Persistent Systems Ltd:Annual Report 2023-24 Analysis

Persistent Systems Ltd.: A Comprehensive Overview #

About the Company #

Year of Establishment and Founding History:

Persistent Systems was founded in 1990 by Dr. Anand Deshpande. The company initially focused on providing product engineering services.

Headquarters Location and Global Presence:

• Headquarters: Pune, Maharashtra, India
• Global Presence: Persistent Systems has a significant global presence with offices and development centers across North America, Europe, Asia, and Australia.

Company Vision and Mission:

While a publicly stated, singular vision and mission statement are not readily available, Persistent Systems focuses on accelerating digital transformation for its clients through product engineering and digital services. They aim to be a trusted partner in helping businesses innovate and grow using technology.

Key Milestones in Their Growth Journey:

• 1990: Founded as a product engineering services company.
• 2000s: Expanded service offerings to include digital solutions.
• 2010: Listed on Indian stock exchanges.
• Recent Years: Focused on strategic acquisitions to bolster expertise in specific technologies and industries, especially in cloud, data, and AI.

Stock Exchange Listing Details and Market Capitalization:

• Listing: National Stock Exchange of India (NSE) and Bombay Stock Exchange (BSE)
• Ticker Symbol: PERSISTENT
• Market Capitalization: Varies dynamically; refer to current financial data sources for the most up-to-date information.

Recent Financial Performance Highlights:

Refer to the most recent annual reports and quarterly results released by Persistent Systems for accurate and up-to-date financial performance information. Key metrics to consider include:

• Revenue growth
• Net profit
• Earnings per share (EPS)
• Operating margin

Management Team and Leadership Structure:

• Chairman and Managing Director: Dr. Anand Deshpande
• Refer to Persistent Systems’ Investor Relations page or LinkedIn for the most current list of key executives.

Any Notable Awards or Recognitions:

Persistent Systems regularly receives industry recognition for its innovation, employee practices, and financial performance. Check their website and press releases for recent awards.

Their Products and Services #

Complete Product Portfolio with Categories:

Persistent Systems offers a wide range of digital engineering and enterprise modernization services. Key categories include:

• Digital Strategy & Design: Consulting services to define and design digital transformation initiatives.
• Product Engineering: Building and supporting software products for clients.
• Intelligent Automation: Automation solutions using AI, RPA, and other technologies.
• Cloud & Infrastructure: Cloud migration, management, and optimization services.
• Data & Analytics: Data engineering, data science, and analytics solutions.
• Enterprise Applications: Modernizing and integrating enterprise applications.

Flagship or Signature Product Lines:

While Persistent Systems is primarily a services company, they develop accelerators and platforms to improve service delivery and create intellectual property. Examples include:

• Accelerators for specific industries: Solutions tailored for healthcare, banking, and financial services.
• IP based solutions: Tools and frameworks to accelerate cloud migration, data engineering, and AI deployments.

Key Technological Innovations or Patents:

Persistent Systems invests in R&D and innovation. Look for information on their website and patent filings.

Quality Certifications and Standards:

Persistent Systems adheres to industry-standard quality certifications such as:

• ISO 9001 (Quality Management System)
• ISO 27001 (Information Security Management System)
• SOC 2 (Service Organization Control 2)

Any Unique Selling Propositions or Technological Advantages:

• Deep Engineering Expertise: Strong focus on software product engineering.
• Strategic Acquisitions: Acquiring companies to expand expertise in key areas like AI, Cloud and Data.
• Partnerships: Strong partnerships with major technology vendors (e.g., AWS, Microsoft Azure, Google Cloud).
• Domain Expertise: Specialized knowledge in specific industries (e.g., Healthcare, Financial Services).

Recent Product Launches or R&D Initiatives:

Check Persistent Systems’ press releases, blog, and investor relations page for details of new solutions, offerings, and R&D activities.

Primary Customers #

Target Industries and Sectors:

• Healthcare & Life Sciences
• Banking, Financial Services & Insurance (BFSI)
• Software & Hi-Tech
• Industrial
• Emerging Verticals

Geographic Markets (Domestic vs. International):

Persistent Systems generates a significant portion of its revenue from international markets, particularly North America. However, they also have a presence in the domestic Indian market.

Major Client Segments:

Persistent Systems serves a mix of large enterprises and software product companies.

Customer Testimonials or Case Studies:

Refer to Persistent Systems’ website and marketing materials for customer testimonials and case studies.

Major Competitors #

Direct Competitors in India and Globally:

• Global: Accenture, Tata Consultancy Services (TCS), Infosys, Wipro, HCLTech, Capgemini, Cognizant
• Niche Players: Smaller specialized engineering services firms.

How they differentiate from competitors:

• Focus on Product Engineering: Strong emphasis on software product development and engineering services.
• Specialized Expertise: Domain expertise in specific industries, like healthcare.
• Strategic Acquisitions: Acquisitions designed to quickly enhance their skills and service offerings.
• Strong Partnerships: Leveraging partnerships with cloud providers and other technology companies.

Future Outlook #

Expansion Plans or Growth Strategy:

Persistent Systems focuses on:

• Organic Growth: Expanding their market share and growing revenue from existing clients.
• Strategic Acquisitions: Acquiring companies to expand capabilities and enter new markets.
• Focus on Digital Transformation: Helping customers to implement digital strategies.
• AI-Powered Solutions: Developing solutions incorporating AI and machine learning.

Sustainability Initiatives or ESG Commitments:

Refer to Persistent Systems’ website and investor relations page for details of their ESG (Environmental, Social, and Governance) initiatives and commitments.

Industry Trends Affecting Their Business:

• Digital Transformation Acceleration: Increased demand for digital services and solutions.
• Cloud Adoption: Growing adoption of cloud computing across industries.
• Data and Analytics: Increasing focus on data-driven decision-making.
• Artificial Intelligence: Growing demand for AI-powered applications and services.
• Talent Shortage: Competition for skilled IT professionals.

Long-Term Vision and Strategic Goals:

Persistent Systems’ long-term vision is likely focused on:

• Becoming a leading provider of digital engineering and enterprise modernization services.
• Building a strong brand reputation as a trusted technology partner.
• Delivering sustainable growth and profitability.

Comprehensive Performance Overview #

3-Year Trend Analysis of Key Financial Metrics #

• Revenue Growth: Revenue demonstrated consistent growth, with a 17.62% increase in FY24 (₹98,215.87 million) compared to FY23 (₹83,505.92 million) and a further increase from FY22 (₹57,107.46 million).
• Profitability: Profit After Tax (PAT) increased by 18.72% in FY24, reaching ₹10,934.91 million, up from ₹9,210.93 million in FY23 and ₹6,903.86 million in FY22. The PAT margin improved, standing at 11.13% in FY24, compared to 11.03% in FY23 and 12.09% in FY22.
• Earnings Per Share (EPS): Basic EPS showed a consistent increase, reaching ₹72.44 in FY24, compared to ₹61.87 in FY23 and lower in earlier years. Diluted EPS followed a similar trend.
• Return on Capital Employed (ROCE): ROCE was 28.58% in FY24, a slight decrease from 30.43% in FY23, but an increase from 24.00% in FY22.
• Net Worth: Increased to ₹49,513.46 million in FY24, up from ₹39,588.11 million in FY23 and lower in the previous year.
• Dividend Payout: Dividend per share up from a restated amount of ₹50 in FY23 to ₹52 for FY24.

Business Segment Performance #

• BFSI: Revenue growth was 15.25%, increasing to ₹31,385.58 million in FY24 from ₹27,231.45 million in FY23.
• Healthcare & Life Sciences: This segment demonstrated strong growth, with a 29.20% increase in revenue, rising to ₹20,880.32 million in FY24 from ₹16,161.07 million in FY23.
• Software, Hi-Tech, and Emerging Industries: Revenue grew by 14.55%, reaching ₹45,949.97 million in FY24 from ₹40,113.40 million in FY23.
• Segment Margins: Operating margins differ across segments, with Healthcare having the highest and Software, Hi-Tech, and Emerging Industries having the lowest margins in FY24, with a declining trend noted.

Major Strategic Initiatives and Their Progress #

• AI and GenAI Solutions: Launched a comprehensive range of AI and GenAI solutions (ExtenSURE.AI, SASVA, Persistent iAURA) to accelerate software development, enhance customer experiences, and improve productivity.
• Hyperscaler Partnerships: Expanded partnerships with major hyperscalers like AWS, Google Cloud, and Microsoft to leverage their platforms for client solutions. Achieved AWS Premier Tier Partner status.
• Employee training: Trained over 16,000 employees in AI technologies.

Risk Landscape Changes #

• Geopolitical and Macroeconomic Risks: Increased focus on managing risks related to global economic slowdown, inflation, and geopolitical uncertainties.
• Cybersecurity Risks: Continued investment in cybersecurity measures and resilience, including a focus on data protection and compliance with data privacy regulations.
• Talent Acquisition and Retention: Addressed challenges in talent acquisition and retention by investing in training and employee engagement programs.
• Operational Risk: The shift toward greater proportions of revenue derived from North America (79.6%) expose the business to operational risks.

ESG Initiatives and Metrics #

• Environmental Sustainability: Commitment to achieving carbon neutrality for Scope 1 and Scope 2 emissions by mid-FY25 and sourcing 100% renewable energy for owned India facilities by the same time. Committed to reducing Scope 3 emissions.
• Social Responsibility: Continued CSR activities through Persistent Foundation, focusing on education, health, community development, wildlife, and heritage conservation. Spent ₹207 million on CSR initiatives in FY24.
• Governance: Recognized as one of India’s leading ESG entities by Dun & Bradstreet, maintaining strong corporate governance practices.

Management Outlook #

• Cautious Optimism: Management anticipates continued challenges from the macroeconomic environment but remains optimistic about growth opportunities.
• Focus on Innovation and Client Value: Continued emphasis on leveraging AI, GenAI, and Digital Engineering to deliver innovative solutions and client value.
• Financial Discipline: Commitment to financial discipline, operational efficiency, and sustainable growth, with an aim to reach $2 billion in revenue.

Detailed Analysis #

Financial Position Analysis of Persistent Systems Limited #

3-Year Comparative Analysis (Standalone Financials) #

(In ₹ Million)

Significant Changes in Major Line Items (>10% YoY) #

• Non-current Assets: Increased by 5.89% (FY24) due to increases Capital work in progress, investment and decrease in intangible assets and other financial assets.
• Current assets: Increased by 40.64% (FY24) due to increases in trade receivables, cash and cash equivalents, and other current financial assets
• Other Equity: Increased by 21.63% (FY24) primarily due to retained earnings and transfer to general reserve.
• Non-current Liabilities: Increase of 2.16% (FY24).
• Current Liabilities: Increased by 38.64% (FY24), mainly due to an increase in trade payables and other current liabilities.

Working Capital Trends #

(In ₹ Million)

• Working capital increased significantly in FY24, indicating improved short-term liquidity.

Asset Quality Metrics #

(In ₹ Million)

• Impairment in non-current financial assets remains zero.
• The proportion of impaired current trade receivables to total trade receivables decreased from 0.75% to 0.37%, but increased in absolute amounts.

Debt Structure and Maturity Profile #

(In ₹ Million)

• Total Borrowings significantly decreased from the previous year, primarily due to the repayment of foreign currency loans.
• The majority of the debt is classified as current, indicating repayment is due within one year.

Off-Balance Sheet Items #

• Contingent Liabilities: Disclosed claims against the company not acknowledged as debts, amounting to a total of ₹1,102.72 million for FY24.
• Letter of Comfort: Persistent Systems Limited has provided Letters of Comfort for subsidiaries for the value of USD 24.69 Million as of March 31, 2024.

Segment-Wise Financial Analysis of Persistent Systems Limited #

Revenue Breakdown by Segment/Geography with Growth Rates #

• BFSI: FY24 revenue was ₹31,385.58 million, up 15.25% from ₹27,231.45 million in FY23.
• Healthcare & Life Sciences: FY24 revenue reached ₹20,880.32 million, a 29.20% increase from ₹16,161.07 million in FY23.
• Software, Hi-Tech, and Emerging Industries: FY24 revenue totaled ₹45,949.97 million, a 14.55% growth from ₹40,113.40 million in FY23.
• North America: contributed 79.6% of total revenue in FY24.
• Europe: contributed 9% of total revenue.
• India: contributed 9.9% to total revenue.
• Rest of the World: represented 1.5% of total revenue.
• Overall Revenue Growth: 17.62% in INR and 14.48% in USD.

Cost Structure Analysis #

• Personnel Expenses: Increased by 18.26% to ₹71,102.40 million, representing 72.39% of revenue in FY24 compared to 72.00% in FY23.
• Operating and Other Expenses: Rose by 26.42%, with an increase from 9.81% of revenue in FY23 to 10.54% in FY24.

Margin Analysis with Trends #

• EBIT Margin: 14.4% for FY24.
• Profit Before Tax (PBT) Margin: 14.74% in FY24, a slight decrease from 14.86% in FY23.
• Net Profit Margin: Increased to 11.13% in FY24 from 11.03% in FY23.
• Segment Operating Margins: BFSI at 36.72%, Healthcare & Life Sciences at 41.53%, and Software, Hi-Tech, and Emerging Industries at 25.69%.

Non-Recurring Items #

• Exceptional Item (FY23): A provision of ₹296.55 million related to export incentives was recorded as an exceptional item in FY23, now resolved.

EPS Analysis (Basic/Diluted) #

• Basic EPS: Increased to ₹72.44 in FY24 from ₹61.87 in FY23 (Pre-split).
• Diluted EPS: Increased to ₹71.07 from ₹60.26.

Cash Flow and Liquidity Analysis #

Operating Cash Flow (OCF) #

• FY24 OCF: ₹12,213.07 Million, increased from ₹9,557.62 Million in FY23, driven by profit before tax and non-cash adjustments.
• Major components of operating profit before working capital changes included:
  • Profit Before Tax: ₹14,476.06 Million.
  • Depreciation and Amortization: ₹3,093.73 Million.
  • Employee Stock Compensation: ₹1,091.75 Million.
  • Interest Income: ₹(562.45) Million.
• OCF/EBITDA: 0.76 in FY24 vs 0.63 in FY23.

Investing Cash Flow (ICF) #

• FY24 ICF: ₹(4,694.68) Million, a decrease from ₹(4,213.10) Million in FY23, primarily due to investments in mutual funds and capital expenditures.

Free Cash Flow (FCF) #

• FCF is significantly positive, implied as OCF less Capex (purchase of Property, Plant & Equipment).

Working Capital Management #

• Increase in trade receivables drove working capital needs (₹1,810.64 Million increase).
• Trade payables, current liabilities, and non-current liabilities increased (₹4,386.28 Million), partially offsetting the receivables impact.
• Change in provision decreased by ₹(1,144.65) Million.

Dividends and Share Buybacks #

• Total dividend outflow for FY24: ₹4,002.10 Million, up from ₹3,832.25 Million in FY23.
• FY24 total dividend: ₹52 per share (pre-split), compared to ₹50 in FY23 (including a special dividend).
• Dividend Payout Ratio: 36.60% for FY24, compared to 41.61% for FY23, 33.25% without special dividend.
• Interim dividend: ₹32 per share.
• Final dividend: ₹10 per share.
• No share buyback mentioned in FY24.

Debt Service Coverage #

• Debt Service Coverage Ratio (DSCR): 8.49
• Interest of ₹467.27 Million considered in Finance Cost.

Liquidity Position and Cash Conversion Cycle #

• Liquidity Position:
  • Cash and cash equivalents (as of March 31, 2024): ₹18,585 Million (net of borrowings), up from ₹13,821 Million.
  • Current Ratio: 1.89 (FY24), 1.71 (FY23).
• Billed Days Sales Outstanding (DSO): 63 days in FY24, down from 68 days in FY23.

Future Outlook for Persistent Systems #

Market Growth Forecasts #

• Expectation for the tech sector to return to modest growth, with AI solutions anticipated to lead.
• IT services are expected to be the largest segment of IT spending.
• Majority of IT enterprise software and services companies are expected to integrate GenAI into their offerings.
• Transition from Web2 to Web3 is anticipated, with a projected value of $8 to $12 trillion according to some financial institutions.

Planned Strategic Initiatives #

• Focus on two primary areas: growth and financial discipline, with a client-centric approach.
• Cultivating a culture of operational efficiency to enhance profitability and accelerate cash flow.
• Strategic investments in technology and innovation, particularly in AI and GenAI solutions.
• Expansion of partnerships with leading hyperscalers (AWS, Microsoft, Google Cloud) to accelerate GenAI innovation.
• Extensive internal AI training for over 16,000 employees through Persistent University.
• Pursuing multi-year deals and engaging with different sourcing channels, resulting in strong order wins.
• Formation of a Wholly Owned Subsidiary Company under Section 8 of the Companies Act, 2013 by the name ‘Persistent India Foundation’.

Capital Expenditure Plans #

• Capital investments of INR 54.12 million in FY 2023-24 for energy-saving devices and systems.
• Investment in software used for internal systems and new office facilities leading to an increase in capital work-in-progress.

Efficiency Improvement Targets #

• Reducing greenhouse gas emissions and using energy from renewable sources.
• Improving water use efficiency and recycling.
• Implementing sustainable waste management and reducing waste to landfill.
• Protecting biodiversity.
• Achieve Carbon Neutrality for Scope 1 and Scope 2 by FY 2026, and for wholly owned facilities by mid-FY25.
• 100% electricity sourced from renewable energy by FY25.
• Reduce 30% emissions (Scope 3) by FY28.
• Net-zero GHG emissions by FY 2050.

Potential Challenges and Opportunities #

• Challenges:
  • Slower industry growth, tightening margins, elevated interest rates, and geopolitical uncertainties.
  • Global contraction in tech spending and longer decision-making cycles for IT investments.
  • Shortage of skilled talent in new technologies.
  • Maintaining communication and productivity in a hybrid work model.
• Opportunities:
  • Leveraging AI’s transformative potential, becoming a strategic implementation partner.
  • Capitalizing on increasing investments in AI and GenAI solutions by enterprises.
  • Partnerships with leading hyperscalers and startups for co-developing new intellectual property and products.
  • Geographic diversification and expansion into Europe and other regions.

Scenario Analysis and Sensitivity to Key Assumptions #

• Sensitivity of Discount Rate on Defined Benefit Obligation: Every percentage point increase/decrease in the discount rate will change the defined benefit obligation (gratuity) by approximately ₹1,824.04 million / ₹1,445.62 million respectively.
• Sensitivity of Salary Assumption on Defined Benefit Obligation: Every percentage point increase/decrease in compensation levels will change the defined benefit obligation (gratuity) by approximately ₹1,758.09 million / ₹1,499.68 million respectively.
• Foreign Currency Risk: Every percentage point depreciation/appreciation in the exchange rate between the Indian rupee and foreign currencies would affect the Group’s profit before tax margin (PBT) by approximately 0.12%.
• The Goodwill impairment test performed, did not identify any probable scenario where the CGU’s recoverable amount would fall below its carrying amount.

Audit & Compliance Analysis #

Auditor’s Opinion and Qualifications #

• The Statutory Auditors, M/s. Walker Chandiok & Co LLP, issued an unmodified opinion on the consolidated and standalone financial statements, indicating a true and fair view in conformity with Ind AS.
• Statutory audit report for FY 2023-24 does not contain any qualification, reservation, or adverse remark, however, contains a remark.
• The Auditors’ Report contains a remark regarding an instance of accounting software (Oracle Fusion ERP) maintained by a third-party provider, where the auditors were unable to comment on the audit trail feature at the database level, as the report from the Independent Service Auditor’s Assurance did not include information on the availability of audit trail for direct changes made at database level.

Key Accounting Policies #

• The financial statements are prepared on an accrual basis under the historical cost convention, with exceptions for certain financial instruments and equity-settled employee stock options.
• The accounting policies, were consistenly applied, align with Indian Accounting Standards (Ind AS) and the Companies Act, 2013.
• Revenue recognition uses the percentage-of-completion method for fixed-price contracts, requiring estimates of efforts/costs.
• The Company uses an Expected Credit Loss (ECL) model for impairment loss on financial assets.

Internal Control Effectiveness #

• The Board asserts that internal financial controls were adequate and operating effectively.
• The auditor’s separate report (Annexure B) expressed an unmodified opinion on the adequacy and operating effectiveness of internal financial controls.
• The Company has an internal audit system commensurate with its size and nature.

Regulatory Compliance Status #

• The Company complies with Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI).
• No non-compliances, penalties, or strictures were imposed on the Company by Stock Exchanges, SEBI, or any statutory authority during the reporting period.
• The Company implemented a 24x7 toll-free number for reporting concerns, aligning with Whistleblower Policy.
• Anti-Harassment Policy is in place in line with the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.
• All employees have signed a Code of Conduct form.

Legal Proceedings and Potential Impact #

• There are pending litigations, primarily related to income tax demands disputed in appellate proceedings. The amounts are disclosed in Note 42.
• The company believes, based on independent legal opinions, that the liabilities with respect to these tax matters are not likely to arise.

Related Party Transactions #

• All related party transactions were entered into on an arm’s length basis and in the ordinary course of business.
• The Company did not enter into any material transaction with any party who is related to it as per the Act.
• Disclosure of transactions with related parties is provided in Note No. 33 of the Standalone Financial Statements.
• Donation of INR 175.45 Million was given to Persistent Foundation.

Subsequent Events #

• Sub-Division/Split of Equity Shares: Approved by shareholders on March 11, 2024, with a record date of April 1, 2024, changing the face value from ₹10 to ₹5 per share.
• Wholly Owned Subsidiary Formation: A Section 8 Company, ‘Persistent India Foundation,’ was incorporated on May 1, 2024.
• CFO Relinquishment and Appointment: Mr. Sunil Sapre relinquished the CFO position on May 15, 2024, and Mr. Vinit Teredesai was appointed as the new CFO.
• Scheme of Merger of Capiot Software Private Limited (Wholly Owned Subsidiary) into Persistent Systems Limited (Holding Company) was approved by the Board on January 19, 2024, and is awaiting approval.
• Transfer of Equity Shares of Persistent Systems UK Limited (subsidiary) from Aepona Group Limited, Ireland (subsidiary) to Persistent Systems Limited upon execution of Share Purchase Agreement, which happened on March 19th, 2024.

Accounting Quality Analysis #

• The accounting quality is supported by the use of Ind AS and consistent application of accounting policies. The unmodified audit opinion reinforces this.
• Significant estimations are involved in revenue recognition for fixed-price contracts, determination of fair value for certain financial instruments, and employee stock option valuations.
• The use of the percentage-of-completion method for revenue recognition introduces inherent estimation uncertainty.
• The Company maintains detailed documentation and uses external valuation experts for key estimates, enhancing the reliability of financial reporting.

Regulatory Risk Assessment #

• The Company is subject to risks associated with changes in tax laws and regulations, particularly in India and the United States, as well as other jurisdictions where it operates.
• The remark regarding the third-party maintained accounting software represents a minor area where complete assurance on the audit trail feature could not be provided, representing a potential, though not necessarily material, control limitation.
• The outstanding legal disputes, primarily tax-related, pose a potential regulatory risk, though the Company believes the likelihood of adverse outcomes is low.