Persistent Systems Ltd: In-Line Operating Performance In Q4FY23

BUY

CMP: Rs4472 

Target Price: Rs4800

PSYS reported in-line operating performance in Q4FY23. Revenue grew by 3.9% QoQ to USD274.6mn (3.5% CC), driven by the top-10 clients. Revenue from the top client grew by 30.5% QoQ (after four consecutive quarters of decline), contributing ~60% to incremental revenue sequentially, owing to deal ramp-ups. Services revenue grew 5.5% in Q4, while IP revenue declined 14.6% due to seasonality. Services growth momentum moderated to 4.4% CQGR over the last three quarters. Management remains watchful of macro uncertainties and has suggested some moderation in demand amid a tough demand environment for the next couple of quarters; however, it remains confident to sustain 3-5% sequential growth due to robust deal intake (USD421.6mn in Q4; 1.5x book-to-bill), healthy deal pipeline and steady progress in client mining. Management expects EBITM to expand by 200-300bps over the next 2-3 years, owing to scale benefits, client mining, pyramid rationalization and better pricing in newer areas like cloud and generative AI. We tweak our EPS by 1.1-1.5% for FY24E/25E, factoring in Q4 performance. We retain BUY with a TP of Rs4,800 on 25x Mar-25E EPS (earlier Rs4,700).

Result summary: Revenue grew by 3.9% QoQ to USD274.6mn (CC 3.5%), in line with our estimate of 3.5% CC, driven by Healthcare and Lifesciences (4.4% QoQ), Software, Hi-Tech and Emerging Industries (4.3%), and BFSI (2.9%). Services revenue grew by 5.5% QoQ, aided by 7.8% growth in volume, while blended realization declined by 2.2%. IP revenue declined by 14.6% QoQ in Q4 to USD18.6mn. EBITM was flat QoQ at 15.4%, ~10bps below our estimates. Benefits from lower subcontracting expense and improved utilization were negated by lower IP revenue, higher purchase/royalty expenses and cost from annual planning event, resulting in flat EBITM QoQ. Reported net profit grew 5.7% QoQ to Rs2.5bn. Revenue growth was led by Europe (18.9% QoQ) and North America (4.9% QoQ), while that from India fell 15.6%, due to the completion of a large project. TCV of deals signed stood at USD421.6mn (1.5x book-to-bill; ACV of USD310.4mn), including USD250.3mn of new business TCV. Management continues to see a healthy deal pipeline and is confident of delivering higher-than-industry revenue growth, although macro-related uncertainties could last for a couple of quarters. What we liked: In-line operating performance, top client performance, strong deal intake, and moderation in attrition (19.8% in Q4 vs. 21.6% in Q3). What we did not like: Weakness in non-top 10 clients and weak cash conversion (OCF/EBITDA at 69.5% in Q4).

Earnings call KTAs: 1) The largest BFSI customer grew 7.6% QoQ in Q4. 2) The company highlighted ramp-downs in a key hyper-scaler relationship, impacting revenue by USD3mn QoQ/10mn YoY. Management expects it to recover in the coming quarters. 3) Subcontracting costs declined QoQ due to ramp-down in a hyper-scaler relationship. Management targets to lower it to ~12% of revenue compared to ~14% in FY22. 4) Purchase/royalty expenses increased to 3.6% of revenue in Q4 from 1.8% in Q3 due to the ramp-up of large deals, which include license purchases as part of the overall delivery. Management suggested it will moderate as a percentage of revenue in the coming quarters. 5) India utilization declined 40bps QoQ to 75.9% in Q4. Steady deployment of freshers over the next few months will act as a margin lever in the near term. 6) Attrition moderated to 19.8% in Q4 vs. 21.6% in Q3, and management expects it to continue trailing down. 7) PSYS has on-boarded over 3,000 freshers in FY23 and plans to add 800-1000 freshers in FY24. 8) PSYS is actively looking at M&As, particularly in areas of consumer tech, cyber security, generative AI, and specific segments in healthcare and financial services, and, to expand its delivery capability in Eastern Europe. 9) PSYS has hedges of USD230mn as of end-Q4, at an average exchange rate of Rs82.83/USD. 10) It declared a final dividend of Rs12/share and special dividend of Rs10/share (including interim dividend of Rs28/share, total dividend of Rs50/share for FY23).