Sharekhan Bets On This Mid Cap Multibagger IT Stock, Suggests Buy For 26% Potential Gains

Sharekhan in its equity report on Persistent Systems Limited suggests 'buy' for a target price of Rs 4,300 apiece. Persistent Systems is a mid-cap Computer - Software & Consulting company with a market capitalization of Rs 26,156.07 crore. The company beat the estimates of the brokerage on all fronts; Q1 also saw strong deal intake, robust net headcount additions, good client mining and growth across top accounts. Management sees demand staying robust as it does not see delays in decisions on deals despite macro factors. In contrast, macro concerns could create huge opportunities for Persistent Systems in cost optimisation areas.

Stock Outlook & Results

Persistent Systems Ltd's Current Market Price (CMP) is Rs 3,430 apiece, opened at Rs 3609.80 apiece. Trading 4.90% below its previous close of Rs 3,606.55 apiece. The CMP is nearly Rs 456.35 above the 52-week low.

The shares of the company in the last 1 year moved up around 5.67%. It has given 3.2% in last 1 week and 5.32% in last 1 month. The stock in terms of returns in long term has delivered multibagger returns. In the last 3 years, it has given massive 508.61% returns and 437.76% in the last 5 years.

The stock hit the 52-week low last year on 26 July August at Rs 2,973.65 apiece, while the 52-week high it touched on January 03, 2022, at Rs 4,987.50 apiece. The ROE is 20.49%. TTM EPS is Rs 98.23. PE ratio is 34.93. PB ratio is 8.18. The Dividend yield is 0.90 and its face value is Rs 10.

As per the CMP of the company and the brokerage's estimated target price of Rs 4,300 apiece, the share price sees a potential-jump of nearly 26% in 12 months.

 

Q1FY23 Result Updates & Brokerage Views

Persistent Systems Limited (PSL) delivered yet another quarter of outstanding all-round growth, beating our estimates in revenue and operating profitability. The company's strong revenue growth remained in excess of 9% q-o-q for five consecutive quarters. USD revenue grew by 11.1% q-o-q (up 44.8% y-o-y) to $241.5 million, led by continued strong growth in IT services (including revenue contribution from acquisitions).

Organic revenue growth stood at 5.6% q-o-q and 30.5% y-o-y in Q1FY2023. EBIT margin improved by 27bps q-o-q to 14.3% (exceeded our estimates), as margin headwinds (continued supply-side issues, visa costs, rising travel expenses, and higher depreciation expenses) were offset by operating leverage and currency tailwinds.

Management indicated that demand continues to remain robust as it does not see any material delay in decision-making process on deals or project cancellation owing to adverse macro factors. In contrast, it believes the current macro headwinds remain favourable for the company given rising opportunities in cost-optimisation areas.

Growth in the medium term would be supported by robust deal intake, revenue synergies in the acquired business, new logo additions, and rising growth and cost-optimisation opportunities.

Key Positive-Negative & Risks

Key positives - Deal TCVs/deal ACVs grew by 61%/39% y-o-y, respectively; one of the strongest growth among its peers in the recent macro situation. Revenue grew at 9%+ sequentially over the past five successive quarters. Strong net headcount addition of 3,039 employees on a q-o-q basis, includes 1,950 freshers. Broad-based growth across top 5/10/20 accounts.

Key negatives - Technology companies and emerging vertical's EBIT margin declined by 1100 bps q-o-q. OCF to EBITDA declined to 20% in Q1FY2023 from 63% in Q4FY2022.

Key Risks - Any slowdown in non-Internet of Things (IoT) revenue/delay in product launches/stronger rupee and/or adverse cross-currency movements could affect earnings.

Management Commentary

Management aims to reach $1 billion annual revenue run rate over the next 3-4 quarters. The current macro factors remain favourable for the company in terms of increasing number of opportunities in cost-optimisation areas. EBIT margin to come under pressure by 200-300 bps in Q2FY2023 due to higher-than-usual wage revision owing to the inflationary environment. Excluding the addition of freshers, the trailing 12-month attrition for the quarter remained at 26.3% versus 26.6% in Q4FY2022. It expects attrition to moderate going ahead.

Revision in estimates - We have broadly maintained our earnings estimates for FY2023E/FY2024E because of strong deal intake, healthy deal pipeline, robust headcount addition, and stable margin despite supplyside challenges.

Growth outlook intact, Suggests buy for a target price of Rs 4,300

According to Sharekhan "We believe Persistent Systems is well poised to deliver another year of industry-leading growth in FY2023 because of strong deal intake, sharpening focus on fast-growing verticals, capabilities to participate in both growth and cost-optimisation transformation initiatives, and potential synergies from recent acquisitions. Margin headwinds are expected to be absorbed by improving utilisation, reduction in subcontracting costs, pyramid balancing, and currency tailwinds."

It added, "We expect USD revenue/earnings to report a CAGR of 27%/25% over FY2022-FY2024E. At the CMP, the stock trades at a valuation of 32x/26x its FY2023E/FY2024E earnings estimates. Hence, we retain our Buy rating on the stock with a revised price target (PT) of Rs. 4,300."

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.