Persistent Systems Q4 Results Review - Balancing Growth, Margins Could Be Tricky: Nirmal Bang

"NDTV Profit’s special research section collates quality and in-depth equity and economy research reports from across India’s top brokerages, asset managers and research agencies. These reports offer NDTV Profit’s subscribers an opportunity to expand their understanding of companies, sectors and the economy..Nirmal Bang Report.Persistent Systems Ltd. reiterated its aspiration of being in the leader’s quadrant for growth while aspiring for margin improvement of 200-300 basis points over the next three years versus FY24 levels (Ebit margin of 14.4%). We believe achieving both could be challenging and current valuation still assumes that it would happen; hence, we have a ‘Sell’.  .To be in the leaders’ quadrant of growth, it saw a 50 bps dip in margin in FY24. The dip could have been larger had it not been for one-off gains from reversal of acquisition-related earn outs in Q4 FY24 of ~286 bps. Achieving 200-300 bps margin improvement will be challenging as delivering industry-leading revenue growth (which is likely Persistent Systems’ bigger priority) would require it to fight for managed services contracts with tier-I players. Taking them on would require extra investments in sales and marketing, higher onsite employees initially, solutioning, hiring subcontractors, rebadging of employees, taking on third-party items like software and hardware on to the P&L and possibly lower pricing. We think there is a clear downside risk to the flat margin guidance for FY25 and the 200-300 bps margin improvement in three years. Most of its tier-II peers have Ebit margins which are in mid-teens, where Persistent Systems already is. We are currently building in flat FY25 margin and only 160 bps of improvement by FY27..While Persistent Systems could be among the top quartile performers in FY25 in terms of revenue and earnings growth, we believe that the current valuation of 42 times FY25E is excessive (and this is after a 21% cut from its peak). We reiterate ‘Sell’ with a lower target price of Rs 2,723 based on a target price-to-earning multiple of 26.1 times March 2026E earnings per share, 10% premium to benchmark TCS (lowered the premium from 15% due to perceived risk to margins)..Click on the attachment to read the full report:.Persistent Systems Shares Tumble Despite Inline Q4 Profit.DISCLAIMERThis report is authored by an external party. NDTV Profit does not vouch for the accuracy of its contents nor is responsible for them in any way. The contents of this section do not constitute investment advice. For that you must always consult an expert based on your individual needs. The views expressed in the report are that of the author entity and do not represent the views of NDTV Profit..Users have no license to copy, modify, or distribute the content without permission of the Original Owner."

Persistent Systems Q4 Results Review - Balancing Growth, Margins Could Be Tricky: Nirmal Bang

Reversal of earn outs offsets significant margin headwinds in Q4 FY24

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Persistent Systems Q4 Results Review - Balancing Growth, Margins Could Be Tricky: Nirmal Bang

Reversal of earn outs offsets significant margin headwinds in Q4 FY24

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