Birlasoft Ltd - Stock Valuation and Financial Performance

Good results even on QoQ basis amidst ongoing sector slowdown.

Birlasoft Ltd. | Market Cap: Rs. 13,223 Cr.

CMP 474 | PE 24x FY23

Results: Birlasoft reported ~6% sequential growth in sales and operating profit grew ~7% in the same period.

Sales for the quarter was Rs. 1,071 Cr versus 880 Cr in Q3FY21. This indicates a 21.7% growth year on year. The operating margin declined to 15.2% (vs 16.4% in Q3FY21).

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Key highlights: 

• Birlasoft signed deals of the value of $ 319 Mn during the quarter. The company had US$1.2bn sales pipeline despite of reduced size of the deals (vs ~US$750mn in FY21)
• The company has maintained its guidance of US$1 billion in revenues by FY25
• Total employee headcount decreased to 11,945 (vs 12,065 in Q2FY22). The attrition rate was at all time high at 31% (vs 24% in Q2FY22). The utilization rate reduced to 85% from 86% in previous quarter. Overall a negative development

Outlook:  The management expects attrition to cool off in next few months. The company is witnessing a marginal increase in client budget spending which is a positive indication as far as demand is considered. The management sees good momentum, good pipeline coming from client in all aspects and is watchful on talent supply. Growth for now doesn’t seem to be an issue as it is expected to continue as company is working in hi-tech, digital space, where there are significant opportunities in platform business. The key reason for decline in headcount is due to optimization of bench, higher fixed price projects and reallocation of resources.

Birlasoft Ltd. | Market Cap: Rs. 8,257 Cr.

CMP 298 | PE 20x FY22

Recommendation | HOLD

Results: Birlasoft reported ~2.5% sequential growth in sales and operating profit grew ~5.5% in the same period.

Sales for the quarter was Rs. 903 Cr versus 907 Cr in Q4FY20. This indicates a flat growth year on year. The operating margin improved to 16.9% (vs 13% in Q4FY20).

Click here for 10 year X-ray

Key highlights: 

• Vertical wise year on year growth came from BFSI (~15%) and Manufacturing (2.5%). Energy & Utilities (-15.5%) and Lifesciences (-4.5%) verticals declined during the quarter. 
• North America is the dominant market for the company with 82% revenue share during the quarter. This is followed by Europe (9%) & Rest of the world (9%).
• Birlasoft signed deals of the value of $ 326 Mn during the quarter, this was higher than previous quarter $109 Mn. The company signed deals worth $888 Mn during FY21 (~33% above previous year)
• Total employee headcount increased to 11,051 (vs 10,399 in Q3FY21). The attrition rate reduced to 11.6% (vs 18.9% in Q4FY20). The utilization rate reduced to 82.8% from 85.6% in previous quarter.

Outlook:  The management stays confident about the double digits growth in FY22 and beyond on the back of focus on customer centric strategies to win more transformational, multi-services and long-term deals. With increase in scale, the margins are also improving. 

MoneyWorks4me Opinion: We had recommended Birlasoft at 117/share as it is scaling up post-merger with KPIT IT services and traded at attractive valuation. We believe that after achieving scale and cross selling new offering to existing customers offers good growth opportunity for Birlasoft. 

Increase in deal size will also aide margins leading to much higher earnings growth. This has already panning out. We expect higher than industry growth rate for Birlasoft due to smaller size advantage and steady deal wins.

Birlasoft trades at P/E ratio of ~20x FY22 EPS. Usually IT companies’ valuation is also compared using Price to Sales ratio. Birlasoft trades at ~2x P/S ratio versus median P/S ratio of 1.5x for small cap IT as on today. Valuation re-rating has happened, now we expect steady growth in earning to take the stock price higher over next 2 years.

Birlasoft Ltd. | Market Cap: Rs. 7,524 Cr.

CMP 271 | PE 20x FY22

Recommendation | HOLD

Results: Birlasoft reported ~6% year on year growth in sales and operating profit grew ~34% in the same period.

Sales for the quarter was Rs. 881 Cr versus 857 Cr in Q2FY21. This indicates a sequential growth of ~3%. The operating margin improved to 16.4% (vs 13.9% in Q2FY21).

Click here for 10 year X-ray

Key highlights: 

• Vertical wise year on year growth came from BFSI (~12%) and Lifesciences (32%). Manufacturing grew only ~1% while Energy & Utilities declined by ~18% during the quarter.
• North America is the dominant market for the company with 78% revenue share during the quarter. This is followed by Europe (13%) & Rest of the world (9%).
• Birlasoft signed deals of the value of $ 109 Mn during the quarter, this was lower run rate than previous quarter $274 Mn.
• Total employee headcount increased to 10,399 (vs 10,010 in Q2FY21). The attrition rate decreased to 10.9% (vs 11.4% in Q2FY21). The utilization rate increased to 85.6% from 83.7% in previous quarter.

Outlook:  As per the management, the company delivered a strong performance in the quarter and hit 15% operating margin target, earlier than planned. Such key accounts have been able to show a ~20% growth year on year and form bulk of the revenue. The markets have been showing a steady improvement and strategic investment in digital transformation and cloud strategies are starting to pay off with new deal wins.

MoneyWorks4me Opinion: We had recommended Birlasoft as it is scaling up smartly post-merger with KPIT IT services and traded at attractive valuation.

We believe that after achieving scale and cross selling new offering to existing customers offers good growth opportunity for Birlasoft. Increase in deal size will also aide margins leading to much higher earnings growth. This has already panned out. We expect higher than industry growth rate for Birlasoft due to smaller size advantage and steady deal wins.

Birlasoft trades at P/E ratio of ~21x on its 2 year forward earnings. Usually IT companies’ valuation is also compared using Price to Sales ratio. Birlasoft trades at 1.91x P/S ratio versus median P/S ratio of 1.5x for small cap IT as on today. Valuation re-rating has happened, now we expect steady growth in earning to take the stock price higher over next 2 years.

Birlasoft Ltd. | Market Cap: Rs. 5,000 Cr.

CMP 184 | PE 14x FY22

Recommendation | BUY

Results: Birlasoft reported 11% year on year growth in sales. Operating profit grew ~40% year on year.

Sales for the quarter was Rs. 857 Cr versus 914 Cr in Q1FY21. This indicates sequential decline of 6%. The operating margin improved to 13.9% (vs 12.3% in Q1FY21).

Click here for 10 year X-ray

Key highlights: 

• Vertical wise year on year growth came from BFSI (9.6%), Lifesciences (55%) and Manufacturing (2.3%). Energy & Utilities declined by 7.4% during the quarter.
• North America is the dominant market for the company with 78% revenue share during the quarter. This is followed by Europe (11%) & Rest of the world (10.5%).
• Invacare, project deferrals and price discounts were some reasons why sequential growth was 6% lower.
• Birlasoft signed deals of the value of $ 274 Mn during the quarter. Overall deals are at 160% higher year on year. Pipeline deals are also up 15-20% quarter on quarter.
• Total employee headcount increased to 10,010 (vs 9,908 in Q1FY21). The attrition rate decreased to 11.4% (vs 16.5% in Q1FY21). The utilization rate increased to 83.4% from 78.2% in previous quarter.
• The company declared an interim dividend of Rs. 1 per share. Cash and Cash equivalents form 18% of total share price (i.e. Rs. 34 per share)

Outlook:  Given the consistent and strong record of TCV deal wins in H1FY21, combined with a healthy pipeline, the management is confident about further growth in revenues in rest of FY21. It expects few large deals and better utilization to improve operating profit margin above 15% in FY22. 

MoneyWorks4me Opinion: We had recommended Birlasoft as IT sector is relatively less affected, Birlasoft is scaling up smartly post-merger with KPIT IT services and attractive valuation. We believe that after achieving scale and cross selling new offering to existing customers offers good growth opportunity for Birlasoft. Increase in deal size will also aide margins leading to much higher earnings growth. We expect higher than industry growth rate for Birlasoft due to smaller size advantage.

Birlasoft trades at P/E ratio of 14x and 2 year forward P/E ratio of 11x. Usually IT companies’ valuation is also compared using Price to Sales ratio. Birlasoft trades at 1.2x P/S ratio versus median P/S ratio of 1.5x for small cap IT as on today. Some part of valuation re-rating has already happened we expect steady growth in earning to take the stock price higher over next 2 years.

Birlasoft | Market Cap. 4750 Cr

CMP 171 | P/E 15x FY22

Recommendation | BUY partially (Stock has run up from our initial purchase of 105-115/share)

Event: Birlasoft on 18^th August announced a global strategic cloud alliance with Microsoft. As per the management, “with this cloud alliance with Microsoft, our customers can expect an even broader range of solutions, delivered at a continually faster pace, which will accelerate the execution of their digital transformation strategies.”

With this collaboration, Birlasoft is strategically positioned to support its enterprise clients with their cloud transformation needs, right from infrastructure to business applications. Building on the current collaboration, the company will focus on delivering end-to-end services on Microsoft Azure, Microsoft 365, and Microsoft Dynamics 365, to its clients.

The company has plans to scale its current Microsoft cloud business to $100 Mn in next 2 years. Also the company expects to improve its operating margin to 15% in this deal due to reduction in redundancy.

As we had highlighted in Q1 result update, the deal wins were $180 Mn and the company expects similar wins in ongoing quarter.

Click here for 10 year X-ray

Moneyworks4me Opinion We had recommended Birlasoft as IT sector is relatively less affected, Birlasoft is scaling up smartly post-merger with KPIT IT services and attractive valuation. We believe that after achieving scale and cross selling new offering to existing customers offers good growth opportunity for Birlasoft. We see the increase in deal size aiding the margins leading. This will lead to much higher earnings growth than industry growth rate for Birlasoft due to smaller size advantage. Since we see the story panning out, we are revisiting the valuations.

Birlasoft trades at TTM P/E ratio of ~20x. We revised our MRP to Rs. 178/share, considering the visibility in sales growth and margin expansion guidance and assigning industry P/E of 15x for better than industry growth expectation.

Usually IT companies’ valuation is also compared using Price to Sales ratio. Birlasoft trades at 1.3x P/S ratio versus median P/S ratio of 1.5x for small cap IT as on today. This keeps our valuation in check. Improving prospects can earn enjoy better valuation hence at times we are fine with buying even at MRP.

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