Global brokerage CLSA has highlighted two mid-tier Indian IT firms, Persistent Systems Ltd and LTM Ltd (LTIMindtree), as key outperformers, reiterating a high conviction 'Outperform' rating on Persistent Systems and adding LTM to its picks. The firm notes that Software as a Service (SaaS) is increasingly gaining market share in the artificial intelligence (AI) world, often at the expense of traditional system integrators (SIs).
According to CLSA, a majority of SaaS companies have seen more stable earnings growth and increased their guidance year-to-date, a stark contrast to many IT service companies that have revised their guidance downwards. This trend is supported by an improving margin trajectory and a sharp increase in revenue per employee (RPE) for SaaS firms. While RPE for SIs is also rising, it is doing so at a more gradual pace.
SaaS and Automation Challenges for SIs
CLSA's analysis suggests that product engineering and implementation work around SaaS platforms for SIs are particularly vulnerable to automation. To counter this, SIs need to demonstrate greater aggression by passing on productivity gains and securing higher volumes of deals. The report indicates that the Services-as-Software (SaS) opportunity for IT services, while promising, remains small and will require time to scale. Currently, Globant is the only global SI that publicly discloses its SaS revenue, which stands at 2.5% of its total, with an expectation to reach 5% by the fiscal year-end.
In the high-tech vertical, both LTM and Persistent Systems have previously reported significant deflation due to automation in coding. However, they have actively worked to offset this through increased deal volumes. Persistent Systems recently announced a substantial $650 million deal win, while LTM has seen strong growth in the vertical.
Mid-Tier Agility and Deal Wins
CLSA observes that a majority of Indian IT companies are reporting strong year-over-year order book growth. This is largely driven by clients prioritizing cost takeout and vendor consolidation deals in uncertain economic times. The firm also points out that many deals are being renegotiated to incorporate AI-related productivity enhancements, contributing to healthy deal wins across the industry.
Mid-tier players like Persistent Systems and LTM appear to be better positioned to capitalize on AI opportunities due to their smaller size and greater agility compared to larger peers. HCL Tech, Persistent Systems, Infosys Ltd, and Mphasis Ltd were identified as leaders among IT firms in terms of revenue per employee, with all mid-caps under CLSA's coverage performing well on this metric.
LTM: Catalysts for Growth
- Large Deal Wins: Recent successes include deals with Paramount Global ($585 million), the Indian government ($330 million), a retail client ($200 million), and an agri-business client ($450 million).
- Margin Expansion: Potential for improved profitability.
- Revival in Discretionary Spending: Particularly in the BFSI (Banking, Financial Services, and Insurance) and retail verticals.
- Growth in Top Accounts: Strong performance in key client relationships across BFSI and high-tech sectors.
CLSA values LTM at 25 times its 5Q-8Q EPS, assigning a 65% premium to its target multiple for TCS, citing LTM's superior revenue and earnings growth profile.
Persistent Systems: Engineering Prowess
Approximately 50% of Persistent Systems' revenue is derived from product and platform engineering work, a market estimated at $105 billion and growing in the mid-teens. CLSA highlights several factors contributing to Persistent's strong outlook:
- Consistent Industry-Leading Revenue Growth: Sustained 3-5% quarter-over-quarter dollar revenue growth.
- Strong Order Book Performance: A high correlation between its robust order book and future revenue growth.
- Strategic Deal Wins: Focus on platform/product engineering deals that differentiate it from commoditized managed services programs.
These factors ensure that Persistent Systems remains competitive and continues to capture significant opportunities in its specialized market segments.