Mr. Apurva Prasad & Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities
We upgrade Persistent Systems (PSYS) to BUY (ADD earlier) due to a structural pivot towards growth acceleration, following underperformance in FY16-20 period. PSYS' relative outperformance in FY21 and growth acceleration (20% EPS CAGR over FY20-23E) is driven by (1) recovery in Technology Services (deal sourcing, partnerships, client mining, and improving annuity), and (2) better operational rigour and business synergies improving the operating profile translating into 22% FCF CAGR over FY20-23E. Revival in Alliance business (Red Hat, Dassault) and prospects of better capital allocation (cash ~19% of M-cap) are value-accretive triggers. Our target price is Rs 1,520, based on 21x Sep-22E EPS and supported by 20% EPS CAGR, >35% RoIC.
2QFY21 highlights: Revenue came in at USD 136mn, +3.9/8.4% QoQ/YoY. Within the segments, Technology Services posted +4.1/16.6% QoQ/YoY and Alliance business posted +3.0/-12.4% QoQ/YoY. Growth was broad-based across the verticals led by Technology & Emerging vertical at +4.5% QoQ, BFSI at +4.2% QoQ and Healthcare & Life-sciences vertical at 1.8% QoQ. Revenue from T1 improved, supplemented by higher royalty revenue. EBIT margin stood at 12.1%, +171bps QoQ, aided by gross margin increase (offshoring and utilisation) and characterised by improvement across segments. OCF/EBITDA improved to 76% in 1HFY21 (vs. 65% in FY20) on lower DSO.
Outlook: We have factored in USD revenue growth at 10.0/13.2/12.7% with Technology Services growth at 15.7/15.6/14.7% and Alliance growth at -5.8/+4.7/+4.7% over FY21/22/23E respectively. We estimate EBITDA margin at 15.5% over FY21-23E (2Q at 16.4%), resulting in FY20-23E EPS CAGR at 20% (22% over FY21-23E). At CMP, PSYS trades at 18.0/14.6x FY22/23E.
Shares of PERSISTENT SYSTEMS LTD. was last trading in BSE at Rs.1184.5 as compared to the previous close of Rs. 1171. The total number of shares traded during the day was 8482 in over 1229 trades.
The stock hit an intraday high of Rs. 1220 and intraday low of 1174. The net turnover during the day was Rs. 10183355.