Buy Persistent Systems Ltd, Stock Target Price and Stock Analysis.

 

Persistent Systems Ltd Stock analysis.

Persistent Systems Ltd is a global software company specialising in product and technology services. The company has proven expertise, a strong presence in newer technologies, and the strength to improve its IP base. 

Persistent Systems Ltd focuses on developing IoT products and platforms, as it sees significant traction from industrial machinery, SmartCity, healthcare, and smart agriculture verticals. 

Persistent Systems Ltd has been focusing on product development, establishing processes to build distributed agile teams, and partnering with the world’s leading product companies to build software contributing across the entire product lifecycle. 

The company derives revenue from North America, Europe, and the Rest of the World. 

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Strong industry growth outlook to sustain 

The pandemic has accelerated the adoption of cloud technologies because of strengthening business resilience and agility provided by cloud-based services in terms of cost efficiencies, catching up with cloud-native competitors, and shifting from CAPEX to OPEX. 

The emergence of the new business model would lead to a substantial increase in technology spending of the enterprises, which is expected to reach 5% of revenue by 2030 from 3% currently. 

Over the next five years, overall global IT spending and IT services spending are expected to grow faster than the past five years. 

Gartner forecasts global IT spending to grow at 6.1% over 2020-2025E and global IT services spending growth to remain strong at an 8.5% CAGR over the same period, significantly higher than the average growth of 4.3% during 2015-2020

Well-poised to benefit from the accelerated shift to cloud and increased digital engineering spending.

 Cloud adoption is picking up pace and we believe cloud transformation is in the first phase of a multi-year technology transformation phase. 

It is estimated that 20-30% of workloads have moved to the cloud, and this can increase to 70-80% in the next 3-5 years. Digital and cloud services are expected to be a $600 billion–$700 billion opportunity for IT services companies. 

The Engineering and R&D Services (ERS) segment will pick up and is expected to grow at the fastest rate within the Indian technology space for the next 3-5 years. 

Strong growth in digital engineering will be led by Industry 4.0, digital twins, cloud engineering services, and product engineering.

BFSI growth momentum to continue.

Large global BFS firms, which are the highest spender on technologies, have been investing in online channels because of higher customer experience, cost-efficiency agendas, gaining market share, and intense competition from fintech firms. 

BFS firms are now investing in data and analytics, AI and ML, automation, applications with microservices and APIs, cyber security, regulatory compliance requirements, etc. 

We believe tech spending among BFS firms would remain strong in the medium term as these financial institutions focus on legacy modernisation and digital transformation initiatives.

Well-poised to deliver top-quartile growth in the medium term 

Mid-cap IT companies continued to outperform large-cap companies on the growth front in Q2FY2022. 

We believe strong outperformance will continue in the subsequent quarters, given strong competencies in digital technologies, robust discretionary spending, good strategies around partnership ecosystem to participate in customers’ transformation journey, lesser exposure to legacy business, and attracting external talents at senior levels from large organisations

Strong fresher hiring is likely to continue to improve the pyramid. 

Strong net headcount additions over the past four quarters indicate strong underlying demand and anticipation of strong deal wins in the coming quarters. 

Headcount increased by 975 employees q-o-q during Q2FY2022, taking total net headcount addition of 5,059 since Q3FY2021. Net employee addition over the past four quarters is 47% of the total headcount in Q2FY2021. 

The company plans to aggressively hire freshers going ahead, which will aid in both access to talent and pyramid improvement.

Expect strong growth momentum to continue in Q3

 Deal wins likely to stay strong Since Q1FY2021, the company has been reporting industry-leading revenue growth performance among its mid-tier peers, registering a CAGR of 6.8%. 

Persistent Systems Ltd’s USD revenue grew by 9.3% q-o-q (up 34% y-o-y) to $182.3 million in Q2FY2022, led by industry-leading 10.1% q-o-q (up 39.9% y-o-y) growth in IT services (contributes 87.5% of total revenue). 

We expect PSL would continue to report strong revenue growth in Q3FY2022 because of expected broad-based growth across verticals, strong deal wins ($1,076 million TCVs over the past four quarters), robust deal pipeline, new logo additions, incremental revenue contribution from the acquisitions, and strong seasonality in IP-led business. 

We believe total deal TCVs would remain strong in Q3FY2022, given a strong deal pipeline in the transformation area and the largest-ever deal win ($50 million) because of the acquisition of Shree Partners LLC USA (vendor consolidation).

Margins to remain under pressure in the near term.

 EBITDA margin improved by 22 bps q-o-q to 16.6% in Q2FY2022 despite wage revision and replenishment of attrition with higher-cost resources. 

However, supply-side challenges, replenishment of attrition with higher-cost lateral resources, ESOP expenses, and integration impact of recent acquisitions are expected to weigh on margins. 

Further, the attrition rate would remain elevated in Q3FY2022 given its higher presence in cutting edge technology compared to its peers and a shortage of digital talent across industries.

Persistent Systems Ltd, Stock Target Price.

We have a buy recommendation on the Persistent Systems Ltd Stock with a Target Price of Rs 6000. The current  Market price of Persistent Systems Ltd Stock is Rs 4700.

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