Analysts trim estimates on Persistent amid valuation and growth concerns

Synopsis

Persistent Systems' shares declined following disappointing June quarter results, with revenue growth slowing due to healthcare sector sluggishness and project delays. While the company aims for $2 billion revenue by FY27, some analysts consider its valuation high amid short-term challenges. Despite a growing order book, client caution persists, leading to mixed analyst ratings, with some reducing earnings estimates.

ET Intelligence Group: Persistent Systems has lost nearly 8% on bourses after declaring the June quarter numbers on July 23, which were below analysts' expectations.

The company's sequential revenue growth in dollar terms has been decelerating gradually since the past four quarters amid sluggishness in the healthcare vertical. Given the order pipeline, the mid-tier IT exporter expects a recovery in this vertical in the coming quarters. While the company is confident of meeting its FY27 revenue target of $2 billion, some analysts find its current valuation to be steep given the short-term project delays.

The sequential growth in revenue at $389.7 million slowed down to 3.9% in the June quarter from 5.6% in the year-ago quarter. According to Vinit Teredesai, CFO, the current growth rate reflects organic business momentum given the fact that faster growth in the past was fuelled by acquisitions.

In addition, the healthcare division, which contributes over one-fourth to revenue, has been reporting slower momentum after growing at a faster rate in the past. Its revenue dropped by 2.2% sequentially in the June quarter to $98.5 million due to a planned transfer of onsite work to offshore and project delays. Teredesai expects a gradual recovery in the vertical over the next two quarters going by the mew deals momentum.

Agencies

The company has been facing a slower pace of decision-making in recent times but it has so far not undergone any pricing pressure. The company's overall order book grew by 12.5% year-on-year to $520.8 million in the June quarter. It, however, remained flat on a sequential basis, reflecting the cautious approach by clients. The proportion of new deals improved to 64.7% from 63.6% in the previous quarter but was lower than 67.2% in the year-ago quarter.

Revenue in rupee terms rose by 2.8% sequentially to ₹3,333.6 crore while net profit grew by 7.4% to ₹4,24.9 crore. The operating margin (EBIT margin) fell by a tad 10 basis points to 15.5% compared with the quarter ago. The company has deferred salary increase for employees by one quarter, which is likely to support margin in the September quarter. It expects to improve the operating profitability by 100 basis points for FY26 compared with 14.7% margin in FY25.

Emkay Global Financial Services has slashed earnings estimates by around 2% for FY26-28. Broking firm has retained a 'reduce' call on stock citing rich valuation. On other hand, Motilal Oswal Financial Services has reiterated a 'buy' call with a target price of ₹6,800 given company's consistent execution and growth visibility. Stock was last traded at ₹5,169 on Tuesday on BSE.

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