Generative AI And Protectionism Will Shrink Addressable Market

Key Takeaways

• Increased adoption of AI and protectionist trends threaten market size and make growth dependent on few regions, raising risks of stagnation and concentration.
  
• Margin pressure from heightened competition, labor costs, and rising regulations weakens profitability and exposes earnings to persistent industry headwinds.
  
• Growth is driven by AI and digital offerings, strong partnerships, diversified revenues, and a balanced approach to expansion, ensuring sustained profitability and sector resilience.

Catalysts

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

• The accelerating adoption of generative AI and automation platforms poses a fundamental risk, as enterprise customers increasingly leverage these solutions to automate core software engineering and testing functions in-house, which is likely to shrink Persistent's addressable market and drive revenue stagnation or declines in coming years.
  
• Escalating digital sovereignty movements and local protectionist policies across key regions threaten Persistent's ability to win cross-border contracts, especially as more clients pivot IT spending toward domestic providers; this trend could directly limit the company's ability to diversify revenue, making future growth heavily dependent on a small number of geographies.
  
• Persistent's overexposure to North American and BFSI customers heightens revenue volatility risks, since budget cuts or strategic in-sourcing by a few large clients could swiftly impact overall revenues and lead to significant earnings swings-a structural weakness amplified as industry cyclicality returns.
  
• Intensifying price competition from larger hyperscalers and global IT service providers, coupled with rising labor costs and ongoing talent shortages in India, are likely to erode Persistent's net margins in the medium term, making the company structurally less profitable on new and renewal deals.
  
• With rapid commoditization of traditional IT services and persistent increases in regulatory compliance and cybersecurity costs globally, Persistent faces growing margin compression and execution risk, undermining long-term earnings quality and leaving both revenue growth and profitability vulnerable to sustained industry headwinds.

Persistent Systems Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Persistent Systems compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Persistent Systems's revenue will grow by 12.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 12.1% today to 13.1% in 3 years time.
• The bearish analysts expect earnings to reach ₹23.1 billion (and earnings per share of ₹147.93) by about September 2028, up from ₹15.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 40.6x on those 2028 earnings, down from 53.3x today. This future PE is greater than the current PE for the IN IT industry at 26.4x.
• Analysts expect the number of shares outstanding to grow by 1.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.99%, as per the Simply Wall St company report.

Persistent Systems Future Earnings Per Share Growth

Risks

• Persistent Systems continues to benefit from long-term secular trends such as digital transformation, accelerated adoption of AI, cloud, and data analytics, which is supporting strong revenue growth across client buckets and verticals.
  
• The company is seeing increasing traction for its proprietary SASVA AI platform and other IP-led offerings, leading to higher-margin services and differentiation against competitors, with management emphasizing that these are expanding its addressable market and supporting net margin improvement.
  
• Strategic partnerships with major hyperscalers and ability to win large digital transformation deals across banking, hi-tech, and healthcare verticals provide visibility into robust, diversified revenue streams and reduce dependence on any single sector or geography.
  
• Operational metrics such as sustained double-digit year-on-year revenue growth, improving EBIT margins, strong cash conversion, rising customer buckets across size bands, and the ability to retain utilization levels suggest healthy underlying earnings momentum.
  
• Management's articulated commitment to profitable growth by balancing both organic and inorganic expansion, while continuously investing in AI-driven productivity tools and vertical-specific capabilities, positions the company to maintain or even improve earnings, net margins, and revenue sustainability over the long term.

Valuation

• The assumed bearish price target for Persistent Systems is ₹3934.7, which represents two standard deviations below the consensus price target of ₹5843.12. This valuation is based on what can be assumed as the expectations of Persistent Systems's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹7536.0, and the most bearish reporting a price target of just ₹3675.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹176.7 billion, earnings will come to ₹23.1 billion, and it would be trading on a PE ratio of 40.6x, assuming you use a discount rate of 16.0%.
• Given the current share price of ₹5419.0, the bearish analyst price target of ₹3934.7 is 37.7% 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.