Lack of valuation comfort in Persistent Systems despite strong growth

In 9MFY26, in rupee terms, PSYS's revenue grew 23 per cent, adjusted operating profit grew 39 per cent and adjusted net profit grew 40 per cent Y-o-Y

Persistent Systems (PSYS) reported Q3FY26 revenue of $422 million, up 4 per cent quarter-on-quarter (Q-o-Q) in dollar terms while growth was 4.1 per cent in constant currency.

 

The adjusted operating profit margin stood at 16.7 per cent. And, operating profit grew 8.2 per cent Q-o-Q and 38.7 per cent year-on-year (Y-o-Y) to ₹630 crore.

 

Adjusted net profit came in at ₹500 crore, up 7.4 per cent Q-o-Q and 35.7 per cent Y-o-Y. The adjustment excludes one-time labour code impact of ₹89 crore.

 

In 9MFY26 (rupee terms), PSYS’s revenue grew 23 per cent, adjusted operating profit rose 39 per cent and adjusted net profit grew 40 per cent Y-o-Y. The reported earnings per share (EPS) was ₹28.2 and this was up 16 per cent Y-o-Y. The Board declared an interim dividend of ₹22 per share, with a payout ratio of 78.7per cent.

 

The trailing 12-month (TTM) total contract value (TCV) was $674.5 million, up 11 per cent Q-o-Q (up 13.5 per cent Y-o-Y). This is a book-to-bill ratio of 1.6 times.

 

Annual contract value (ACV) growth outpaced TCV growth, with ACV up 12.1 per cent Q-o-Q (17.2 per cent Y-o-Y) to $502 million with $256 million new bookings. The net new TCV was up 5.6 per cent Q-o-Q at $369 million.

 

Net headcount increased by 18 per cent Q-o-Q with a net addition of 487 employees and utilisation improved 20 basis points (bps) Q-o-Q at 88.4 per cent.

 

The TTM attrition is at 13.5 per cent. This is the fifth consecutive quarter of net additions but headcount has increased 19 per cent. Revenue rose 65 per cent, indicating how productivity has risen.

 

Despite the seasonal weakness, the adjusted operating profit margin rose 40 bps Q-o-Q.

 

Breaking this up, there was 30 bps gain from currency, 20 bps from lower sub-contractor costs, and 40 bps from higher utilisation, onsite pyramid rationalisation and optimisation.

 

A one-time licence fee also contributed 150 bps to margin improvement, though this was offset by the impact of a one-time wage-hike estimated at 180 bps. The seasonal furloughs would have dragged margin down 20 bps.

 

The management attributed gains from higher utilisation, onsite pyramid rationalisation and optimisation to in-house AI tools and platforms like SASVA, iAura, and the GenAI Hub.

 

The company continues to balance investments in technology with harvesting of returns with a combination of tool-driven pricing and manpower optimisation.

 

Further gains on this front will be reinvested in growth. The company has new partnerships with Anthropic and DigitalOcean which will allow it to embed GenAI into core services and this will support AI-led services growth.

 

Revenue growth was led by banking, financial services, insurance (BFSI) (up 4.6 per cent Q-o-Q in dollar terms) and healthcare (up 4.8 per cent Q-o-Q) with healthcare witnessing a recovery from earlier weakness.

 

The third vertical HiTech grew by 3 per cent Q-o-Q. Geographically, growth was led by North America and the rest of the world, as revenues rose 6.2 per cent Q-o-Q and 34.6 per cent Y-o-Y, respectively. India and Europe declined 11.8 per cent Q-o-Q and 4.9 per cent Q-o-Q respectively.

 

The top-100 clients contributed 82 per cent of revenue and revenue from this set is growing at 20 per cent. Given ACV of $502 million and multi-year deals continuing, PSYS should be able to maintain high-teens CC growth.

 

It is aiming at $2 billion FY27 revenues, implying 18 per cent annual growth over FY25-27 in CC and around 3.5 per cent sequential growth for next five quarters.

 

The management is looking to leverage technology (that is AI) to improve productivity per employee. Its software licence revenue includes third-party licences as well as proprietary platforms like iAura and SASVA.

 

These are integrated into client engagements rather than sold as standalone products, and revenue recognition varies with deal structure.

 

The strategy of bundling IP-led offerings and services will be continued.

 

The management feels the company is on track to achieve its $2 billion and $5 billion revenue aspiration by March 2027 and March 2030, respectively. While the FY27 target seems achievable, the $5 billion target would require growth acceleration.

 

While Persistent has excellent growth rates as a diversified product engineering and IT services player, it has really high valuations at around 52 times of estimated FY26 PE. While analysts concur about the positive growth prospects, some are recommending “sell” or “reduce” on valuations.