Growth trajectory to aid higher valuations for Persistent Systems

Midcap IT major Persistent Systems (PSYS) delivered a strong Q2FY25 performance which led to an 11 per cent uptick in its stock price on Wednesday. The company reported a 17 per cent growth in H1FY25 Annual Contract Value (ACV) and a 27 per cent growth in new ACV. There was margin consistency despite wage increases.

 

PSYS registered Q2FY25 revenue at $345.5 million (up 5.3 per cent Q-o-Q in dollar terms). In constant currency terms, growth was 5.1 per cent Q-o-Q. Operating profit grew 5.6 per cent Q-o-Q (18.6 per cent Y-o-Y) to Rs 480 crore and margin came in at 16.6 per cent. Net profit was Rs 320 crore, up 6.1 per cent Q-o-Q (up 23.4 per cent Y-o-Y). 

 

For H1FY25, revenue grew 19 per cent Y-o-Y, while operating profit was up 16.7 per cent and net profit grew 16.8 per cent compared to H1FY24. The Street expects over 20 per cent growth across revenue, operating profit and net profit in H2FY25.

 

The company continues to outpace the industry. Healthcare, and banking, financial services and insurance (BFSI) were the two verticals contributing to growth. PSYS maintained flat margins despite wage hikes (210 basis points or bps), ESOP costs (60bps); headwinds were offset by utilisation gains (120bps), pricing (130bps), lower sub-contracting costs (70bps). In hi-tech, there may be the beginnings of a recovery visible in commentaries. Given high-teens revenue growth till FY27 and some margin expansion, prospects look good. 

 

The Q2FY25 revenue growth was broad-based across the US and Europe and was led by healthcare (up 9.6 percent Q-o-Q) and BFSI (up 7.7 per cent Q-o-Q) with hi-tech flat Q-o-Q. The trailing twelve months TCV was $529 million, up 14 per cent Q-o-Q and 10 per cent Y-o-Y. The net new TCV was up 25 per cent Q-o-Q at $389.8 million. The net headcount declined by 1.2 per cent Q-o-Q. Utilisation was up 270 basis points Q-o-Q at 84.8 per cent. The trailing twelve months attrition was flat Q-o-Q at 12 per cent.

 

Management expects all three verticals to see secular growth over the next couple of quarters. Winning new deals and offshoring have mitigated the deflationary impact on revenue. PSYS is launching the T100 programme — an initiative focused on the top 100 clients. There are incremental levers for margin expansion which include maintaining utilisation at 83-85 per cent, significant investments in SG&A (which are almost complete), right shoring, and pricing momentum, which will improve margins.

 

Q3FY25 will see furloughs in BFSI and in a couple of clients in hi-tech. But the order book is healthy, with a decent pipeline and a push for conversion in Q3. The company is strategising to be positioned as a platform-driven business, utilising AI solutions. There is enough headroom in terms of $75m+ customers. The target is to achieve $2 billion by FY27 and PSYS is on track for that goal. The Q3 ACV is expected to be higher due to new deals and renewals in the US. The aim is for margin expansion in the medium term with the improvement of 200-300 bps with a pivot towards platform-led services. The management shared that earning out reversals for earlier acquisitions will end by FY25. The stock is trading at an expensive valuation but its superior earnings and revenue growth prospects may justify this.