Persistent Systems - Alliances will remain a strategic focus - ICICI Securities

Persistent Systems' Q2FY21 reported revenue and margins were largely in-line with our estimates. As anticipated, growth was led by services (+5.3% QoQ, US$), while IP revenue declined (-3%). EBIT margins improved ~170bps QoQ to 12.1% led by utilisation improvement. Mr. Sandeep Kalra, the new CEO, unveiled the blue print for the strategy going forward. Alliances segment will continue to be a strategic focus for Persistent. For this segment, the company foresees potential cross-sell opportunities with Technology Services Unit (TSU) and a turnaround in 3-4 quarters. While hinting at the scope for further margin expansion, Persistent indicated focus is on sustainable growth. As highlighted in our recent note (link), without a permanent fix in the alliances segment, revenue growth in-line with high quality tier-II companies is a tough ask. At 17x FY22E EPS, we believe, the turnaround in growth and margins is largely priced in. Early signs of permanent solution in alliances segment (organic or inorganic), or EBIT margins increasing beyond 14% can pose an upside risk to our estimates and valuations.

- In-line revenue and margins. Reported revenue growth of 3.9% QoQ (US$) in Q2FY21 was largely in-line with our estimates. As anticipated, growth was led by services (+5.3% QoQ, US$), while IP revenue declined (-3%). Barring healthcare & life sciences (+1.8% QoQ, US$), other verticals reported strong growth. Across geographies, while North America reported robust growth (+7.1% QoQ), Europe reported sharp decline (-22.6% QoQ). EBIT margins improved ~170bps QoQ to 12.1% led by utilisation improvement.

- Alliances segment will remain a strategic focus. Mr. Sandeep Kalra, the new CEO, unveiled the blue print for the strategy going forward. Alliances segment will continue to be a strategic focus for Persistent. For this segment, the company foresees potential cross-sell opportunities with Technology Services Unit (TSU) and a turnaround in 3-4 quarters. Management ruled out the option of a potential divestment of this segment. While hinting at the scope for further margin expansion, Persistent indicated focus is on sustainable growth.

- Turnaround in growth and margins is largely priced in. Company's 100% exposure is to verticals that have been positively/moderately impacted due to Covid-19 pandemic. This should translate into high revenue CAGR (9.5% in US$ terms) over FY20-FY23E. Over this horizon, we expect ~500bps improvement in EBIT margin led by inter-alia growth turnaround and higher share of managed services revenue, etc. At 17x FY22E EPS, we believe, the turnaround in growth and margins is largely priced in. Early signs of a permanent solution in alliances segment (organic or inorganic), or EBIT margins increasing beyond 14%, can pose an upside risk to our estimates and valuations.

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.

Source : Equity Bulls

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