Persistent Systems is in a league of its own as a diversified product engineering and IT services player, justifying a premium valuation multiple. Buy for target price of ₹6300 (21% upside): Motilal Oswal

Worries on margins to recede

We recently met with the management team of PSYS to understand the company’s strategic priorities and financial outlook for the coming years. Key takeaways: (1) PSYS is targeting a revenue of USD2b by FY27, and the management is optimistic about achieving this target despite a challenging business environment. (2) The company is implementing strict cost management strategies and has visible margin levers such as SG&A, offshoring and pyramid; it has already accounted for one-time expenses, which will no longer impact future margins. (3) PSYS is capitalizing on market opportunities, benefiting from vendor consolidation and focusing on high-demand areas like data, cloud, digital engineering, and platform engineering to strengthen its relationship with clients. (4) PSYS aims to diversify geographically to increase its European revenue share from 7-8% to 12%, while it is also exploring new sectors such as AI-driven solutions and enhancing its contact center capabilities.

Since our rating upgrade to BUY on 19th Jul’24 (1QFY25 result note), the stock has outperformed both the Nifty Index and the Nifty IT index (PSYS gained 15% vs. 3% for Nifty and 7% for NSE IT). We estimate an 18% USD revenue CAGR for PSYS over FY24-27, which, combined with margin expansion, could result in a ~21%+ EPS CAGR. This positions PSYS in a league of its own as a diversified product engineering and IT services player, justifying a premium valuation multiple.

Valuation and View – Maintain BUY

 Since our rating upgrade to BUY on 19th Jul’24, the stock has outperformed both the benchmark Nifty Index and the Nifty IT index (PSYS gained 15% vs. 3% for Nifty and 7% for NSE IT).

 We estimate an 18% USD revenue CAGR for PSYS over FY24-FY27, which, combined with margin expansion, could result in a ~21%+ EPS CAGR. This positions PSYS in a league of its own as a diversified product engineering and IT services player, justifying a premium valuation multiple. That said, owing to its superior earnings growth trajectory, on PEG basis, we believe the valuation still has room for upside. We introduce FY27 estimates and roll over to Sep’26E EPS. Reiterate BUY with a TP of INR6,300, based on 50x Sep’26E EPS.

Persistent Systems Motilal Oswal