Research

Persistent Systems - Q3FY23 Result Update - Anand Rathi

Posted On : 2023-01-21 09:22:08( TIMEZONE : IST )

Persistent clocked strong growth in Q3 (up 3% q/q, 22% y/y org. est.), despite more furloughs and weakness in a few top accounts. Q3 is seasonally strong for IP revenues, registering 9% growth q/q, 7% y/y, improving its trajectory for the third consecutive quarter. TCV was a strong $440m, up 32% y/y, and net new TCV was up 52% y/y, showing no signs of slowdown. Ahead, the company intends to maintain its growth trajectory, with leeway in terms of receivable days. The EBIT margin rose 78bps q/q, 140bps y/y, reflecting SG&A leverage. Tailwinds would continue on supply-side pressures easing. We raise our FY24e/FY25e PAT ~2.5%, and target to Rs.4,840 (25x FY25) earlier Rs4,410.

Growth led by Hi-tech and Europe. Persistent delivered $264m revenue, up 3.4% q/q, despite steep declines in its top client. This was possible largely due to Hi-tech (up 4% q/q, excl. the top client 8% q/q) and Europe (up 12% q/q), aided by an IP licensing deal. The top client now brings only 7.4% to revenues (8.7% in Q2, 17.5% in Q3 FY22), with management turning positive on a turn-around here. TCVs continued strong, assuring a strong H1 FY24. Book-to-bill was 1.7x (TTM average: 1.6x), above peers. ACV grew 20% q/q, 12% y/y.

EBIT margin surprises. Q3 EBIT margin was 15.4%, up 78bps q/q, 140bps y/y, partially gaining from high-margin IP revenue and partially from SG&A leverage. Offshoring moved up sequentially to 62.4% (up 16bps q/q) while utilisation dipped to 77.6% (down 230bps q/q). Ahead, utilisation is a clear lever for margins, as also suggested by slower hiring. We build EBIT margins of 16.2% by FY25, a ~110bps expansion (cumulatively) from FY23. NI growth came lower than EBIT largely due to the reversal of Rs297m export incentives.

High capex, receivables. 9M FY23 capex was 6.5% of sales (five-year average ~4%), more than peers. On receivables, DSOs (incl. unbilled) have risen to 96 days (QA) compared to 81 in FY22. Consequently 9MFY23 CFO was flat y/y.

Maintaining a Buy. We slightly raise our FY24e and FY25e, after the strong Q3. The company is seeking to augment growth inorganically. Our target is based on 25x FY25e (from 23x earlier), driven by deal wins. Risk: Slowdown in the Hi-tech vertical.

Shares of Persistent Systems Limited was last trading in BSE at Rs. 4323.75 as compared to the previous close of Rs. 4257.55. The total number of shares traded during the day was 26031 in over 3635 trades.

The stock hit an intraday high of Rs. 4361.00 and intraday low of 4234.40. The net turnover during the day was Rs. 111716116.00.