We are not dependent on discretionary spending: Sandeep Kalra, CEO, Persistent Systems

Sandeep Kalra, CEO, Persistent Systems

Mid-tier information technology (IT) services Persistent Systems continued to deliver double digit growth in the second quarter ended September 30, despite the ongoing macroeconomic and demand challenges that confronts the wider sector.

The company’s revenue was up by 20.1 per cent year-on-year (YoY) to Rs 2,897.15 crore, while net profit grew 23.4 per cent YoY to Rs 325 crore.

The company is positioning itself as a platform-driven business, utilising artificial intelligence (AI) solutions to adapt to shifting market demands.

In an interview with Moneycontrol, Persistent Systems' Chief Executive Officer (CEO) Sandeep Kalra and Chief Financial Officer (CFO) Vinit Teredesai discussed customers tech budgets, acquisition strategy, Gen AI outlook, margins, hiring plans and more.

Edited excerpts from the interview:

What’s the outlook on discretionary spending in the second half of financial year (FY) 2025? Has the US Federal Reserve interest rate cut started to bake into client conversations?

Kalra: I don't think we are seeing a big change because of the US Fed interest rate cuts yet, because there are many other things happening in the market.

There's the US elections and the uncertainty around that. The geopolitical tensions around the Israel-Iran conflict and the Russia-Ukraine war. But there is a little bit of loosening, if I may say so, in terms of the spend. From our perspective, we are not necessarily dependent on discretionary spend.

So if you look at the last several years, we have delivered four sequential years of 12.5 per cent, 35 per cent, 35 per cent, followed by 14.5 per cent of growth. It basically means that in the last four years we have run at about 24 per cent compounded annual growth rate (CAGR). And compared to the industry, it's a 16 per cent outperformance.

Now, as far as we are concerned, we have been investing on the other side while executing well with respect to our existing strategies. We have been building AI-led platform for product engineering, for application development maintenance, many tools for addressing the CIO (Chief Information Officer) market. And those are also starting to kick in.

So from that perspective, our pipeline is decent. Within this environment, whatever is given to us, we are reasonably confident of delivering good growth.

Persistent has made several acquisitions pertaining to AI. Take us through your M&A (merger & acquisition) strategy and also the AI-led platform services strategy?

Kalra: If you look at our M&A strategy for the last five years, we have acquired about seven companies.

All of these are capability-led acquisitions. About four years ago, we were focusing on cloud computing and data as the two pivots, in addition to financial services. We acquired companies, which had capabilities in Microsoft cloud and Google Cloud Platform.

We also acquired a company in the payment space, which was North Carolina-based Software Corporation International (SCI). We did vendor consolidation. We got a company in that vendor consolidation space called CV Partners.

But a lot of these companies and our latest acquisitions have been more towards AI, data privacy and data governance. If you look at the Starfish acquisition, it is more to do with contact centre AI, which is a horizontal use case across multiple verticals. If you look at Arrka, it is a small company based out of Pune — good capable people, they are experts in data privacy.  As we take the pivot more towards AI platform-driven services, data privacy in our solutions, from a customer adoption perspective, AI governance, ethical AI, and all of those become important topics.

While Arrka is a small company, it gives us a relative edge over our competitors that even otherwise makes us smarter in the emerging era of AI and data-related growth.

Oour strategy is small token acquisitions, capability-led acquisitions, where we can take those to our existing customers and supersize our relationships.

How’s is your AI/ Gen AI deal pipeline shaping up? Can you share some numbers around deal sizes and revenue expected? A lot of your peers said deal sizes have moved from sub-$1 million to $10 million?

Kalra: Gen AI is a subset of AI. There are two different pivots. There is AI for tech. We are dealing with product companies, which are horizontal or vertical software firms and enterprise software companies.

The other side is AI for business, where we are looking at business use cases and even IT-driven use cases, which are basically being adopted by CIO organisations to deliver better tools, enabling revenue, and reduction in costs to their business. These are two distinct streams. We have built a platform called SASVA for AI for tech and similarly other tools for this.

If you look at our recent wins, we announced a certain number of wins based on SASVA, the platform for tech. We don't quantify and we do not intend to quantify the quantum of overall deal wins, deal pipeline on AI or Gen AI because down the line, it's like digital. There was a time when people would announce their digital revenues and then over a period of time, everything was digital.

We are trying to infuse AI into everything that we do, even in our internal operations, internal IT, HR (human resources), recruitment, etc.  We don't want to get into the trap of quantifying how much is AI-led revenue, AI-led booking, pipeline. All I can tell you is we have won deals upwards of $40 million, one single deal using our platform and multiple of those which are in the range of $5-10 million plus.

We are going to pivot big time on that and that's where our investment has been significantly in the last 18 months and will continue to be in that direction. I am pretty proud to say we are ahead of the curve as far as adoption internally and externally, taking it to customers and winning business is concerned.

Your EBIT (earnings before interest and taxes) margin has remained flat over this quarter and the previous quarter and it has declined also over the last four quarters. What’s driving that and by when do you see the recovery happening?

Teredesai: First of all, we have sustained the EBIT margin at 14 per cent. It is after absorbing the full wage inflation impact in this particular quarter. We are one of the very few companies who has stuck our neck out and ensured that we are committed to giving our employees their increments well in time.

At this point of time, there was no market pressure for us to go and give the increment, but as a management and as the philosophy of our company, we believe in giving it well in time and that's what we have done. It's after absorbing that and the impact of that was almost 210 basis points, we have still sustained a 14 per cent margin.

From a year-on-year perspective or even from quarter-on-quarter (QoQ) perspective, there is an absolute number that has grown. On an annual basis, we have been able to grow our EBIT margin. We are running a pretty tight shop.

If you look at it, we have added $17 million roughly in revenue in this quarter, but we have reduced our headcount down by 282 people. That is reflected in our utilisation levels going up from 82 per cent to 84.8 per cent this quarter. Yes, it is a high level, but we believe we can sustain this utilisation levels for another couple of quarters.

If you look at the last 12 odd months, we have made a good amount of investment into the sales and general administration expenses. We have invested in sales and marketing people well in time. Our growth in the top 50 accounts, that is consistently growing.

That is reflecting that we are able to put the right people at the right places and the account mining strategy started yielding results for us. Going forward, we will continue to invest, but we don't need to make the investments at the same pace. There is a lever available for us to improve the margins subsequently.

At this point of time, looking at the pipeline and bookings that we have done, we are pretty much confident that subject to the seasonality that you may see in the third quarter, everything else seems to be looking very positive for us. And we are aspiring to sustain the same amount of margins that we have delivered, the same epic margins that we delivered in FY24, even in FY25.

We technically have to deliver around 15 per cent plus margins in the second half of the year and we are pretty confident that we will be able to achieve that.

Your headcount has declined QoQ? Are you not backfilling attrition? What’s the hiring plan?

Teredesai: I don't think it's a strategy that we wanted to reduce headcount. It's a question of demand and supply at this point of time. The market is ripped off. As you know, in the last three-odd years, when everything was growing at an exponential pace there was a lot of hiring that was done in anticipation of that growth.

Obviously, there was a little bit of a flab into the system, and we have been slowly trimming down that flab. But at the same time, we are investing where the need is, and we are hiring. It's not that we are not hiring.

If you look at our gross numbers, we are pretty much hiring. And there are such pockets whereby we are building our ventures. Those are special skills, and the customer wants to see those resources available before the new contracts are awarded to us.

Any targets for hiring freshers?

Teredesai: We have issued almost close to around 400 to 500 offers to freshers, and those commitments will be honoured in the subsequent two quarters.