A Muted Start to FY26
Persistent Systems Ltd, a leading mid-tier IT services company in India, kicked off FY26 with slower-than-expected revenue growth. The company reported a 3.3% rise in constant currency revenue in Q1FY26—significantly lower than the 4%+ growth trajectory seen in the previous four quarters. This shortfall was attributed to client-specific delays and a subdued macroeconomic environment, reflecting the widespread hesitance in tech spending across industries.
While core verticals like BFSI (Banking, Financial Services & Insurance), software, and hi-tech supported the topline, the healthcare and life sciences segment—previously a robust growth driver—registered a sequential decline. This underperformance was largely influenced by supply chain challenges and U.S. tariffs on Chinese medical equipment, impacting manufacturers and downstream IT spending.
Segment Insights and Management Outlook
Despite healthcare headwinds, Persistent’s management remains cautiously optimistic. They expect a rebound in healthcare spending and reiterated the role of BFSI as a key growth anchor. The hi-tech segment, meanwhile, is forecast to hold stable performance.
The company also reaffirmed its ambitious FY27 revenue target of $2 billion, implying a 19-20% CAGR over the next two years. FY25 ended with revenues of $1.4 billion, and Persistent is targeting 200–300 basis points expansion in EBIT margins from the FY24 level of 14.4%.
However, the path to this target is not without hurdles. The soft Q1 performance underscores the importance of deal conversion and execution, particularly as the broader demand environment remains weak. The management emphasized a focus on profitable growth rather than chasing topline figures at the expense of margins.
Bookings and Revenue Visibility
In Q1FY26, the total contract value (TCV) grew a modest 0.6% sequentially and 12.5% year-on-year to $520.8 million. The annual contract value (ACV) rose 10% sequentially and 14.2% year-on-year to $385.3 million, suggesting healthy new deal activity. However, the book-to-bill ratio dropped to an eight-quarter low of 1.34x, raising red flags around future revenue acceleration.
Kotak Institutional Equities noted that the trend of TCV and ACV growing slower than revenue could lead to a sustained deceleration in topline performance if not addressed through faster deal ramp-ups and conversion.
Margins and Cost Pressures
Persistent’s EBIT margin in Q1FY26 came in at 15.5%, slightly below the consensus estimate of 15.6%, and down 10 bps sequentially. The margin dip was due to delayed project ramp-ups, unfavorable currency movements, and increased amortization expenses.
While annual wage hikes have been deferred by a quarter, and ESOP costs are expected to remain flat, there is only limited headroom for margin improvement. According to BOB Capital Markets, Persistent’s margins are still high compared to peers—at 15-16% vs. the industry average of 13-15%—but future EPS growth will now depend more on revenue expansion than margin levers.
Valuation Premium and Investor Expectations
Persistent’s stock has fallen 20% year-to-date, roughly in line with the Nifty IT index’s 18% decline. Despite this correction, the stock is still trading at a premium valuation of 37x FY27 EPS estimates, significantly above tier-1 IT peers.
BNP Paribas Securities India highlighted that while Persistent has historically outperformed on the back of its services pivot and strong engineering capabilities, a sustained slowdown in revenue growth could challenge investor assumptions about its resilience to macroeconomic cycles.
The Road Ahead: No Room for Complacency
To sustain its growth narrative, Persistent must aggressively win cost take-out deals, especially in BFSI, hi-tech, and healthcare. The scale of deals needs to increase without compromising on margin ambitions—a tricky balancing act. Given the current macroeconomic climate, Persistent cannot afford any slip-ups, especially with investor expectations baked into its elevated valuation.
Persistent’s near-term performance will hinge on converting its pipeline into billable engagements. While management confidence in achieving industry-leading growth remains intact, execution and deal velocity will be the key differentiators in a market bracing for prolonged uncertainty.
Feel free to share your experiences and insights in the comments below. Let’s continue the conversation and grow together as a community of traders and analysts.
By sharing this experience and insights, I hope to contribute to the collective knowledge of our professional community, encouraging a culture of strategic thinking and informed decision-making.
As always, thorough research and risk management are crucial. The dynamic nature of financial markets demands vigilance, agility, and a deep understanding of the tools at your disposal. Here’s to profitable trading and navigating the election season with confidence!
Ready to stay ahead of market trends and make informed investment decisions? Follow our page for more insights and updates on the latest in the financial world!
For a free online stock market training by Yogeshwar Vashishtha (M.Tech IIT) this Saturday from 11 am – 1 pm, please sign up with https://pathfinderstrainings.in/training/freetrainings.aspx
Experience profits with my winning algo strategies – get a free one-month trial with ₹15 lakh capital! – https://terminal.algofinders.com/algo-terminal
Disclaimer
This article should not be interpreted as investment advice. For any investment decisions, consult a reputable financial advisor. The author and publisher are not responsible for any losses incurred by investors or traders based on the information provided.