Persistent Systems Q1 Review - Results Beat; Margin Expansion Story Pushed Further: Dolat Capital

Dolat Capital Report

Persistent Systems Ltd. posted constant currency revenue of $328.2 million, up 5.6% QoQ (our estimate: +5%), driven by ramp-up in healthcare/banking, financial services and insurance (up 16.5%/5.9% QoQ).

Operating profit margin stood at 14%, down 50 bps QoQ (our estimate: 13.7%) and included one-time gain from earnout reversal (+60 bps) and change in amortisation (+40bps).

Persistent Systems' management pointed out that it continues to expect healthy growth momentum backed by robust new annual contract value wins while expect margins to remain in-line with FY24 (13.9%).

We believe that aspiration to expand operating profit margin has always been a challenging goal and was baked conservatively in our estimates versus guidance/consensus.

We raise our FY25/FY26E EPS estimate by (3.4%/2.5%) backed by improved deal wins and strong growth. Nevertheless, we believe stretched valuations (over 50x on 12m forward basis) and risk to significant cut in consensus est. (factoring 26% EPS CAGR Vs our est. of 18% for FY24-26E) make it expensive. Thus, maintain ‘Sell’ rating with target price of Rs 3,320 (valued at 33 times FY26E).

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