Persistent CEO Sandeep Kalra on share slide after Nagarro buy

For Persistent Systems, the acquisition of Nagarro unlocks a stronger foothold in Europe and expands its presence in consumer and industrial verticals, adding fresh growth levers as it chases its $5 billion revenue target by 2031.

In an interview with Moneycontrol, Persistent CEO Sandeep Kalra and CFO Vinit Teredesai discuss the roadmap ahead for the $2.9 billion combined entity, Nagarro’s strategic advantages, the stock market’s knee jerk reaction to the deal and more.

Persistent's recent acquisition suggests the company is unable to sustain organic growth and is instead buying growth. How valid is this concern, and does the acquisition indicate a weakening of the core business?

Kalra: We have also just won a $650 million mega deal with a US tech firm. In an environment where people are struggling to grow, that basically should signal to the intelligent people that our growth is here to stay.

You don't work for the stock movements. You work to build a company that is built to last. You have to be right in terms of building the company, capabilities, and have a forward-looking play. In the last 24 quarters, we have delivered 3% plus sequential growth every quarter, and then a new large deal.

Let me share with you what our hypothesis is. We have come from being a $500 million company to $1.7 billion plus. Our customer who used to be during our $ 500-600 million range with the customers that we have now, the personas are very different. These are the Fortune 500 companies and Fortune 100 companies. They like Persistent’s capabilities.

They like the fact that we are nimble, but they are also asking us to be more global. We are pretty strong in North America, which accounts for 81.4 percent of revenue. We have 3000 plus people in North America. We are very good in 2-3 verticals, which are tech, BFSI, healthcare, life sciences.

But in Europe, we are only 300 of us. We have very limited 9 percent revenue. Rest of the world, only 10% revenue. We are not present in Middle East or in countries like Turkey, Japan, etc. So, the global customers, when they ask us for bids, they hope we had this global footprint. They say they would love for us to work with their European subsidiaries.

So, we often don't have the seat at the table and the right to win when it comes to that. Now, if we want to grow from nearly the $2 billion run rate, that we will have by the end of the year, to $5 billion, we need global.

Nagarro brings a very good European footprint, a very good footprint in the rest of the world. In MENA, which is basically all the places like Middle East and then Egypt, Turkey and so on, so forth. It also brings us industrial vertical, consumer vertical at scale.

They are $370 million in industrial, $250 million in consumer, $100 million in public sector. They are small in healthcare, but this healthcare is Europe. We are big in healthcare. They are small in BFSI. We are big in BFSI.

Combined, we become even more meaningful. This here is a growth play. They are also a forward-looking company.

They are also a company, which is on the digital transformation and AI side. By combining these firms, we can bring the rigour of a Persistent to the technology capabilities and footprint of a company like Nagarro.

The answer to whoever says that we are buying for growth would be yes -- we are buying for growth, but combined growth, combined capabilities, more verticals, more practicality in the $5 billion aspiration have.

While you see a whopping $2.9 bn revenue opportunity, Street sees overpayment. How do you justify a 140% premium for a company operating in an environment where discretionary IT spend is tepid?

Teredesai: The acquisition was done not keeping in view how the stock market will react. Look at Nagarro -- a billion euro revenue, decent EBITDA margin, strong European presence, complementary selling capabilities, coming at a 1.2X revenue multiple, 9X of EBITDA multiple.

If you are trying to take a control over the company, the control comes at a certain amount of premium. When you do a deal, it has to be a win-win from both the sides.

We are not trying to do a forced takeover at a price, which doesn't make a deal. The deal also has to make the other party feel good about it. The important part is 1.2 times of revenue and 9 times of EBITDA multiple.

If you look at it from an upward guidance perspective, it is 7.7 times of the EBITDA multiple. So that itself is the compelling value issue. They have fantastic clientele, great capabilities, strong European presence, you know, these don't come.

Kalra: If we had to build all of these, it would have taken another six years and by that time the world would have been on a different territory, all of this would have required huge amount of investments.

Even four months back, Nagarro’s stock was trading at 73 Euros. This is a God-given opportunity for us, where the multiples are compressing for European-traded companies. If we can get it at this time, we can bring the growth of the joint company and the kind of synergies that we see, we'll create so much value for our shareholders.

How do you plan to work through the process of integrating both the companies, since both are significantly big firms? Are you expecting margin and growth pressures in the coming quarters?

Teredesai: The next one or two quarters will go into the procedural part of it, getting the regulatory approvals, getting the shares into the tender offer and getting as much as possible in terms of the control.

On the parallel side, our intent here is not to force Persistence culture on Nagarro. The good part is both the companies have engineering culture and a strong Indian dominance. The CEO of the company is again Indian operating out of Gurgaon.

In the current environment, they have been growing at five to six percent on a constant currency basis for the last two years. It's quite huge for a company of that size with a European dominance. That's the opportunity.

There will be some natural synergies such as how we plan out offices, there may be consolidation in existing locations over a period of time, which will help in margin improvements.

Even if you remove the one-time expenses that we will incur as a part and parcel of the transaction it will be EPS (earnings per share) accretive from year one.

We are pretty confident to achieve our growth targets for FY27. This will only be accretive for us.

Next year onwards, we slowly will bring this together. There will be execution hiccups, but that's what some of the experienced leaders like us who have the past experience of doing some of these strong and large transactions do. We have to learn from the mistakes.

How does this deal position Persistent Systems for its $5 bn revenue target by 2031? This is your biggest acquisition till date. Will you reach the revenue goal faster?

Teredesai: It's a building block in terms of the $5 billion story. One of the pillars on which this target was resting was also a strategic acquisition in the European region, which will help us in getting that footprint that was absolutely missing in our team.

So today, we get that European footprint and the capabilities that were missing on our team.

Earlier when we did some of these large deals, we left a lot of dollars on the table because we didn't have certain capabilities.

Nagarro has $250 million worth of ERP capability, which we don't have. They do a pretty decent job on some of these things. They have presence in the Middle East, Japan, and Philippines, markets where we’ll get access now.

There’s also an opportunity of doing a lot of account mining on it. Even if you do the most conservative push on it, you'll easily be able to get 200 to 300 basis uptake on your growth pattern.

Our diligence says that their AI capabilities compared to some of the other players what we saw are in a pretty advanced stage. So it's a very, very complimentary that will help us in terms of making this happen.