Persistent Systems sees strong Hi-Tech growth as Nagarro costs weigh on earnings

Investment View and Valuation

ICICI Securities' October 16, 2026 results update maintains a HOLD recommendation on Persistent Systems. The broker describes industry-leading revenue growth, while flagging softness in Healthcare and Europe, margin pressure from the large Hi-Tech deal and delays in deal decision-making.

The valuation has been rolled forward by two quarters to Q3FY28 to Q2FY29E EPS of Rs 178, with the target multiple unchanged at 32 times.

Q2FY27 Revenue Performance

Persistent Systems reported Q2FY27 revenue of USD 487.6 million, up 7.8 per cent quarter on quarter and 20.8 per cent year on year in constant currency. Growth exceeded ICICI Securities' 6.5 per cent estimate and the 7.5 per cent consensus estimate. Revenue in rupees was Rs 46,639 million, up 8.4 per cent quarter on quarter and 30.3 per cent year on year.

Segment Drivers and Challenges

Management attributed Hi-Tech growth to the new Software Reinvention Services offering and the USD 650 million deal won in Q1FY27. About 75 to 80 per cent of that deal had ramped up by Q2FY27. BFSI growth was driven by vendor consolidation at a major financial-services client. Persistent acquired Estonia-based Concise Systems effective July 1 as part of that vendor-consolidation engagement.

Healthcare demand remained challenging at two clients, although management said this was already factored in and expects the vertical to return to growth. Europe declined 10 per cent quarter on quarter in US-dollar terms because of two client-specific issues.

Margins and Operating Metrics

Q2FY27 EBIT was Rs 6,977 million, up 1.6 per cent quarter on quarter and 19.5 per cent year on year. EBIT margin was 15.0 per cent, down 100 basis points sequentially and 134 basis points year on year, but 76 basis points above ICICI Securities' estimate.

Annual wage hikes and third-party licence costs relating to the large deal reduced the margin. Management expects FinOps and AI-led engineering to lower people, tools and cloud costs on that deal as revenue scales and costs are optimised.

Headcount increased by 958 to 29,598, while trailing twelve-month attrition improved to 11.9 per cent from 12.3 per cent.

Deal Wins and Pipeline

ICICI Securities considers TCV broadly in line with the approximately USD 600 million four-quarter run-rate after excluding the unusually large USD 650 million deal in Q1FY27. Some deals slipped into Q3FY27 owing to slower decisions late in the September 2026 quarter.

Nagarro Acquisition and Estimates

Persistent has secured about 94.04 per cent of Nagarro's share capital, excluding treasury shares. Management expects deal closing in Q4CY26 or Q1CY27, subject to remaining approvals.

Funding includes a USD 1.25 billion capital raise, of which USD 450 million is planned as equity. One-time Nagarro transaction costs are estimated at about USD 50 million over three to four quarters. Persistent booked Rs 1,853.4 million in Q2FY27, with USD 25 million to USD 30 million expected over the following two quarters.

ICICI Securities cut FY27E and FY28E EPS by 11 per cent and 3 per cent respectively for these costs, despite raising revenue estimates by 0.9 per cent and 0.7 per cent. Management expects the acquisition to be cash EPS accretive in its first year excluding transaction costs.

Key Risks

Upside Risks

• A faster macroeconomic turnaround.
• Market-share gains that drive stronger revenue growth.
• Tighter cost control that improves margins.

Downside Risks

• An increasing base effect.
• Quarterly revenue growth falling below the industry average.