Tuesday, March 12, 2024

Persistent Systems Records Strong Execution Drives Superior Performance

TARGET PRICE (Rs): 7,850

We recently interacted with the management of PSYS, to comprehend the demand environment & business outlook. KTAs: Under the leadership of CEO Sandeep Kalra, PSYS has strengthened its sales focus, changed incentive models to identify large deals & inculcate long-range thinking, enhanced client mining efforts, expanded partnerships across major tech players, and bolstered capabilities in hyperscaler clouds, integration, salesforce and digital payments via strategic tuck-in acquisitions – this has helped PSYS deliver top-quartile growth. Despite a challenging demand scenario, PSYS is well-poised to sustain industry-leading growth momentum, on the back of strong execution, proactive deal pursuits, and ability to identify new growth avenues like PE channel (~60-65% of the pursuits are proactive), presence in high-growth areas, and limited exposure to legacy business. But the stock has seen a stellar run-up of over 26%/74%/361% in the last 3M/1Y/3Y, resp., and trades at ~45x/36x on FY25E/FY26E EPS (broadly similar to BBG consensus) which we find expensive. Current valuation requires flawless execution and sustained industry growth tailwinds, and leaves little room for error. We find the risk-reward unfavorable at the CMP and await a better entry point to turn constructive on the stock. We roll forward to Mar-26E; retain REDUCE with TP of Rs7,850 at 34x Mar-26E EPS.

Demand scenario remains tough, but PSYS’s proactive approach drives consistent performance

Management is seeing some green shoots in discretionary spending, but has indicated that the overall demand environment is not materially different versus the last few quarters. Strong execution, proactive deal pursuits, and success in large deals are driving healthy deal intake for the company. Deal intake TCV grew 15.3% YoY to USD1.8bn on TTM basis, on account of traction in the private equity (PE) channel and Company’s proactive approach towards building the deal pipeline. PSYS works with 375 clients (over USD250k annualized revenue; ~47% of the clients boast of above-USD1mn revenue run-rate), including 14 of the top-30 technology majors, 8 of the top-10 global banks, and 6 of the top-10 healthcare companies. Mgmt expects revenue growth to stay broad-based, led by Healthcare, and followed by Software, hi-tech & emerging industries, and by BFSI. Expansion into Europe (targets increasing revenue share to 12-15% from ~9% of revenue now), expanding new logos in focus verticals, cross-selling to existing accounts, deepening partnership with tech majors, and steady progress on large-deal wins would drive strong growth and consistency in operating performance over the next 3-5 years.

Private equity channel adds another growth avenue

PSYS has tapped the PE channel to add newer avenues of growth. As PE firms increasingly intensify investments in software companies, they are looking to maximize investment returns within a set timeframe, with revenue and profit growth being the focus. With over 30 years of software product engineering experience, PSYS brings the right expertise, operating models, and infrastructure that is required to aid PE firms in deriving value throughout the investment lifecycle. ISVs select PSYS to optimize their operations, while continuing to innovate on product development. PSYS serves 16 of the top-20 software players and has been involved in the engineering of more than 5,500 product-releases from ISVs in the past five years. The PE channel is scaling well for the company, and is on track to attain a USD100mn run-rate.

Aspires reaching USD2bn revenue by FY27, with margin expansion

PSYS aims to maintain its growth momentum and attain USD2bn revenue run-rate by FY27, implying ~18% CAGR in FY23-27. It expects organic rev. CAGR of ~16%, while it sees acquisitions contributing ~USD150mn. It targets to expand EBITM by 200-300bps, factoring-in SG&A leverage with scale (+100bps), higher utilization (+100bps), pyramid correction, automation, and moderation in amortization costs as a percent of revenue.

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