Collaborations With Microsoft, Google, And AWS Will Expand AI Market Reach

Key Takeaways

• Strategic acquisitions and partnerships with hyperscalers aim to enhance AI capabilities, potentially improving service efficiency and expanding the addressable market for growth.
  
• Focus on industry-specific solutions in healthcare, life sciences, banking, and financial services offers opportunities for sustained revenue growth with higher-margin, outcome-based engagements.
  
• Heavy reliance on North American revenue could pose risks amid economic or regulatory shifts, while high operational utilization limits further efficiency gains and strains resources.

Catalysts

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

• Persistent Systems is developing an AI-led platform-driven services approach, which is likely to boost revenue through innovative offerings that streamline client workflows and improve outcomes.
  
• The company's strategic acquisitions and integration of Arrka and Starfish aim to bolster its AI capabilities and offer more comprehensive solutions, which could enhance net margins by improving service efficiency and value-added services.
  
• Persistent is partnering with major hyperscalers like Microsoft, Google, and AWS to co-develop AI solutions. This collaboration could drive significant revenue growth by expanding the company’s addressable market and leveraging joint go-to-market strategies.
  
• The company’s focus on healthcare and life sciences, along with banking and financial services, which have shown significant growth, presents opportunities for sustained revenue growth, driven by industry-specific solutions.
  
• Persistent's move towards nonlinear revenue models and outcome-based engagements could enhance earnings by decoupling revenue from headcount growth and enabling higher-margin offerings.

Persistent Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Persistent Systems's revenue will grow by 13.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.7% today to 12.5% in 3 years time.
• Analysts expect earnings to reach ₹20.5 billion (and earnings per share of ₹131.85) by about January 2028, up from ₹13.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹24.0 billion in earnings, and the most bearish expecting ₹18.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 69.4x on those 2028 earnings, down from 70.7x today. This future PE is greater than the current PE for the IN IT industry at 32.8x.
• Analysts expect the number of shares outstanding to grow by 1.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.54%, as per the Simply Wall St company report.

Persistent Systems Future Earnings Per Share Growth

Risks

• The company's high reliance on North America, where 80% of its revenues come from, could pose a risk if economic conditions or regulatory changes in that region become unfavorable, potentially impacting revenue growth.
  
• The EBIT margin of 14.9% is partially influenced by favorable conditions, such as currency tailwinds. Potential negative currency fluctuations or other economic factors could adversely impact net margins.
  
• The competitive need for AI and platform-driven services require significant ongoing investments, which may strain cash flows and earnings, especially if the expected ROI is not realized.
  
• With high utilization rates already at 87.4%, there is limited room for further operational efficiency without impacting potential headcount-related growth, which could hinder future cost management efforts and margin improvement.
  
• The company’s inorganic growth strategy focused on acquiring capabilities such as AI and data privacy poses integration risks and may not lead to expected synergy benefits, potentially affecting future earnings if not adequately managed.

Valuation

• The analysts have a consensus price target of ₹6117.71 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 ₹9267.0, and the most bearish reporting a price target of just ₹3400.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹164.3 billion, earnings will come to ₹20.5 billion, and it would be trading on a PE ratio of 69.4x, assuming you use a discount rate of 14.5%.
• Given the current share price of ₹6275.95, the analyst's price target of ₹6117.71 is 2.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.