Tuesday, April 23, 2024

Persistent Systems In-line Revenue; Weaker Margin Trajectory Leads To EPS Out

Persistent reported mixed performance in Q4 — revenue grew 3.4% QoQ CC, in line with our estimate, while margin of 14.5% (flat QoQ) missed it. Revenue growth still lopsided with HLS contributing ~94% of incremental revenue sequentially. Top client growth was impacted by a planned ramp down for the second consecutive quarter, while other large client growth was healthy. Deal wins TCV was USD447.7mn (1.4x book-to-bill), showing moderation with Q4 and TTM TCV up 6% and 12.6% YoY, respectively. Amid the challenging macros, the management aims for top-quartile growth in FY25E, while maintaining EBITM at FY24 levels. Company reiterated their medium-term target of improving EBITM by 200-300bps over the next 3 years. However, progress has been slow and target is shifted by a year; which is disappointing. Moderation in deal intake, Q4 performance, and slow progress on margin trajectory led to EPS cut of 5-6% for FY25-26E. Valuation remains rich even after today’s ~10% price correction. We retain REDUCE with a TP of Rs3,700/sh at 34x Mar-25E EPS.

Results Summary

Persistent’s revenue grew 3.4% QoQ (similar in CC) to USD310.9mn, broadly in line with our estimates. EBITM came in at 14.5% (flat QoQ), lower than our estimate of 15%. EBITM was flat sequentially due to one-time transition costs related to ramp up in large vendor consolidation deals (-110bps), addition of lateral hires at offshore (-50bps), and higher travel costs for planning and budgeting exercise for FY25 (-40bps). These were negated by reduction in earn out liability related to an acquisition (where performance did not meet expectations) and reversal of provisions (+200bps). Revenue growth was led by HLS (14.8% QoQ) and BFSI (1.8%), while Software, Hi-Tech, and Emerging Industries (SHTE) saw a decline of 0.7% QoQ (ex-top client: grew 1.8%). Top-client revenue declined 11% QoQ due to planned ramp downs. Top 2-10 clients saw a growth of 10.3% QoQ. Among geographies, North America, India, and ROW reported growth of 4%, 4.5%, and 47.8% QoQ, while Europe saw a decline of 9.3% QoQ. The company has announced a final dividend of Rs10/sh. What we liked: Steady revenue growth, heathy cash conversion (OCF/EBITDA: 76.9%). What we did not like: Margin miss.

Earnings Call KTAs

1) Demand environment has remained largely unchanged over the last few quarters and is not expected to improve materially anytime soon. 2) Company recently won large deals (including vendor consolidation), which have higher onsite proportion at the start, and have seen an increase in contractor spending along with lower utilization and higher travel costs. 3) HLS growth was driven by a large deal ramp up and well supported by multiple mid-sized deals. Overall environment has been difficult in BFSI, but the company has delivered growth aided by new deals. Hi-Tech is facing headwinds due to enterprise customers facing their own challenges and is likely to remain under pressure for the next few quarters. 4) FY25 growth is likely to be led by HLS followed by BFSI and SHTE. 5) Management aims to turn around performance in Europe, driven by both team reinforcements and M&A activities. 6) For M&A, Persistent is looking for tuck-in acquisitions in HLS and BFSI, which are at the cusp of data/AI. Within Healthcare, the company is targeting areas like Payer-Provider ecosystem, while in BFSI, it is focused on certain micro segments. In terms of geography, it is looking at a combination of Western Europe from a business perspective and Eastern Europe from a delivery perspective.

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