Accumulate Persistent Systems; target of Rs 550: Dolat Capital

Dolat Capital's research report on Persistent Systems

Persistent reported 1.8% QoQ decline in revenues as US$127mn (in line with our estimates) as Alliance Business de-grew 28% QoQ, partially off-set by 3.8% QoQ growth in Services (Technology+ Digital) Segment. OPM for the quarter improved 50bps QoQ to 9.2% (our estimate: 8.1%) led by lower volumes in reseller business in Q4. Technology & Digital segment (collectively 74% of revenues) continue to drive topline growth with 2.2% and 7% QoQ growth. PSYS expects these segments to outperform based on positive client interactions, strong pipeline and increased need for Digital services. Alliance Business turnaround is expected to be gradual as it is continuing its’ focus on new tech areas – (closed new deals with Red Hat). Profitability is expected to be under pressure as client discounts and requested delays in implementation are in the talks. Persistent has taken senior team pay cuts (20-25%), variable cuts and also has scope to leverage S&M costs (systemic rationalization of 100-200bps here).

Outlook

We expect Persistent to continue to deliver strong performance in the Tech-services business led by its micro-focus approach in select capabilities and verticals. We have built in revenue/earnings CAGR of 7%/6% over FY20-22E and maintain our Accumulate rating on the stock with TP of `550, valued at 11x on FY22E earnings (implies 1.5x on PEG).

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