Strong deal momentum to keep Street hooked on to Persistent

ET Intelligence Group: The stock of Persistent Systems, a mid-tier IT services company, has gained 10% since its second-quarter result announcement last Tuesday, taking the three-month return to 20%. The stock has remained buoyant following the company’s strong business momentum in the September quarter, even as the broader market has shown weakness.

The key business vertical of hi-tech and emerging industries, where the revenue growth has been sluggish over the past few quarters, is likely to show a turnaround given the new deal wins. The company’s management also expects to improve the operating margin in the second half of the fiscal year with rising utilisation levels.

The company reported above 5% sequential revenue growth for the second consecutive quarter. Revenue grew by 5.3% to $345.5 million, driven by the banking, financial services and insurance (BFSI), and healthcare verticals, contributing 59% to the top line. Each of these two verticals reported 8-10% sequential revenue growth. The company’s biggest vertical, software, hi-tech and emerging industries, which clocked 41% of the revenue, showed sluggish growth of 0.8% during the quarter. While global supply chain issues have kept the segment’s revenue depressed in the past, the management believes that it’s time for a recovery.

“We believe the slowdown in the hi-tech vertical has bottomed out as we see more deal flows there,” Persistent’s chief financial officer Vinit Teredesai told ET adding that the rate of deal conversion in the vertical has also improved.

The total contract value (TCV) of deals increased by 14.3% sequentially to $529 million. The share of new deals in TCV increased to 73.7% from 67.2% by similar comparison.

The company’s net profit rose by 6.1% sequentially to ₹3,250 crore in the second quarter. The operating margin (EBIT margin) remained flat at 14% compared with the earlier quarter as higher employee utilisation and improved pricing offset the impact of salary increase and ESOP costs. The utilisation increased to 84.8% from the previous quarter’s 82.1%. Along with these factors, the cost optimisation programme implemented in the first quarter is expected to improve margin in the second half of the current fiscal year.The company’s client concentration is on the rise – the contribution of the top 10 customers in revenue increased by 200 basis points year-on-year to 41.5% during the September quarter. Teredesai attributed this to a higher mining of top-billed clients. “We are now focussing on increasing the wallet share of our top 100 clients,” he said. Motilal Oswal Financial Services expects the company to grow dollar revenue by 19% annually between FY24 and FY27 and increase earnings per share by over 21%, which will be helped by an improvement in margin. The brokerage has a buy call on the stock with a 12-month target price of ₹6,300. The stock closed at ₹5,615 on the BSE on Wednesday.