Persistent Systems outperformed analyst estimates in the second quarter of FY23 ended September 30. Profit after Tax (PAT) stood at Rs 220 crore, growing 4 percent QoQ and nearly 36 percent YoY.
Revenue grew to Rs 2,048.64 crore, up by 9.1 percent on a QoQ basis and by about 51.6 percent YoY. The total contract value (TCV) for deal wins came in at $367.8 million.
The company has already achieved $1 billion in annualised revenue and plans to reach $2 billion in revenue in the next four years.
The company’s EBIT margin or operating margin consistently improved over the past eight quarters, touching 14.6 percent in Q2FY23.
In an interview with Moneycontrol, Sandeep Kalra, Chief Executive Officer and Sunil Sapre, Chief Financial Officer of Persistent Systems discuss the current demand environment for the company, defending operating margins, enabling timely variable payouts amidst cost pressures and how moonlighting risks the company IPs.
Edited excerpts:
Can you give a sense of how the macro uncertainties are changing the client conversations right now, especially in terms of spending?
Kalra : Overall, there are inflationary pressures on one side, and to compare between the US and Europe, the US is more inflationary due to Fed-related issues, interest rates going up, cost of capital going up all those things. On the other side, Europe is more ready for inflation going up because of the war, gas prices going up, and then there's uncertainty and the winter coming up. Places like Germany that never saw 8-9 percent inflation are now seeing 9 percent inflation. So that will trigger a bunch of downstream effects. There is definitely going to be a slowdown, how much and how long? Nobody knows. With that impending slowdown, anyone who's a business leader is looking at their businesses and trying to see where do you kind of stop the cost or cut the cost, where do you still invest and so on. So there's a reprioritisation happening.
The BFSI sector again is one of the key revenue enablers for Persistent Systems. And this sector particularly got hit globally. What kind of impact are you expecting on it? Has there been any impact so far?
Kalra: Our exposure to things like mortgage was very minimal. We were working with a company which is a leader in mortgage technology, not mortgage servicing. So they have a platform that's used by many different stakeholders in the mortgage industry. We did see some amount of issue in terms of ramp downs, etc, there but our exposure is very limited. So far we have not seen a huge impact but if the entire industry kind of gets impacted a little bit by rising costs, people expecting a recession, bad debt or whatever else, there may be an impact over a period of time but we’ll see how it pans out.
Your operating margins have been improving quite well across the quarters. But currently given the global cross-currency headwinds, how do you plan to defend margins?
Sapre: On the operating margins, the dollar and rupee was a good tailwind this time. Now, let's see how long it lasts, this quarter may pan out to be in this kind of range of 80 to 83 rupee-dollar. Some people say it may go to 84, which is not too far. But that's how the current situation is with the Fed leading the rate hikes. The ECB (European Central Bank) is a little bit trailing on that. And you know, inflation is remaining sticky. So the weakness in the Eurozone is contributing more to the dollar index strengthening, not so much about what has changed in India. So, if the Eurozone comes to terms with this winter-related issue and the dependence on gas imports from Russia, then over time, this will settle down maybe by early next quarter. Then you may see the dollar settling down to a more reasonable level, which the RBI may be comfortable with. This benefit may be there for some time, say this quarter, it was 90 basis points (in terms of operating margins) in Q2.
Moonlighting in the IT sector has been a big concern lately. What is Persistent’s stance on that?
Kalra: So moonlighting in our parlance is when someone who is a full-time employee of ours has signed that he or she will be working full-time for us and not for anybody else. And at the same day starts working for someone else.
Now, obviously, that is not what we stand for. Because look, we have employment contract that you know, the person has a choice. If the person doesn't want to work as a full-time employee, we have contractual positions that might be there from time to time in different projects then the person can work on those. And if the person wants to work part-time and do something else, then it's clearly a known thing between the two entities, right between us and the potential contractor, and the employee. So we do not support at the highest-level, moonlighting without consent. If you want to be a part-time freelancer, that's a different issue. We can support that.
We have figured out over the last several quarters a handful of people who were doing that and we have to let go, and we do not want to have people say something and do something else.
Sapre : I think this issue is very new right now, first and foremost, we have client engagements which mandate us to have full-time employees. If there are people who are not full-time employees, we are required to make it known to clients and take their approval, because they may have confidentiality concerns. Because if you are a contractor, then they may look at it from that point of view, and the role that can be assigned can be only a certain role that is on the contractual side, and we have to deal with that with the customers. Now look at it from the employee’s point of view, the matter is not so very clear as to what is the ownership and at what level moonlighting employees can be allowed to work. Can they run teams? can they drive the performance of a team? It is also about customers at the end of the day; we are working in the intellectual property area and this cannot be so free-flowing.
Mid-tier IT companies were better positioned last quarter in terms of giving out variable pay, as compared to the top two-three IT companies, where it was deferred or partially paid. What led to mid-tier companies like Persistent Systems managing that better?
Kalra : Whether it is IT services companies out of India, globally or whatever, we are not one monolith. While we play in the same sector, we have different specialisations, we have different go-to-market and different growth rates. Thankfully for us, because the variable pay is very specific to our goals, we have beaten our goals hands down in the last several years. And we are on the path to do that again. So from that perspective, we are not worried about cutting our people’s variable salaries and so on. Hopefully, we'll pay more than 100 percent the same way that we've done over the last few years. And so from our perspective, our focus is on performance, whether rain or sunshine. And as long as we do that, as long as we meet our goals, we'll take care of our employees and we'll wish others the best.
Sapre: What probably might have played out over the last say a couple of quarters when this news was there, is that a couple of sectors, if you look at mortgages and retail, did face significant headwind because of a sudden increase in interest rates by the US Fed. Fewer people went for mortgages, or even consumer spending to some extent would have been lower. And because of that some of the companies which may have had significant exposure may have looked at that as an option to link it to their underlying loading and performance in terms of their overall revenue. Thankfully, we didn't have that type of exposure to mortgage detail. And hence we don't have that type of a situation to face.
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