JPMorgan downgrades Persistent Systems just two months after an upgrade

Brokerage firm JPMorgan has downgraded Pune-based Engineering, Research & Development (ER&D) firm Persistent Systems to neutral, just two months after upgrading it to an overweight.

In fact, Persistent Systems was JPMorgan's only overweight within the ER&D space. While upgrading the stock, JPMorgan had cited Persistent's then valuations to be an attractive entry point for the stock. Back then, the stock traded at 26 times one-year forward price-to-earnings.

Since then upgrade, shares of Persistent Systems have rallied 31 percent. The stock has recovered 40 percent from its 52-week low of Rs 3,092.

On CNBC-TV18's dealing room chatter on Friday, we had spoken about Persistent Systems gaining for nine straight days and that a leading long-only fund has been accumulating the stock recently.

While downgrading the stock, JPMorgan said that it does not see any positive catalyst that can drive a further re-rating on the stock.

The brokerage now finds Persistent to be fairly valued at 32 times one-year forward price-to-earnings ratio, adding that the current valuations imply a 17 percent Compounded Annual Growth Rate (CAGR) for the next decade.

However, it has maintained its price target on the stock at Rs 4,100, which is a 6 percent downside to Friday's closing price.

Despite similar earnings growth expectations, Persistent Systems is now trading at a premium to global peers like EPAM, Endava and Globant.

JPMorgan believes that among the key factors to watch will be the company's ability to maintain 4-6 percent sequential growth during the December quarter and whether it can continue to expand its margin that has been going up over the last five quarters.

The brokerage and other consensus estimates peg Persistent's sequential growth to be at 3 percent in the December quarter.

A positive surprise may definitely lend support to the stock but JPMorgan believes that the stock can de-rate from here considering the elevated expectations.