EUR 120.00 For Business Accounts Only

MOSL: PERSISTENT SYSTEMS (Buy)-In-line performance, good outlook

Persistent Systems: In-line performance, good outlook

(PSYS IN, Mkt Cap USD0.7b, CMP INR688, TP INR830, 21% Upside, Buy)

 

Also valuations offer margin of safety; Reiterate BUY

• Despite the weakness at the top client, revenue growth and margins were largely in line with our estimates. The positive outlook on all key verticals and the healthy deal pipeline within IBM are likely to translate into decent revenue growth (8.6% CAGR, USD) over FY20-22. The focus on annuity revenue should further improve growth visibility. Also, SG&A optimization will likely leave ~120bp headroom for margin expansion over FY20-22. 
• Our EPS estimates over FY20-22 remain largely unchanged. Despite the sharp re-rating (40% over last year), reasonable multiples offer margin of safety, in our view.

 

In-line performance despite weakness at top client

• Revenue grew 7% YoY to USD129m, EBIT declined 38% YoY to INR806m and PAT was down 4% YoY to INR879m – largely in line with our estimates.
• Sequentially, Services revenue increased ~5% (our estimate: +3%), while IP revenue was down 3% (our estimate: 4.5%), largely due to the decline at the top account.
• Growth was led by Services (+6.1% QoQ) and Digital (+6.8% QoQ), partially offset by a decline in Alliance (2% QoQ) and Accelerite (~14% QoQ).
• Among geographies, growth in the US was tepid (+1.5% QoQ) but came in at  ~10% QoQ in non-core geographies like Europe/ROW.
• While IP-led revenue declined by ~2.8% QoQ, both Enterprise (+5.5% QoQ) and ISV (+4.2% QoQ) reported strong growth.
• EBIT margin contracted ~20bp QoQ to ~8.7% (40bp miss). The decline in the gross margins (-140bp impact) and the improvement in SG&A costs (+110bp impact) were the key margin movers.