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MOSL : . PERSISTENT SYSTEMS: Strong growth factored in the rich valuations

PERSISTENT SYSTEMS: Strong growth factored in the rich valuations

(PSYS IN, Mkt Cap USD3.4b, CMP INR3707, TP INR3660, 1% Downside, Neutral)

• PSYS posted a strong 2QFY23, with revenue growing 6.6% in CC terms (150bp above our estimate). In USD terms, revenue grew 5.8% QoQ (organic growth of 5% QoQ). EBITDA margin was strong at 18% (est. 16.8%). It reported a TCV of USD368m, with 62% new business TCV. Employee additions stood at 838 after the highest ever addition in 1QFY23. Attrition fell 110bp to 23.7%.
• The company maintained its strong performance in Services (+4.9% QoQ) and demand outlook. IP bounced back with a strong 18.1% QoQ growth. It also delivered a strong TCV (despite a high 1Q base), with a book-to-bill ratio of 1.4x. PSYS’ capability to garner new deals is encouraging and should result in its sustained industry-leading growth in FY23.
• A strong order book and robust pipeline should allow PSYS to deliver a USD revenue growth of 35% in FY23, despite a high base in FY22 (up 35% YoY). With a strong demand commentary, we expect PSYS to deliver top tier revenue growth among our midcap IT Coverage Universe (24% of over FY22-24E).
• We remain watchful of the growing risk to growth (despite very strong deal wins) due to weakness in its top two clients and higher exposure to the Software industry, which has been cautioning about a demand moderation.
• PSYS should be able to maintain margin at current levels in the near term, given the operating leverage and improving metrics. We expect an EBIT margin of 14.5% over FY23-24 and a FY22-24 EPS CAGR of 29%.
• PSYS is now trading at 25x FY24E P/E, which is on the higher side of the Midcap IT median valuation and appropriately factors in a favorable growth and demand environment. Hence, we maintain our Neutral rating as we see limited upside from current levels.
• We raise our FY23/FY24 EPS estimate marginally (~3.5% each) given its strong performance in 2QFY23. We value the stock at 25x FY24E EPS.

Strong broad based performance in 2QFY23

• Revenue/EBIT/PAT grew 40%/59%/36% YoY in 2QFY23.
• Revenue in USD terms grew 42%, while EBIT/PAT in INR terms rose 57%/35% YoY in 1HFY23.
• In USD terms, revenue rose 6.6% QoQ in CC terms to USD255.6m, 150bp above our estimate. Reported USD QoQ growth stood at 5.8%.
• EBITDA margin grew 30bp QoQ to 18%, 120bp above our estimate, despite wage hikes.
• PAT grew 4% QoQ in INR2.2b (est. INR2.1b).