Persistent Systems Ltd is looking to anchor its long-standing European ambitions and hit a $5 billion revenue target by March 2031 through its largest-ever acquisition, German digital engineering firm Nagarro. The deal is expected to propel the company up two spots to become India’s seventh-largest IT services firm, boasting a combined revenue of about $2.9 billion.
During an analyst call on Sunday, the company’s management outlined the strategic rationale behind the mega-deal and addressed analysts’ queries regarding debt repayment.
“They (Nagarro) are a key implementation partner for SAP, whereas our ERP (enterprise resource planning) progress is not necessarily at scale, so these kinds of additions are fairly important to us,” Sandeep Kalra, chief executive of Persistent Systems, said during the call.
He added that Nagarro’s product engineering capabilities for SAP and its partnership with OpenAI are key additions to Persistent’s portfolio. IT services firms do not typically disclose specific revenues generated from software embedding or individual AI partnerships. Kalra also noted that Nagarro is among a select group of accredited OpenAI resellers and has a specialised engineering team dedicated to deploying its technologies.
Nagarro’s slower growth
The analyst call took place a day after the company proposed a $1.3-billion purchase of Nagarro, in which Persistent Systems would pay €81 per share to acquire the entire equity of Nagarro SE. The deal is expected to close by March 2027, after which the combined entity will operate as the Persistent-Nagarro Group.
The Pune company ended FY26 with $1.65 billion in revenue, up 17% from the previous year. Nagarro’s growth has been slower. It ended last year with $999 million, up 2.8% on a yearly basis. Nagarro follows the January-December financial year, unlike Indian, which follow April-March.
Addressing concerns over Nagarro’s sluggish growth, Kalra explained that the numbers do not reflect the company’s true potential. From a big-picture perspective, he noted that Nagarro grew by more than 5% on a constant-currency basis despite a challenging market. Kalra attributed the recent slowdown to temporary internal distractions. “And keep in mind, if I may say so, they were distracted for some time when they were taking a transaction to take Nagarro private in the last year,” said Kalra.
Nagarro’s profitability also lags behind Persistent’s. Last year, Nagarro posted an operating margin of 10.9%, compared to Persistent’s 15.6%, which had expanded by 90 basis points over the previous year.
Management said the combined entity’s operating margins would not be lower than Persistent’s overall margins as the company would engage in cost synergies and re-invest its cash in new growth areas. Management is mulling over doing away with tail accounts once the acquisition comes into effect. The combined entity is expected to earn $750 million each from banks and telecom companies. It expects 22% of its business to come from Europe, up from the current 10%.
Hurdles to acquisition
However, completing the involves significant challenges. First, the plan hinges on Persistent successfully acquiring at least 50% of Nagarro’s shares through its upcoming open offer and securing necessary regulatory approvals. Second, the company must successfully refinance its $1.6 billion transaction loan. It has agreed to buy 21% of the company’s shares from Nagarro’s largest shareholder, and is making a public offer to all other Nagarro shareholders to buy their shares at €81 each, which is more than double its current share price.
Responding to an analyst’s question during the call, Persistent Systems chief financial officer Vinit Teredesai explained that a critical immediate factor is determining the exact acceptance rate of the open offer, which will dictate the final amount of debt the company needs to take on.
Persistent isn’t paying the entire share repurchase amount out of its own pocket. It is expected to borrow up to €1.4 billion ($1.6 billion) from Barclays, which has to be repaid in 18 months. This debt facility is larger than the $1.3 billion equity purchase price because, as management noted, the additional funds will be used to clear and refinance Nagarro’s existing debt. The rest of it is expected to be repaid through the companies themselves.
“The good part is that both and Nagarro are good in terms of their cash generation. So our intent is basically to see some of this money and some of these loans are repaid through the cash generation that will be happening over a period of time,” Teredesai added.
Management noted that the deal has already drawn strong interest from private equity firms over the last 24 hours. Crucially, Persistent clarified that it does not intend to launch a qualified institutional placement (QIP) to raise fresh capital from large financial institutions.
“We don’t intend on diluting our steak at this point in time. We may look at whether there is a merit in deleveraging by having private equity or some other participation at the asset level. Those options are open,” said Kalra, adding that no decisions have been taken yet.
At least one analyst said the company may refinance the debt. “Both these companies generate a good amount of cash. They can repay the debt through internal accruals and cash generation whereas the short-term loan will be refinanced,” said Amit Chandra, vice-president at HDFC Securities. He added that there is huge scope for margin expansion in Europe as many employees can be shifted away from client locations.