Persistent Systems (PSYS) reported strong revenue growth of 9.1% QoQ for Q4FY22, beating our estimate of 7.9%. Organic growth was 6.8% QoQ after taking into account a US$4mn drop due to contract restructuring. Services business grew by an impressive 14.7% QoQ (this was the fifth consecutive quarter of >8% growth in this segment). IP-led segment declined 27% QoQ due to restructuring of the CCLM contract. This was also the reason for 13% QoQ decline in top account. For the full year, PSYS reported organic growth of 32.8% YoY.
Operating margin performance was decent at 14%, flat QoQ, a slight beat on our estimate of 13.6%. Company's ability to defend margins in the current cost inflationary environment is commendable. We believe PSYS can deliver 14% EBIT margin in FY23E. Overall deal TCV stood at US$361mn, up 8% QoQ. New deal TCV was US$195mn, a robust 24% QoQ rise.
PSYS continued its strong momentum on all fronts. Apart from the consistent operating performance, the company has focused on a number of inorganic opportunities in recent times in order to bolster existing capabilities (acquisitions of Data Glove, and Media Agility) or capture high-growth markets (SCI acquisition). Acquisitions do carry integration risks, but PSYS' strategy of: 1) structuring in the form of retaining key personnel of the acquired businesses, and 2) pay-out being a mix of upfront and retention/performance linked - is likely to help achieve targeted revenues and margin synergies. We believe these acquisitions will provide PSYS the opportunity to cross-sell and expand its reach to a more sizeable customer base, thereby increasing focus on high-growth areas. We believe PSYS will pause on acquisitions for a couple of quarters and management will concentrate on integration of the entities already acquired. They are futureproofing the business to fuel the next phase of growth through strategic investments, acquisitions and leadership hiring.
We are indeed impressed with PSYS' emphasis on growth priority. Company is poised to be the fastest-growth IT company under our coverage in FY23E/FY24E. We build-in revenue growth of 30.9%/18.4% with EBIT margins of 14%/14.5% for FY23E/FY24E. As we adjust our revenue, margin and ETR trajectories, EPS estimates for FY23E/FY24E remain largely unchanged. We believe street has adequately rewarded PSYS in the topmost valuation band among IT services - which leaves little room for disappointment. The stock is currently trading at a P/E 39x/32x on FY23E/FY24E EPS of Rs112/136. With consistent performance in terms of growth and steady margin expansion, we believe PSYS is a good turnaround story; however, valuations have already baked-in the performance. We value the stock at 33x FY24E EPS arriving at a target price of Rs4,500. HOLD.
Shares of Persistent Systems Limited was last trading in BSE at Rs. 4312.65 as compared to the previous close of Rs. 4311.30. The total number of shares traded during the day was 21462 in over 4512 trades.
The stock hit an intraday high of Rs. 4390.00 and intraday low of 4282.65. The net turnover during the day was Rs. 93163872.00. |
