pipeline within IBM are likely to translate into decent revenue growth (8.6% CAGR, USD) over FY20-22. Also, SG&A; optimization will likely leave ~120bp headroom for margin expansion over FY20-22. Our EPS estimates over FY20-22 remain largely unchanged. Despite the sharp re-rating (40% over last year), reasonable multiples offer margin of safety, in our view. Revenue grew 7% YoY to USD129m, EBIT declined 38% YoY to INR806m and PAT was down 4% YoY to INR879m largely in line with our estimates. Growth was led by Services (+6.1% QoQ) and Digital (+6.8% QoQ), partially offset by a decline in Alliance (2% QoQ) and Accelerite (~14% QoQ). While IP-led revenue declined by ~2.

Persistent reported a strong quarter on the revenue front with 4.9% QoQ growth in US$ revenue (4.1% organic, 0.8% contribution from Youperience acquisition). Growth was primarily led by IP led revenues, which increased 9.7% sequentially. Digital business (22.4% of revenues) also witnessed a recovery (3.5% QoQ growth) post weak Q1. On the margin front, despite robust growth in high margin IP led revenues, EBIT margins declined 90 bps QoQ to 8.9% mainly led by higher sales & marketing expenses. However, we expect margins to expand from these levels with the play of utilisation,...

Despite strong domain expertise in ISV and niche specialisation (partner-led) in BFSI/Healthcare verticals, PSYS has lagged peers significantly (both rev/EPS) historically with low annuity/high project-based being the nemesis. However, we reckon that the trajectory has bottomed out following the recent leadership changes based on (1) Strong participation in Salesforce ecosystem (USD 60mn annual-rate biz), (2) Early signs of deal momentum (long tenured deal wins in BFSI) supported by sales re-alignment, and (3) Broad-based IP growth (Alliance/Accelerite) with pick up in renewals (93%) in Alliance. Expect 8/5% CAGR in rev/APAT over FY19-22E. Key risks include worsening working capital, volatility in Digital business (platform-led) & Alliance. We maintain BUY on Persistent Systems (PSYS) following an in-line 2Q. PSYS is exhibiting early signs of recovery (steady TSU, broad-based IP, sales velocity) and valuations are reasonable (12.5x FY21E). Our TP is Rs 670, valued at 13x Sep-21E EPS.

Revenue growth was subdued for another straight quarter with lower-thanexpected growth in IP led revenues (0.8% QoQ growth to $25.8 million) being the primary reason. Further, a decline in digital business (5.9% QoQ) also added to lower growth numbers. The management alluded to its focus on large annuity deals and improving IP led revenues to gain revenue growth momentum. While we expect FY20E revenues to register muted growth, acceleration is expected to be only in FY21E. Further, poor Q1FY20 performance and a slow start to IP revenues dampens our hope that the company will be able to register double digit growth over FY19-21E. Hence,...