Persistent's premium valuations hinge on sustaining growth momentum

Firm continues to outperform mid-, large-tier listed IT majors

The stock of mid-tier information technology (IT) major Persistent Systems has been one of the outperformers in the IT pack with a return of 5.3 per cent over the last year, while its peer index, the Nifty IT, is down 16.2 per cent over the same period. The strong September quarter (Q2FY26) result and upgrades by brokerages are positive but its ability to sustain growth momentum in a weak macroeconomic environment will be key for future gains. At the current levels, the stock is trading at a premium valuation of 38 times its FY27 earnings estimates. 

The firm continues to outperform mid and large listed IT majors and Q2 was no different as it rec­orded revenue growth of 4.4 per cent sequentially and 17.6 per cent year-on-year (Y-o-Y). The growth was led by the banking financial services and insurance (BFSI) vertical, followed by software, hi-tech and emerging industries at 3.8 per cent. 

Healthcare and life sciences reported growth of 2.2 per cent. Barring India which saw a decline of 2.1 per cent, most geographies saw growth, led by the rest of the world at 26.6 per cent followed by Europe at 7.7 per cent, and North America, which was up 4.2 per cent in dollar terms. 

Deal wins or total contract value were healthy at $609.2 million and rose 15 per cent over the year ago quarter with new bookings at $350.8 million. This translates to a book-to-bill ratio of 1.5 times as compared to 1.3 times in the June quarter. 

Abhishek Shindadkar of InCred Research believes that robust pipeline and conversion confidence was encouraging but remains a key monitorable and is critical to sustaining the growth momentum. Any material deterioration in the macroeconomic environment, however, remains a risk. 

The margin performance too exceeded the Street’s expectations in the quarter. Operating profit margins expanded by 80 basis points to 16.3 per cent. This was primarily led by planned reduction in software license costs related to a large eng­ag­ement (80 basis points), favourable currency (60 basis points), and planned offshoring in a health and lifesciences client (30 basis points). 

This was partially offset by headwinds from higher provision for doubtful debt (-50 basis points), lower utilisation (-20 basis points) and increased capex leading to higher depreciation and amortisation (-20 basis points). 

Going ahead, the management expects growth to sustain, backed by focused execution, deal booking, and pipeline. The company indicated that it is on track towards the aspirational revenue run-rate of $2 billion by FY27-end ($1.35 billion in FY25), and expects 100 basis points Y-o-Y improvement in margins in FY26, followed by another 100 basis points increase in FY27. 

Emkay Research has raised FY26-28 earnings per share by 2-3 per cent based on the Q2 beat. The brokerage has retained its add rat­ing on the company while raising its target price by 6 per cent to ₹5,700 valuing it at 36 times its September 27 earnings per share estimates. 

InCred Research has maintained a hold rating and values Persistent Systems at 36 times its FY28 earnings to arrive at a lower target price of ₹5,778 vs earlier target of ₹6,863. The revision of multiple is to account for growth moderation, rising competitive intensity, and macroeconomic uncertainty, says the brokerage. Nuvama Research, however, believes that the stock deserves a valuation premium and has a buy rating on it.

 

Persistent continues to deliver industry-leading growth (17.6 per cent Y-o-Y in Q2FY26) and its FY27 revenue target of $2 billion translates to strong annual growth of 18 per cent while its margins and cash flow remain robust, it says. The stock is now trading at 38 times its FY27 earnings-- which might appear expensive, but is justified given the 25 per cent earnings growth anticipated over FY25–27, it adds.