Persistent Systems revenue growth stays strong as margins become the key focus

Investment View and Valuation

Prabhudas Lilladher downgraded Persistent Systems to ACCUMULATE from BUY in its October 16, 2026 Q2 FY27 result update. The downgrade reflects stretched valuations in recent sessions, although the broker retained a constructive view of the company's underlying fundamentals.

The broker values Persistent Systems at 32 times September 2028 estimated EPS and arrives at a target price of Rs 6,550.

Q2 FY27 Revenue Performance

Persistent Systems reported Q2 FY27 IT services revenue of USD 488 million, representing 7.8% quarter-on-quarter growth in both constant-currency and reported-currency terms. This was marginally ahead of Prabhudas Lilladher's 7.6% constant-currency growth estimate. Overall revenue increased 8.4% quarter on quarter and 30.3% year on year to Rs 4,664 crore.

Growth was led by the technology companies and emerging verticals segment. Healthcare and life sciences was broadly flat because of macroeconomic challenges in the US payer segment. North America delivered strong growth, while Europe declined and APAC remained flat.

Margin Pressure and Profitability

Profitability was the principal negative in the quarter. EBIT margin declined by about 100 basis points quarter on quarter to 15.0%, 60 basis points below the broker's and consensus estimate of 15.6%.

Gross margin fell to 33.7% from 35.1% in Q1 FY27. Adjusted PAT was Rs 537 crore, 3.7% above the broker's estimate of Rs 518 crore. Reported PAT was affected by Rs 185 crore of one-off acquisition-related costs.

Deal Activity and Outlook

Deal activity moderated after Persistent Systems won a large strategic deal worth USD 650 million over 6.5 years in Q1 FY27.

Management attributed the weaker deal closures partly to slower customer decision-making in recent weeks, including disruption from Middle East dynamics, and expects a recovery in Q3 FY27. Despite the sequential moderation, trailing-twelve-month total contract value and annual contract value grew 36.3% and 22.0% year on year, respectively.

Operational Metrics

• Headcount increased by 958 to 29,598, including 909 software employees.
• Utilisation including trainees declined 70 basis points quarter on quarter to 85.8%.
• Trailing-twelve-month attrition improved 40 basis points to 11.9%.
• The top five and top 10 clients grew 23.7% and 17.3% quarter on quarter, respectively, while non-top-10 accounts grew 0.6%.

Estimates and Margin Outlook

Management remains confident of achieving a 16% to 17% EBIT margin in FY27E. Prabhudas Lilladher expects operating leverage to support second-half margin improvement as the compensation revision is completed and the large deal reaches full potential in Q3 FY27.

The broker kept its constant-currency revenue growth estimates broadly unchanged but reduced its FY27E EBIT margin estimate to 16.0% from 16.3%.

Key Risks and Acquisition Timeline

• Continued margin pressure from wage costs and technology investments.
• Weak healthcare demand, particularly in the context of macroeconomic challenges in the US payer segment.
• Slower client decision-making and potential delays in deal closures.
• European client-specific ramp-downs.
• Delays in obtaining approvals for the Nagarro acquisition.

Management expects the Nagarro acquisition to close by Q4 CY26 or Q1 CY27. It also expects an additional USD 25 million to USD 30 million of acquisition-related expenses over the next two quarters.