Analysts retain buy on Persistent Systems after Q4 numbers, expect 24-45% return

While maintaining buy call with a target at Rs 730 (the highest among brokerages, potential upside of 45 percent), Motilal Oswal also feels despite the disruption due to COVID-19, Persistent's strong performance within the services segment (around 15/11 percent in 4Q/FY20, YoY) reflected its steady progress on turnaround.

"As the pandemic situation is expected to increase the uptake of digital services, we expect Persistent's portfolio to benefit. High exposure to salesforce consulting and verticals such as Technology, Healthcare, and BFSI gives us this confidence," the brokerage said.

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The company’s robust performance in 4Q (barring IP), healthy deal pipeline, and cautiously optimistic outlook indicate the near-term COVID-19 disruption would not be as bad as we initially anticipated, it added.

Persistent Systems delivered a steady performance in a tough environment, with better-than-expected performance in both revenue and operating profitability. USD revenue came at $127.1 million, down by 1.8 percent QoQ, attributed to significant 24.3 percent QoQ decline in IP-led revenue due to weak seasonality and lower revenue re-seller business because of COVID-19 outbreak. PAT declined 4.7 percent QoQ mainly due to lower forex gain.

However, the sharp decline in IP revenue was partially offset by 3.8 percent QoQ growth in Technology Services Unit (TSU, 73.7 percent of total revenue), driven by strong 7 percent QoQ growth in digital revenue.

"IP revenue should continue to be an overhang. Historically, execution challenges and volatility in the IP portfolio have led to inconsistency in the company’s performance. However, the recent improvement witnessed in execution and a higher focus on annuity revenue should address this issue to some extent," said Motilal Oswal.

The brokerage upgraded its EPS estimates over FY20–22 by 20–22 percent. "While material delay in clients’ discretionary spends is a monitorable risk, subdued multiples offer adequate margin for safety," it said.

EBITDA margin improved by 41 bps QoQ to 13.8 percent despite lower IP revenue and bad provisions in the wake of COVID-19, led by lower sales and marketing expenses, decline in purchase/royalty expenses, and rupee benefits (50 bps).

Management expects margin to improve in FY21 on account of lower sales and marketing expenses and completion of rebranding activities.

"We assume FY21 is going to be a weak year, given anticipated material deterioration in the demand environment. However, growth is likely to recover in FY22 once the situation normalises," Sharekhan said.

Meanwhile, Persistent expanded its partnership with Dassault Systèmes to strengthen digital transformation capabilities in Europe.

"This agreement brings industrial OEMs and suppliers to the Dassault Systèmes 3DEXPERIENCE platform where clients can reduce costs, improve supplier collaboration, drive agility and gather better field insights for future product iterations and customer support," company said in its BSE filing.

ICICI Direct

In a post COVID-19 world, we expect digital technologies to gain traction. Persistent is expected to be a key beneficiary of this digital acceleration. In addition, the focus of the new management on large annuity oriented deals, increase in deal sizes and less reliance on top client bodes well for services growth in the long term (which is also visible in the near term quarterly performance).

In addition, the company also has substantial cash on its balance sheet (around 24 percent of market cap), which can be used for acquisition (to fuel growth). Further, considering multiple levers for cost rationalisation, we expect margins to see an improved trajectory in the long term. This, coupled with reasonable valuation of 10x P/E on FY22 EPS, prompts us to remain optimistic on the stock. Hence, we maintain buy rating on the stock with a revised target price of Rs 625 per share (potential upside of 23.8 percent).

Anand Rathi

Taking into account potential weakness in contract renewals and smaller accounts, we cut FY21 and FY22 respectively around 12 percent and 7 percent. However, we believe that current valuations factor in the risks and, on free cash flow basis, the stock can generate 14 percent yield. Maintain buy with target of Rs 630 (potential upside of 24.8 percent).

Centrum Broking

We believe Persistent delivering steady growth in Enterprise segment could enable address larger opportunity as well as stabilize performance. Post Q4FY20, we model Persistent Systems USD revenue growth/(decline) at (3.8)/8.7 percent for FY21/FY22 (versus (2)/8.5 percent modelled earlier).

We trim EPS estimates by 9/4 percent for FY21/FY22E led revenue, margin downgrade. Stock trades at 9.6x FY22E EPS and valuations are reasonable. We reduce our target price by 4 percent to Rs 650 (potential upside 28.7 percent). Retain buy.

Emkay

The company’s senior leadership has taken 20-25 percent salary cuts as a temporary measure to protect margins. We note that cash generation improved in the March 2020 quarter after the weakness in 9MFY20 on account of changes in the internal finance systems.

We raise FY21/22 estimates by 5/2 percent on higher-margin assumptions but retain revenue estimates broadly. We introduce FY23 EPS at around Rs 60. We maintain hold, with a revised target price of Rs 550 (versus Rs 540 earlier) based on an unchanged 10x FY22E EPS.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.