Reduce Persistent Systems; target of Rs 5441: KR Choksey

KR Choksey's research report on Persistent Systems

We expect a Revenue/PAT growth at a CAGR of 17.0%/21.0% for FY24-FY26E, respectively, and to witness a revenue/PAT growth of 16.6%/21.8% for FY24-FY27E. Accordingly, we project FY26E EPS of INR 102.7 and assign a P/E multiple of 53x, driven by recent ACV wins, improving discretionary spendings supported by margin expansion due to lower SG&A expenses. Consequently, we arrive at a TP of INR 5,441 (previously: INR 4,798). Historically Revenue/PAT growth of PSYS from FY21-FY24 has been 32.9%/34.4%, exceeding our forecasted growth rates, which typically would suggest a lower P/E multiple. However, over the past six months, the stock has surged close to 61.0%, leading to stretched valuations. 1Yr Forward P/E of PSYS now trades at a record high of 65.6x, compared to a 3Yr average of 32.2x.

Outlook

At the current market price, we believe the risk-reward profile has turned unfavorable with the risks of a potential correction in multiple outweighs the potential upside. Accordingly, we are downgrading the shares of Persistent Systems Ltd to “REDUCE” from “HOLD”.