Generative AI Integration Will Strengthen SASVA Core Offerings

Key Takeaways

• Integrating generative AI into offerings and focusing on strategic partnerships aims to drive revenue growth and improve net margins through innovation and efficiencies.
  
• Targeting long-term growth via enhanced customer relationships and geographic expansion could boost revenue diversification and earnings sustainability.
  
• Heavy reliance on the U.S. market and macroeconomic uncertainties could impact revenue growth and earnings predictability, with potential margin pressures from attrition and cautious client decisions.

Catalysts

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

• Persistent Systems has outlined plans to integrate generative AI into its core business offerings, which could drive future revenue growth through enhanced product and service innovation, particularly via platforms like SASVA. This can lead to increased revenue and potentially improve net margins.
  
• The company is focusing on expanding its strategic partnerships and capabilities through acquisitions, such as Starfish and Arrka, to disrupt specific domains like contact centers and enhance data privacy and governance capabilities. This should help in driving both top-line growth and improve net margins due to synergetic efficiencies.
  
• Persistent Systems is targeting long-term growth by enhancing its customer relationships, focusing on scaling revenue within its top customers across various verticals like healthcare, life sciences, and BFSI. This effort to increase revenue share from existing clients could improve overall earnings.
  
• The company aims to progressively implement more outcome-driven commercial models leveraging its AI investments, which could lead to an improvement in revenue growth and net margins as these models offer higher sustainability and profitability.
  
• With plans to achieve $2 billion in revenue by FY '27 and considering strategic geographical expansion, particularly in Europe, Persistent Systems looks set to benefit from potential revenue diversification and scale efficiencies, which would positively influence revenue growth and EPS.

Persistent Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Persistent Systems's revenue will grow by 17.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.7% today to 13.2% in 3 years time.
• Analysts expect earnings to reach ₹25.5 billion (and earnings per share of ₹161.96) by about May 2028, up from ₹14.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹28.7 billion in earnings, and the most bearish expecting ₹21.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 51.7x on those 2028 earnings, down from 56.5x today. This future PE is greater than the current PE for the IN IT industry at 26.7x.
• Analysts expect the number of shares outstanding to grow by 1.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.29%, as per the Simply Wall St company report.

Persistent Systems Future Earnings Per Share Growth

Risks

• The macroeconomic environment is fluid, with increased caution in decision-making and potential slowdown in deal closures, which may affect future revenue growth and predictability.
  
• Trailing 12-month attrition increased to 12.9% from 11.5%, possibly indicating higher employee turnover that could impact continuity and costs related to hiring and training, thus affecting net margins.
  
• There is significant reliance on the U.S. market, contributing 80% of revenues, which poses a geographic risk if economic conditions in the U.S. change unfavorably, potentially impacting earnings.
  
• Delay in ramp-up and decision-making due to clients' cautious approach amid political and economic uncertainties could result in slower revenue conversion and vary from expected earnings outcomes.
  
• The pursuit of margin improvements through utilization and pricing levers may not fully offset potential margin pressures if larger macroeconomic factors hinder growth or increase costs unexpectedly, impacting net margins.

Valuation

• The analysts have a consensus price target of ₹5546.353 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 ₹7730.0, and the most bearish reporting a price target of just ₹3550.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹192.8 billion, earnings will come to ₹25.5 billion, and it would be trading on a PE ratio of 51.7x, assuming you use a discount rate of 15.3%.
  
• Given the current share price of ₹5321.5, the analyst price target of ₹5546.35 is 4.1% higher. 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.