M&As add to the growth engine for Persistent Systems' stock: Brokerages

The stock remains one of the top picks among brokerages in the mid-cap IT space

In line with its strategy of tapping high growth markets and expanding its capabilities, mid-tier software services provider Persistent Systems made its fourth acquisition in the last seven months. Its latest buy for $71.7 million is MediaAgility, a Google Cloud premium partner. The transaction is valued at 2.8 times its enterprise value to revenue considering CY2021 financials. 

The acquisition will lead to setting up of a dedicated Google business unit which will offer solutions around the Google cloud ecosystem and is in line with the company’s strategy of adding relevant skills across key hyperscaler partners. Last month, the company had acquired Data Glove, another cloud transformation company and a Microsoft Azure partner for $90.5 million. This helped it expand its relationship and offerings with the hyperscaler.

Analysts at Sharekhan say that the The MediaAgility acquisition in the cloud area will benefit Persistent  as the addressable market for IT service providers is expected to be multi-fold as compared to revenue of hyperscalers. According to Gartner, the public cloud services market is expected to grow at 20.7 per cent annually over the next five years. 

The company indicated that there could be a 45-50 basis point impact on margins due to the acquisition in FY23 due to amortisation of intangibles/employee retention payments. This is expected to be offset by synergy benefits over time. Dipesh Mehta and Monit Vyas of Emkay Research believe that the transaction will add 3 per cent revenue in FY23, but it will be low single-digit dilutive to earnings per share due to a 45-50 basis impact on margins and lower other income. 

The acquisitions this year have taken the total M&A value to over $200 million for Persistent given that its trailing twelve months revenues have stood at just over $700 million. The company has indicated it will not look at further acquisitions given the geopolitical situation. 

At 8.3 per cent, Persistent has the lowest exposure across IT majors to Europe as of the December quarter, according to Nomura Research. The stock is the top pick of the brokerage in the mid-cap space. Nomura expects Persistent to clock revenue growth of 30 per cent plus for FY22 and FY23 and 22 per cent in FY24; margins are expected to improve from 13.9 per cent in FY22 to 16.5 per cent in FY24. 

Sharekhan too has a buy rating on the stock considering growth avenues via tuck-in acquisitions, robust execution and broad-based demand. While the stock has gained 17 per cent over the past fortnight and is trading at 38 times its FY23 earnings estimates, the brokerage believes the valuations are justified considering the revenue growth potential, deal wins and strong demand.