Persistent Systems shares slide 5% despite Q2 revenue growth. Buy, sell or hold?

ETMarkets.com

Consolidated revenue rose 7.8% quarter-on-quarter in constant currency to $487.6 million, beating market expectations. EBIT margin, however, contracted 100 basis points QoQ to 15%, missing estimates. Profit after tax fell 27.2% QoQ to Rs 351.51 crore, impacted by higher amortisation costs from large deal execution and one-time acquisition expenses.

Overall total contract value stood soft at $633.5 million, with management noting that macro-related uncertainty delayed client decision-making in the quarter's final weeks.

"We are pleased to report Q2 FY27 revenue of USD 487.6M, marking our 26th sequential quarter of growth. This reflects a 7.8% increase quarter over quarter and 20.0% year over year, with an EBIT margin of 15.0%," said Sandeep Kalra, Chief Executive Officer and Executive Director.

Q2 revenue strong, margins under pressure

The margin weakness was driven by a combination of wage hikes, lower utilisation and amortisation linked to a large customer deal, according to Nomura. These pressures were partly offset by lower selling, general and administrative expenses and favourable currency movements.

Nomura said the quarter was a “mixed bag”, with revenue broadly in line but a significant margin miss. It retained a Neutral rating on the stock while raising its target price to Rs 5,600 from Rs 5,330, citing rich valuations. The brokerage expects margin recovery over the next few quarters as large deal amortisation eases and costs are optimised.

Deal momentum was another weak spot. Persistent reported total contract value of $633.5 million and annual contract value of $481 million for the quarter. Nomura noted that deal wins softened after an exceptional first quarter, with management attributing some of the slowdown to delayed client decision-making amid the macro environment.

Buy, sell or hold Persistent Systems shares?

JPMorgan retained an Overweight rating with a Rs 6,400 target, highlighting the 7.8% constant currency sequential revenue growth, driven by large tech deal ramp-up and a vendor consolidation win at a large BFSI client. However, it expects margin pressure from amortisation costs linked to the large technology deal.

CLSA also retained its High Conviction Outperform call with a Rs 6,488 target. It noted that revenue was 2% ahead of consensus, although EBIT and adjusted PAT were below expectations. The brokerage expects revenue, EBIT and EPS compound annual growth rates of 16%, 19% and 22%, respectively, over FY27-29.

Nuvama, meanwhile, retained its Hold rating and cut its target price to Rs 5,450 from Rs 5,500. It said Persistent continues to deliver industry-leading growth, but the stock's 34x FY28E PE valuation, coupled with incremental risks from the Nagarro acquisition, makes the risk-reward unattractive.

The Nagarro deal remains a key part of the investment story. Persistent has secured approximately 94.04% of Nagarro's share capital and voting rights and is progressing towards the takeover, while management expects the acquisition to strengthen engineering capabilities, geographic diversification and global delivery.