AI Advancements Will Improve Efficiency Despite Regional Challenges

Key Takeaways

• Launching the T100 program and enhancing AI offerings could deepen customer relationships and boost long-term revenue and earnings.
  
• Strategic partnerships and AI advancements, including cost optimization efforts, suggest potential improvements in efficiency, net margins, and overall earnings.
  
• European revenue decline suggests regional vulnerabilities, while reliance on top clients and new bookings poses risks to revenue stability and predictability.

Catalysts

Provides software products, services, and technology solutions in India, North America, and internationally.

• The launch of the T100 program aimed at driving enhanced value and innovation for the top 100 clients is expected to deepen customer relationships and improve long-term strategic partnerships, potentially boosting future revenue and earnings.
  
• Persistent's comprehensive AI strategy, including the advancement of platforms such as SASVA 2.0 and iAURA, is poised to drive tangible improvements in efficiency and cost-effectiveness, which could lead to enhanced earnings and net margins.
  
• The strategic initiative to enhance Persistent’s AI offerings and integrate acquired expertise, such as from the Arrka acquisition, into its platforms may bolster the company's position in AI governance and cybersecurity, potentially leading to increased revenue from these high-demand services.
  
• Expansion of services in collaboration with hyperscalers and the development of solutions like GenAI models for large pharma companies and the construction sector could lead to new revenue streams and increased market share, positively impacting future revenue growth.
  
• Cost optimization programs, improved utilization, and the focus on maintaining a high EBIT margin despite wage hikes suggest an ongoing commitment to efficiency that may improve net margins and overall earnings in the upcoming quarters.

Persistent Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Persistent Systems's revenue will grow by 13.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.5% today to 12.7% in 3 years time.
• Analysts expect earnings to reach ₹19.9 billion (and earnings per share of ₹128.65) by about December 2027, up from ₹12.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹23.1 billion in earnings, and the most bearish expecting ₹17.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 64.0x on those 2027 earnings, down from 75.8x today. This future PE is greater than the current PE for the IN IT industry at 45.0x.
• Analysts expect the number of shares outstanding to grow by 1.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.52%, as per the Simply Wall St company report.

Persistent Systems Future Earnings Per Share Growth

Risks

• Despite a healthy revenue growth of 18.4% year-on-year, European revenue declined by 1.3% year-on-year. This might indicate regional vulnerabilities that could impact future revenue streams from Europe.
  
• The EBIT margin improvement relies heavily on cost optimization and right-shoring, which may not be sustainable long-term without continuous strong demand, potentially affecting future profitability.
  
• The significant increase in the on-site effort share carries the risk of deflationary impacts on revenue as future plans involve right-shoring, which must be effectively managed to avoid net revenue declines.
  
• There is a high concentration of revenue from top clients (top 10 at 41.5%), which presents risk if any of these relationships weaken or if competitive pressures lead to pricing reductions impacting revenue stability.
  
• Persistent's reliance on new bookings for revenue growth suggests a need to continuously secure large, multi-year engagements which, if not maintained, could affect the predictability and consistency of revenue inflows.

Valuation

• The analysts have a consensus price target of ₹5486.82 for Persistent Systems based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹8462.0, and the most bearish reporting a price target of just ₹3090.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹156.8 billion, earnings will come to ₹19.9 billion, and it would be trading on a PE ratio of 64.0x, assuming you use a discount rate of 14.5%.
• Given the current share price of ₹6359.75, the analyst's price target of ₹5486.82 is 15.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.