10% decline in persistent stock due to flat margin expectations

Monday saw a 9.7% decline in the share price of IT giant Persistent Systems to Rs 3,510.60 on the BSE after the company’s guidance for unchanged Ebit margins in FY25. In the previous six years, this was the largest decline in the company’s stock price in a single day.

 

In addition, the business revealed a flat EBIT margin of 14.5% for the March quarter, defying market expectations that margins would rise in Q4.

According to Sunil Sapre, CFO and executive director of Persistent Systems, deal ramp-ups in BFSI, healthcare, and a few high-tech software transactions resulted in a large increase in on-site staffing, which is why margin did not improve.

The effort to boost margin was being hindered by a rise in subcontracting expenses from little less than 11% to 14%, according to Sapre. Within the next two to three years, the business has projected for a rise in Ebit margins of 200–300 basis points. There would not, however, be a margin increase in the foreseeable future.

The BFSI category was under pressure, according to Sapre, since the macro climate remained unstable and it would take an additional two to three quarters for interest rate decreases and geopolitical issues to materialize. Healthcare and life sciences drove Persistent’s expansion, which was later followed by BFSI and high-tech software.

Overall, I don’t see any problems with the structure. For us, the price landscape remains steady. Simply said, deal ramp-ups are led on-site when they occur and require some time to transition to an off-shore model. We had a dual-edged impact. The costs associated with being on-site are going to go up significantly, and you also need to prepare the offshore staff. We increased the headcount for that reason, according to Sapre.

Since Persistent hired more individuals offshore, its utilisation rate decreased from 81.5% to 80%. The market’s anticipation that furloughs would return and boost margins was not realized.

The form of the revenue ramp-up and its mix, according to Sapre, were having an effect on margin development. According to him, the business has to present itself as a rival supplier to the established names. According to Sapre, the business is now entering into deals of $100 million and even more, having previously closed deals in the $25–70 million range.

According to the CFO of Persistent, the company invested a lot of money on hiring staff for marketing and sales in FY24. The business would work hard to optimize use. “We have room to grow by 3-4% in terms of utilisation, which will improve our margins,” Sapre said.

Additionally, the business is investing in GenAI and AI. Compared to a few quarters ago, this was seen as a market opportunity with a solid line of sight, even if it hasn’t yet begun to significantly contribute to revenue. According to Sapre, the company will begin panning in FY25, which will result in additional transactions in the Gen AI domain.

For the March quarter, Persistent recorded a 10.2% sequential increase in profit after tax to Rs 315.32 crore. In the March quarter, the company’s dollar sales increased 3.4% over the previous quarter to $310.89 million. In rupees, Persistent’s revenue increased 3.7% on a quarterly basis to Rs 2,590.52 crore. The Ebit increased 3.1% in a row to Rs 374.45 million. Order booking was $447.7 million in terms of total contract value (TCV) and $316.8 million in terms of annual contract value (ACV) for the March quarter.