Prabhudas Lilladher's research report on Persistent Systems
The investments (USD 1.6bn) in Nagarro is largely complementing and scaling the core business dynamics of PSYS, in terms of expanding new verticals and geographies, where PSYS has marginal presence. More importantly, the target entity shares a similar culture and service lines to PSYS’ core business, which is a positive in our view. However, we believe there is a slight business risk which comes along with the vertical presence, barring 2-3 verticals, the near-term growth within other business units remains a challenge (mid-single-digit). PSYS is largely pivoted on the build side (platform engineering), while Nagarro is dominated on the managed side that results in having higher T&M practice (around 60% mix). Hence, there is a notable difference in growth/margin profile of PSYS and Nagarro. Although there are a few (10 accounts) client overlapping between them, the management is excited and confident of scaling the potential accounts through cross-selling and up-selling opportunities.
Outlook
As per our estimates (Pro-forma), we see 120bps and ~200bps margin dilution at GM and EBITDA levels, however the integration will be EPS accretive (~4% at FY28E) despite the additional amortization & interest expense. The EPS calculation is excluding the USD650m deal (ACV 125m), that would add ~5% each (FY27E/FY28E) to PSYS core USD revenue. Retain BUY.
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Persistent Systems - 2906026 - prabhu