Stock Tales - Birlasoft Ltd - ICICI Securities

Birlasoft Ltd (Birlasoft) post the merger with KPIT Technologies has successfully overcome integration challenges, restructured its sales & delivery functions and optimised its cost structure. Apart from this, the complimentary business of merged companies has enabled Birlasoft to win large deals and improve deal wins. Going forward, we expect improving opportunities from cross sell, large deal wins, client mining opportunities, focus on niche verticals and geographical expansion to drive revenues in the long run. In addition, cost rationalisation and migration to new tax regime will help improve EBITDA and PAT margins. As a result, we expect revenues, profits to increase at 11%, 25% CAGR, respectively, in FY20-23E.

Large deal wins, cross sell, client mining key growth drivers

Post the merger, Birlasoft has aligned its sales structure towards more cross selling, adding new logos, diving multi service deals and client mining. Further, the company has also hired leaders from Tier 1 companies, which will help strengthen its leadership, improve client mining and drive operational efficiency. The company is also rationalising its tail clients to improve sales effort for top client mining. We believe this will drive its long-term revenues and improve revenue per client (that is the lowest at US$1.2 vs. midcap peers at US$3). Further, the company has also shown improved performance in terms of deal wins. Birlasoft has signed record deals of US$669 million (book to bill ratio of 1.44x) in FY2020, of which ~65% was new deals. In Q1FY21 the company's overall deals increased 104% YoY despite challenging times. We believe consistent deal wins coupled with large deal wins will be a key driver of revenues in the long run.

Sustained improvement in margins expected; going forward

In the past few quarters, the company has seen some cost rationalisation. This has led EBITDA margins to improve from 9.9% in Q1FY20 to 12.3% in Q1FY21. Going forward, we expect margins to improve led by higher offshoring, increase in annuity revenues & fixed price projects, increase in utilisation and rationalisation of support staff & sub-contracting cost. Hence, we expect EBITDA margins to reach 15% in FY22E (as indicated by the company of achieving 15% EBITDA margins in next four quarters). Also, we expect PAT margins to improve in coming quarters due to migration of the company to the new tax regime.

Valuation & Outlook

Birlasoft's focus on niche verticals, geographic expansion, cross selling, client mining, large deal wins are key long-term revenue drivers. This coupled with talent from tier 1 players will drive revenue growth. Also, cost efficiency, tax rationalisation will drive profitability. Further, the company's healthy cash balance could lead to inorganic expansion or healthy dividend payout. This, coupled with attractive valuation of 11x FY23E EPS prompts us to recommend BUY with target price of Rs. 210 (13x FY23E EPS).

Shares of Birlasoft Limited was last trading in BSE at Rs.172.5 as compared to the previous close of Rs. 172.05. The total number of shares traded during the day was 228067 in over 2588 trades.

The stock hit an intraday high of Rs. 177.4 and intraday low of 167.45. The net turnover during the day was Rs. 39491903.

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_Birlasoft_StockTales_Aug20.pdf

Source : Equity Bulls

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