HDFC Securities' research report on Persistent Systems
We maintain REDUCE on Persistent Systems, despite its strong 1Q performance, as current valuations (at 16x FY22E vs. 14x 5-yr average) amply factor in the recovery trajectory. The Technology Services segment continues its steady performance supported by its large accounts mining, consolidated structure, and sales re-organisation. In contrast, the Alliance segment adds uncertainty to the revenue and operating profile based on volatility in re-seller revenue, despite the growth opportunities via Red Hat and Dassault ecosystem. The leadership changes in the organisation over the past year have stabilised and fortified the non-IBM business, but the IBM ecosystem remains a work-in-progress.
Outlook
Our upgraded target price is Rs 775, 14x Jun-22E, following ~16% EPS upgrade on growth/margin reset. The valuation discount to mid-tier peers reflects sub-par/volatile client mining, margins, and FCF as compared to peers.
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