Target: ₹ 6,030
CMP: ₹ 5,292.50
Investors have little doubt on Persistent Systems (PSYS) growth momentum. They are not wrong. Such has been the strength of PSYS’ recent deal wins (LTM ACV: +15% YoY) that it merely needs to maintain current ACV/ leakage levels to achieve our FY25E USD revenues (+17 per cent).
Our recent interaction with the company, on the contrary, suggests revenue as well as booking momentum has continued into Q2. Leakages have stabilized as well. That should start to flow into FY26 revenue visibility, further undergirding investor confidence. Investors however, fret over sustainability of PSYS’ margins. One-off nature of margin benefits in 4Q/1Q does raise doubts. But, we see sufficient near/medium-term margin levers at PSYS’ disposal.
PSYS has reversed only a third of potential earn-outs attributable to the under-performing entities. Incremental reversal should support Q2 margins, offsetting wage hike impact to some extent, in our view. Beyond that, sub-con, offshoring and professional fees are material margin levers.
We expect PSYS to exit FY25 at 15.5 per cent EBIT margin. Growth, SG&A leverage and maturity-profile of deals are medium-term levers. We raise our target multiple to 48x (at an unchanged 2x PEG) from 45x earlier. Maintain Buy with a revised TP of ₹6,030 (from ₹5,240).