Persistent Systems’ strong deal wins boost outlook, acquisition costs pose risk

ET Intelligence Group: The stock of Persistent Systems has gained 31% from the 52-week low at the end of June after the mid-tier IT exporter announced the $1.4 billion acquisition of Germany based Nagarro. The BSE Infotech index has gained 10% during the period. The rebound in Persistent’s stock can be attributed to Persistent’s sustained focus on AI-driven client engagements and a better than expected June quarter result. Apart from a strong sequential revenue growth, the company booked a multi-year, mega deal worth $650 million from a US client, which improves revenue visibility. For the September quarter, operating margin may come under pressure considering the salary increase in July. In addition, the $1.6 billion bridge loan taken to fund the acquisition of Nagarro will result in interest expenses, further denting the bottom line. The stock may remain range-bound in the medium term given the acquisition related strain on the financials.

Persistent Systems reported a strong 3.8% sequential revenue growth for the June quarter, largely led by a 22% increase in India business while the US, its largest market, grew by a modest 0.8%. The growth in India seems more like an aberration, driven by a few clients that procured services through the global capability centres (GCC) in the country. Therefore, the outlook for rest of the fiscal year depends on the recovery in the US market.

The total contract value (TCV) of order bookings shot up to $1.1 billion from $520.8 million in the year-ago quarter, aided by the large deal win. According to the management, ramp-up of this project has begun and its full effect on the company’s revenue will be visible by the December quarter.

The operating margin (EBIT margin) contracted by 30 basis points sequentially to 16% amid a 150 basis point fall in employee utilisation at 86.5% as the company hired employees to ramp up the large project. The staff strength increased to 28,640 from 27,502 a quarter ago. The wage increase undertaken at the beginning of the September quarter is likely to pull down the margin by 180-200 basis points, which may be mitigated to some extent through improved utilisation amid the ramp up of new projects.

Read more: Global Market Today: Asian shares slip as US stock futures dip ahead of Warsh’s Jackson Hole speech

Despite the recovery since the end of June, the stock price is still 10% lower on year-to -date (YTD) basis though it remains in a relatively better position compared with a 20% drop in the BSE Infotech index. It is likely to stay range-bound in the short term depending on the actual impact of the funding of Nagarro’s acquisition on the financials. For the long-term, analysts have raised the valuation multiples amid higher new deal momentum. JM Financials has raised the FY28 expected price-earnings (P/E) multiple to 34 from 28, resulting in a higher target price o ₹5,870 compared with ₹4,755 earlier. The stock ended Thursday’s session at ₹5,647 on the BSE.