Maintain REDUCE on Persistent Systems - Recovery factored in - HDFC Securities

Mr. Apurva Prasad & Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities.

We maintain REDUCE on Persistent Systems, despite its strong 1Q performance, as current valuations (at 16x FY22E vs. 14x 5-yr average) amply factor in the recovery trajectory. The Technology Services segment continues its steady performance supported by its large accounts mining, consolidated structure, and sales re-organisation. In contrast, the Alliance segment adds uncertainty to the revenue and operating profile based on volatility in re-seller revenue, despite the growth opportunities via Red Hat and Dassault ecosystem. The leadership changes in the organisation over the past year have stabilised and fortified the non-IBM business, but the IBM ecosystem remains a work-in-progress. Our upgraded target price is Rs 775, 14x Jun-22E, following ~16% EPS upgrade on growth/margin reset. The valuation discount to mid-tier peers reflects sub-par/volatile client mining, margins, and FCF as compared to peers.

1QFY21 highlights: (1) Revenue came in at USD 131mn, +3.1/9.5% QoQ/YoY, driven by Technology Services (77.1% of revenue) growth at +2.2/17% QoQ/YoY and Alliance business (22.9% of revenue) growth at +6.4/-9.8% QoQ/YoY. (2) EBIT stood at 10.4%, +113bps QoQ, supported by higher IP-led revenue and lower SG&A cost, including lower travel cost (+156bps QoQ margin tailwind). (3) Deal wins were strong including USD 50mn TCV 5-year EN in software & hi-tech and BFS consolidation win.

Outlook: We have factored in revenue growth of +8.9/9.7% for FY21/22E, based on Technology Services growth at 14.6/10.5% and Alliance growth at -7.0/+6.6% over the same period; factored in EBIT at 9.9/9.4% for FY21/22E, translating into a 7% EPS CAGR over FY20-22E.

Shares of PERSISTENT SYSTEMS LTD. was last trading in BSE at Rs.884.25 as compared to the previous close of Rs. 855.5. The total number of shares traded during the day was 39964 in over 2474 trades.

The stock hit an intraday high of Rs. 897.9 and intraday low of 840.85. The net turnover during the day was Rs. 34866645.

Source : Equity Bulls

Keywords