Motilal Oswal's research report on Persistent Systems
Persistent (PSYS) reported better-than-expected USD revenue growth of 7.4% QoQ in 3QFY21, driven by seasonality in the Alliance business (+12% QoQ) and growth in the Technology Services business (TSU, +6% QoQ). The EBIT margin expanded 60bp QoQ to 12.7% despite the two-month impact of a wage hike (200bp) and c15% increase in the workforce during the quarter. n It also reported order bookings of USD302m, the highest in the recent past. Of this, USD175m (1.2x book-to-bill) came from new deal wins. n PSYS has delivered best-in-class growth in the TSU business, reporting 4.4% CQGR over 1QFY20–3QFY21, aided by improved operational focus. We expect the company to continue the momentum in the TSU vertical and deliver a 16%+ FY21–23E CAGR as new deal wins scale up. n Over and above TSU growth, PSYS’ management has guided for a strong rebound in its troubled Alliance business (flat revenues over the last six quarters) – as new deals and acceleration in the Cloud business with IBM should help improve performance. We see this as a key positive as it should help PSYS deliver strong 16.5% USD revenue growth in FY22, despite a high FY21 base effect (12.1% YoY estimated). n Strong revenue growth (including at Alliance) should help PSYS deliver 120bp margin improvement over FY21–23E, leading to 20% PAT growth over this period. n We upgrade our EPS estimates over FY21–23E by 6–8% as we gain further confidence on growth and margin momentum. We reiterate Persistent as our top Buy across our small-cap IT coverage.
Outlook
The stock is currently trading at 19x FY23E EPS. Our Target Price is based on 22x FY23E EPS
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