Outperform on Persistent Systems, target price Rs 6,730: BNP Paribas Securities

BNP Paribas Securities has an outperform call on Persistent Systems with a target price of Rs 6,730. The current market price of Persistent Systems is Rs 6208.45 . Persistent Systems., incorporated in 1990, is a Mid Cap company with a market cap of Rs 98543.96 crore, operating in the IT Software sector.

Persistent Systems' key Products/Revenue Segments include Software Services and Software Licence for the year ending 31-Mar-2024.

Financials

For the quarter ended 30-09-2024, the company has reported a Consolidated Total Income of Rs 2943.67 crore, up 6.35% from last quarter Total Income of Rs 2767.81 crore and up 20.20% from last year same quarter Total Income of Rs 2448.95 crore. The company has reported net profit after tax of Rs 325.00 crore in the latest quarter.

The company's top management includes Dr.Anand Deshpande, Dr.Ajit Ranade, Mr.Dan?l Lewin, Dr.Ambuj Goyal, Mr.Arvind Goel, Ms.Avani Davda, Mr.Praveen Kadle, Ms.Roshini Bakshi, Mr.Sunil Sapre, Mr.Sandeep Kalra, Ms.Anjali Joshi. Company has Walker Chandiok & Co. LLP as its auditors. As on 30-09-2024, the company has a total of 16 crore shares outstanding.

Investment Rationale
Since its pivot towards the services business, Persistent Systems has seen solid revenue growth outperformance on the back of its strong product engineering capabilities. Renewals are also happening for longer-tenure deals. The company has increased its sales and business development headcount, as it aggressively builds out its sales network to maintain its deal-win momentum. The company's growth drivers are diversifying from the Hi-Tech vertical to Healthcare and BFSI, giving visibility to the sustainability of stronger growth for longer. BNP Paribas Securities sees strong revenue growth and margin tailwinds resulting in solid earnings growth for Persistent Systems and find its PEG ratio attractive relative to its peers.

Valuation methodology:
BNP Paribas values Persistent Systems using DCF methodology, with FY4-11E revenue growth of 17%, WACC of 10.0% and terminal growth rate of 5%.

Risks To the upside: Upside risks to the DCF-based target price are: 1) Marked pick-up in deal signings due to increased revenue scale; 2) margins improving due to better pricing and automation initiatives; 3) sustained INR depreciation vs the USD; and 4) an earlier-thanexpected recovery in revenue growth due to improving macro headwinds.

Downside risks to the DCF-based target price are: 1) Any material weakness at its top client (IBM); 2) a sharper-than-expected decline in global economic activity and GDP growth. 3) margin pressure from increased competition; 4) sustained rupee appreciation vs the US dollar; and 5) deals not ramping up as expected.

Promoter/FII Holdings
Promoters held 30.66 per cent stake in the company as of 30-Sep-2024, while FIIs owned 23.34 per cent, DIIs 27.33 per cent.