Persistent Systems Q4 Results Review - Balancing Growth, Margins Could Be Tricky: Nirmal Bang

Nirmal Bang Report

Persistent Systems Ltd. reiterated its aspiration of being in the leader’s quadrant for growth while aspiring for margin improvement of 200-300 basis points over the next three years versus FY24 levels (Ebit margin of 14.4%).

We believe achieving both could be challenging and current valuation still assumes that it would happen; hence, we have a ‘Sell’. 

To be in the leaders’ quadrant of growth, it saw a 50 bps dip in margin in FY24. The dip could have been larger had it not been for one-off gains from reversal of acquisition-related earn outs in Q4 FY24 of ~286 bps. Achieving 200-300 bps margin improvement will be challenging as delivering industry-leading revenue growth (which is likely Persistent Systems’ bigger priority) would require it to fight for managed services contracts with tier-I players.

Taking them on would require extra investments in sales and marketing, higher onsite employees initially, solutioning, hiring subcontractors, rebadging of employees, taking on third-party items like software and hardware on to the P&L and possibly lower pricing.

We think there is a clear downside risk to the flat margin guidance for FY25 and the 200-300 bps margin improvement in three years. Most of its tier-II peers have Ebit margins which are in mid-teens, where Persistent Systems already is.

We are currently building in flat FY25 margin and only 160 bps of improvement by FY27.

While Persistent Systems could be among the top quartile performers in FY25 in terms of revenue and earnings growth, we believe that the current valuation of 42 times FY25E is excessive (and this is after a 21% cut from its peak).

We reiterate ‘Sell’ with a lower target price of Rs 2,723 based on a target price-to-earning multiple of 26.1 times March 2026E earnings per share, 10% premium to benchmark TCS (lowered the premium from 15% due to perceived risk to margins).

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