Our aspiration is to make Persistent a $2 billion plus company in next three years: CEO

Sandeep Kalra, CEO, Persistent Systems, says “as we go ahead, as the market conditions stabilise, that will give us the opportunity to have the leverage of all the investments we have done whether they are in the next generation technologies like generative AI or increased sales and marketing investments, etc, and that should help us take the margin up. We still stand by our aspiration of growing the margins by 200 to 300 basis points over the next two to three years.”

Your conference call commentary was that your FY25 margins will be similar to FY24, but that has missed Street expectations. What are the headwinds or are you being conservative?
Sandeep Kalra: From a margin perspective, what we are saying is this. The margin has to be looked at in the context of the revenue growth that we deliver. So, if we are going to be looking at a revenue growth which is somewhere in similar lines as what we have done in this year, that is what our aspiration is, then at that point in time you have to optimise for one or the other. The macro condition being where it is, if the demand environment continues to be tough, which we see as of this point in time, the same as the last year, we are basically prioritising growth with similar margins and as we go ahead, as the market conditions stabilise, that will give us the opportunity to have the leverage of all the investments we have done whether they are in the next generation technologies like generative AI or increased sales and marketing investments, etc, and that should help us healthily take the margin up and we still stand by our aspiration of growing the margins by 200 to 300 basis points over the next two to three years.

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You said that you are prioritising growth, which means that this double digit 14% to 15% earnings growth would be doable in FY25?
Sandeep Kalra: I will not put a number forward looking, but all we are trying to say is this, if you look at our track record for the last four years, we have a significant outperformance with respect to the sector. To give you statistics, the last four years for the sector have been 1.6%, 18.6%, 10%, and roughly 3% in terms of the yearly CAGR, the year-on-year growth. From a Persistent perspective, we have outperformed the sector by roughly about 11.3%, 16%, 25%, and 11.8% in the year gone by.

Now, our attempt is to make sure Persistent remains a good growth story based on our capabilities which are far more differentiated than the sector in engineering, in AI, now generative AI, and things like Salesforce, cloud, and so on and so forth, so that is where our story is. Right now, if you look at it, in the last four years, we have doubled the company. We are now being invited to much larger customers bids as a good challenger to the fatigue that they have against the larger peers of ours. So, our thing is to grab market share when the market is not good. We can optimise for the margins as we go along and even within the year, if there is an opportunity to optimise the margins, we would rather under promise over deliver than the other way around.

Let us just talk about how the overall demand environment has changed. With the geopolitical tensions, inflation, rate hike worries, has the discretionary demand revival expectation gotten delayed further or what is the view there?
Sandeep Kalra: There are many dynamics playing around the world right now. We had the conflict between Russia and Ukraine, then the latest Middle east conflict has added to the uncertainties. The chances of things stabilising are a little pushed out because if you look at inflation, it is not going down the way the Fed wants. All of these put together, the chances of the rate hikes happening in the near future are a little lesser than what they were a few months back. So, if one has to be prudent, one has to factor for a demand environment, which we are seeing remain tight for the next few quarters.

Within that, if we have to grow, we have to double down on our investments in sales and marketing and the capability build that we talked about. So, if you sum all of this up, that is where we are saying that, look, we want to grow in line with what we have done in the past from an outperformance perspective and that is what we are looking at. We expect the demand environment to be the same, if not worse, going ahead for the next two to three quarters.

While healthcare held up nicely, the BFSI and high tech segments are yet to fire up. Is that going to happen in the long term?
Sandeep Kalra: If you look at the BFSI and high tech segment for the quarter gone by, BFSI grew roughly about 1.8% quarter-on-quarter. The high tech segment, barring the top one customer, which was a planned ramp down of a particular programme, which is a five-year programme, phased ramp down will happen in that. Even that grew by about 1.6%. Now, our endeavour is to obviously have a secular growth.

So, from that perspective, the pipeline is there. It has to convert and even in BFSI for that matter, we are winning against some of the largest competition in the bigger accounts. Obviously, the ramps have to happen and so on. So, overall, we are confident that in the medium to longer term, all of these sectors should grow. But because of our significant wins across multiple customers in healthcare life sciences, which are ramping up for the near future, healthcare life sciences for us will take the lead in growth.

You also mentioned that slower acquisition ramp up led to some misses in the quarter gone by. From here on though, what is the inorganic scale up plan?
Sandeep Kalra: In the last four-and-a-half years, we have done seven acquisitions, which are in the range of 2.5 million revenue to 48 million revenue. Obviously, when you do multiple of those acquisitions, some of them will pan out very well for you and some of them will be ranked stacked somewhere in the middle and some may not pan out for you. It is not just Persistent, it is overall in the industry it is a well-known fact. Integrating acquisitions and making them perform, there are challenges that can come in the way.

So, from that perspective, a couple of our acquisitions have not necessarily panned out the way we had thought and we have been very transparent to the street about it. Now looking ahead, if you look at our current outlook, we have always said we will look at capability led tuck in acquisitions, a string of pearls if you may, and so we are evaluating multiple of those at any point in time. Hopefully we will announce things as we go along and these will all be capability led, forward looking, bringing more expertise to our customers and helping us grow market share.

Persistent has changed its orbit in the last four-five years. Where do we see it three years from now?
Sandeep Kalra: If we look at Persistent three years from now, we should have crossed the two billion mark, that is our aspiration. This is not forward-looking guidance, this is an aspiration. If you look at it, what are we doing? We are not just aspiring to get to the two billion dollars, we are also laying the foundation for a much bigger, much more relevant Persistent in our market space to come and that is where when people get overly worried about the margin in the here and now parlance, they should understand we are investing in building a company that is very differentiated, that is a company that can consistently grow.

It may become like a consistent, boring growth company, but that is where we are. We have the right capabilities and we want to not lose sight of that, that is where the customers engage us and that is where if you have to invest in building those capabilities and doing better than the market, that is our aspiration, so look to Persistent being a two billion dollar plus company in the next three years, look to the fabric being a much bigger company, much differentiated company in the forward looking technologies as we build all this.

You will be around to see that happen, so are you still as committed to lead Persistent?
Sandeep Kalra: We have had a very good ride at Persistent. There is obviously good fun in all this and there is a lot of pride in delivering what we are delivering. So, we are at it, that is my short answer to you. It is not just me, there are a whole lot of people in Persistent who are committed and who have made it happen and who are at it.

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