Optimism on Persistent Systems put to test after a robust run

In the last six months, the stock of Persistent Systems Ltd. rose 37%, much ahead of the Nifty IT index’s 10% returns.
In the last six months, the stock of Persistent Systems Ltd. rose 37%, much ahead of the Nifty IT index’s 10% returns.

Summary

Valuations of the Persistent Systems stocks are stretched. The shares trade at FY25 price-to-earnings multiple of 43 times.

In the last six months, the stock of tier-2 IT company Persistent Systems Ltd. rose 38%, much ahead of the Nifty IT index’s 10% returns. Investors have rewarded the company’s relatively better revenue growth and robust deal wins. 

The optimism has been put to test lately with the stock falling by 7% in the last one month. While the drop is not steep compared to the rally, there are challenges to growth. The sector is grappling with demand uncertainty leading to lower revenue visibility for FY25.

Akin to peers, banking, financial services and insurance (BFSI) and hi-tech segments are likely to remain the pain points for Persistent in the March quarter (Q4FY24), too. Thankfully, its healthcare and life sciences vertical is expected to do the heavy-lifting. 

Kotak Institutional Equities estimates 3.3% sequential constant current growth for Persistent in Q4, driven entirely by large deal ramp-up in this vertical. Secondly, Ebit (earnings before interest and tax) margin is expected to benefit from operating leverage and improving efficiencies. 

But after hitting a record high of $521.4 million in Q3, deal total contract value (TCV) is likely to moderate on lower renewals. Also, delays in deal conversion from the pipeline stage could hurt. 

Even so, analysts at Nirmal Bang Institutional Equities are pencilling-in total contract value to come above the $400 million mark in Q4FY24 due to the spill over of deal closures from H1FY24 to H2FY24.

“We will keep an eye out for the annual contract value number, which is expected to come in above the $300 million mark," added the Nirmal Bang report.

However, it remains to be seen if the company delivers industry-leading revenue growth in FY24, as guided by the management. Remember that Persistent aims to attain $2 billion revenue run-rate by FY27. 

The management has reiterated its medium-term aspirational Ebit margin improvement guidance of 200-300 basis points over the next two-three years. In the current backdrop, investors should track if the timeline for these targets stays intact.

That apart, the strength of its deal pipeline is crucial. After all, Persistent has been able to consistently punch above weight despite higher exposure to discretionary spending and stressed verticals due to strong deal win activity, according to Kotak. 

Further, downside risks could emerge from lower spending outlook of hi-tech and BFSI clients.

As such, valuations of the Persistent stocks are stretched. The shares trade at FY25 price-to-earnings multiple of 43 times, showed Bloomberg data. This is more expensive than larger competitors such as Tata Consultancy Services Ltd and Infosys Ltd.

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