Broker's call: Persistent Systems (Buy)

CMP: ₹581.8

Target: ₹680

We interacted with Persistent Systems to get a business update.

Persistent cited focus on winning large multi-year and annuity deals which includes managed services component. This we believe is the major shift in strategy compared to company’s earlier focus predominantly on digital offering which were though high-end offerings but restricted scope for client mining owing to project centric nature.

Recent large deal win includes a $50-million five-year tenure deal from ISV which involves employee takeover from its India Captive unit (Persistent had 18 FTE’s working on the project and it has now been scaled to 220 FTE’s).

Persistent cited focus on BFSI/ Healthcare/ISV segment in the medium-term to drive large deal wins. We model Persistent Systems’ dollar revenue growth/(decline) at (3.8)/8.7 per cent for FY21/FY22E.

Company has seen pent up investments in FY20 for re-branding and incremental sales hiring. We see potential for swing in margins over FY21-FY23E with growth improvement and increasing annuity component of business being margin levers.

Stock trades at about 11.3x FY22E EPS and valuations are reasonable (LT Infotech/Mindtree trade at 18/17x FY22E EPS). Retain ‘buy’.