Persistent Systems Q3 Results Review - Growth Outlook Already Baked Into The Price: Motilal Oswal

Motilal Oswal Report

Persistent Systems Ltd. delivered Q3 FY24 revenue of $300.6 million, up 3.1% QoQ in constant currency terms, in line with our estimate. Deal win total contract value was at a record high ($521 million), aided by strong wins and renewals in North America.

Ebitda margin at 17.7% (up 90 basis points QoQ) beat our estimates; the improvement was attributed to seasonality in IP business and selling, general and administration optimisation.

Persistent Systems’ Q3 FY24 revenue performance was positive, although the growth was skewed toward Healthcare and Life (up 16% QoQ); the other two verticals reported muted growth.

Despite a seasonal furlough, the deal TCV recorded yet another quarter of strong growth, up 8.8% QoQ (versus +26% QoQ in Q2), translating to 1.7 times BTB.

Persistent Systems saw a sharp margin improvement of 90 bp on account of strong annuity-based revenues and SG&A optimisation. The management was confident of achieving further improvement in margin, led by enhanced productivity, resulting from previous fresher and lateral hires.

Additionally, it anticipates leveraging SG&A optimization from its earlier strategic investments. Persistent Systems further reiterated its aspiration of 200-300 bp Ebitda margin improvement over the next two to three years.

We expect Ebit margin at 15.2%/16.1% in FY25/FY26, which will lead to FY24-26E profit after tax compound annual growth rate of 22%.

The stock is currently trading at a rich valuation of 36 times FY26E EPS, leaving little room for further upside, despite the strong growth delivery. We believe Persistent Systems’ valuation appropriately factors in the favorable growth along with the adverse macro environment.

We value the stock at 37 times FY26E earnings per share.

We reiterate 'Neutral' as we see limited upside from the current levels.

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