Recalibrating growth stance: Key highlights of our recent meeting with Persistent Systems are: 1) new management will focus extensively on client mining with an eye on higher & more profitable revenue growth; 2) Accelerite will be leveraged to primarily up-sell & cross-sell service offerings and will cease to be a standalone entity; and 3) better utilisation & volume improvement are envisaged to lead to margin recovery from current level.
We also expect Persistent to benefit from strong industry demand dynamics and continue to assign the company 5% weighting in our model portfolio.
The stock trades at 14.3x FY20E EPS. Maintain 'buy' with target price of Rs 739.
Addressing sales engine challenges: While Persistent has an excellent delivery team, its sales strategy had been found wanting as the team ended up chasing new logos without sufficient mining to justify profitability.
The new management is setting this right. We believe, the company’s strategy of focusing on mining at least 25% of its top 100 clients and chasing annuity revenues is sound and should deliver results.
Ample margin recovery levers: We expect the effect of recent transition in management and personnel to last for another quarter as costs of people recruited and who have left is still on the books.
Further, the company is actively chasing projects which have a sizeable offshore component, which should boost profitability. We also believe utilisation level is set to rise even further from the current level as natural attrition is not replaced, leading to further margin improvement.
Outlook and valuation: Strong fundamentals; maintain ‘BUY’: We expect Persistent to regain growth momentum as sales issues are addressed. Dimmed focus on Accelerite business is also a positive. We also perceive a huge client-mining opportunity, which can further boost growth.
The stock trades at 14.3x FY20E