Persistent Systems Q2 Review - Results Beat; Driving Strong Growth At Expense Of Margins: Dolat Capital

Dolat Capital Report

Persistent Systems Ltd. posted constant currency revenue of $345.5 million, up 5.1% QoQ (our estimate: +4%), led by ramp-up in healthcare/BFSI (+9.6%/7.7% QoQ). Operating profit margin was flat at 14% QoQ (our estimate: 13.6%) as wage hike was offset by operating efficiencies.

Management pointed out that it continues to expect healthy growth momentum backed by robust new annual contract value wins while expects margin expansion from here on due to decline in selling, general and administrative. We believe aspiration of OPM expansion by 200 bps in the next two years would be challenging with lower earnout benefit and utilization normalizing.

We revise our FY25/FY26E EPS estimate by (-2%/+1%). We believe stretched valuations (over 56 times on 12 months forward basis) and risk to significant cut in consensus estimate (factoring 23% EPS CAGR versus our estimate of 18.6% for FY24-27E) make the stock expensive.

Thus, we maintain ‘Sell’ rating with target price of Rs 4,250 (valued at 35 times FY27E).

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