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Birlasoft Ltd>
  • CMP : 723.7 Chg : 31.60 (4.57%)
  • Target : 340.0 (9.68%)
  • Target Period : 12 Month

10 May 2023

Organisation restructuring to focus on growth recovery…

About The Stock

Birlasoft Ltd (Birlasoft) has strength in non-ERP digital businesses like CRM, B & data analytics, app development & enterprise solution.

  • The company caters to manufacturing, BFSI, energy & utility and life sciences
  • Debt free and healthy double digit return ratio (with RoCE of >18%)
Q4FY23 Results:

Birlasoft reported muted revenue numbers in Q4FY23.

  • Revenue grew 0.5% in dollar terms & 3.1% QoQ in CC terms (ex-Invacare)
  • Reported EBITDA margin of 13.6% in Q4
  • Signed TCV of US$286 mn during the quarter
What should Investors do?

Birlasoft’s share price has grown by ~2.7x since its demerger (from ~₹ 114 in February 2019 to ~₹ 310 levels in May 2023).

  • We maintain our HOLD rating on the stock
Target Price and Valuation

We value Birlasoft at ₹ 340 i.e., 15x P/E on FY25E EPS.

Key Triggers for future price performance
  • Change in management, organisation restructuring, hiring of new vertical leaders likely to recover revenue growth momentum
  • Revenue growth is expected to be achieved via client mining, cross sell, annuity & multi-year deals, expansion in Europe & APAC and focus on niche verticals
  • Expect rupee revenues to grow at 8.3% CAGR over FY23-25E
  • Expect EBITDA margin to be at 16.1% by FY25E on the back of easing of supply side challenges, higher utilisation, etc
Alternate Stock Ideas

Apart from Birlasoft, in our IT coverage we also like Newgen.

  • Strong logo additions, increasing annuity revenues & GSI opportunity to aid revenue growth
  • BUY with target price of ₹ 660

Key Financial Summary

Particulars FY20 FY21 FY22 FY23 5 year CAGR (FY18-23) FY24E FY25E 2 year CAGR (FY23-25E)
Net Sales 3,291.0 3,555.7 4,130.4 4,794.8 17.1 5,014.0 5,618.7 8.3
EBITDA 391.9 529.2 640.1 520.5 14.2 764.9 906.7 32.0
EBITDA Margins (%) 11.9 14.9 15.5 10.9 - 15.3 16.1 -
Net Profit 224.3 320.8 463.6 331.6 5.1 520.5 628.3 37.7
EPS (|) 8.1 11.6 16.3 11.9 - 18.7 22.6 -
P/E 32.8 23.1 16.0 22.2 - 14.2 11.7 -
RoNW (%) 11.9 14.7 17.9 13.5 - 18.6 19.3 -
RoCE (%) 17.0 19.8 23.1 18.0 - 24.0 24.9 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

  • Revenue grew 0.5% QoQ to US$149.1 mn and in CC terms ex of Invacare revenue grew 3.1% QoQ. In rupee terms, revenue grew 0.4% QoQ to | 1,226 crore
  • Geography wise US (85.3% of mix) grew 2.4% QoQ while Europe and RoW declined 12.2% and 4.6% QoQ, respectively. Vertical wise Manufacturing, BFSI & Energy and utilities (E&U) grew 2.7%, 2.5% and 7.7% QoQ, respectively, while Lifescience vertical declined 11.1% QoQ due to the impact of Invacare and some softness seen in other pharma clients
  • The company reported an EBITDA margin of 13.6%, up 20 bps QoQ compared to adjusted EBITDA margin excluding one-time provision for Invacare in Q3. The margin expansion was aided by a decline in attrition & increase in utilisation. In absolute terms, the company reported an EBITDA of | 167 crore for Q4 and PAT of | 112 crore
  • For FY23, the company reported a revenue of US$594.9 mn, up 7.2% while in CC terms it grew 9.1% (ex-Invacare grew 11.5%). For FY23, Birlasoft reported EBITDA margin of 10.9% while ex-invacare, margins were at 14% down 150 bps. The company reported PAT of | 331.6 crore with corresponding PAT margin of 6.9%
  • The company mentioned that revenue growth in FY23 was impacted due to Invacare bankruptcy (~US$18 mn impact) and certain client run off due to which growth was much below than guidance given by the previous management. The new CEO mentioned that it did organisation revamp since his joining in December 2022. The new organisation structure is now almost operational from Apr 2023. He mentioned that the change is focused on growth recovery, which has been lacking for a few quarters for now. The company also mentioned that special focus is being given to its largest market i.e. US from where it generates 85% of its revenues. The company has appointed four separate leaders for growth of verticals of BFSI, Manufacturing, Energy & Utilities and Lifesciences in the region. The company mentioned that these four leaders will report to North America head and would be responsible for P&L of these verticals in the region
  • The company also mentioned that it has brought all ERP related offerings under one leader as this service line was lagging growth and they are looking at revamp here. Birlasoft mentioned that other changes include appointment of India region COO and Chief Growth Officer at the company level. The company mentioned that 90% of the organisation revamp is complete and rest 10% will be completed in Q1FY24 where they will be welcoming few more leaders. It is likely to be completed by the end of June 2022. The company also indicated that they are also looking for cultural transformation with client focus in mind but mentioned that cultural change may happen gradually
  • The company mentioned that it is not giving any specific revenue guidance for FY24 as the macro situation is still uncertain. Birlasoft also mentioned that its pipeline is strong and continuously growing as on date but mentioned that deal signing is getting delayed as clients are reprioritising their spend towards more cost take out deals and cloud transformation is largely in the backseat now. Birlasoft mentioned that it is confident of sequential growth in all quarters of FY24 but indicated that the growth rate will be difficult to quantify at this moment. The company mentioned that it is going through structural change wherein more of project based legacy work is being shifted to more stable annuity work, which is giving it confidence on growth on a sequential basis ahead. Birlasoft mentioned that its pipeline is also following similar trend i.e. more annuity work
  • The company mentioned that it is expecting muted growth in the near term from the healthcare vertical despite the Invacare issue being behind now. Birlasoft mentioned that its muted growth expectations are based on client consolidation and some layoffs in some pharma majors globally. In manufacturing, the company mentioned that growth in FY23 was muted, which was a reflection of weak ERP service line growth. The company mentioned that since they brought all ERP under one roof and also seeing some green shoots in this space, it will likely bring in growth in manufacturing vertical. The company also mentioned that growth in ERP for them is broad based across SAP, Oracle, etc. In the BFSI space, the company mentioned that it does not have exposure to regional banks in the US and the BFSI vertical is expected to continue its growth momentum, going ahead, as demand is strong especially in lending and payments sub-verticals. The company mentioned that their BFSI mix is not large like its large peers but client spendings in this vertical are most skewed towards cost optimisation programs
  • The company’s active clients declined by 11 on QoQ basis to 288. Birlasoft mentioned that client decline QoQ should be seen as client rationalisation drive, which it has been talking about. The company mentioned that client rationalisation is likely to continue for a couple more quarters as it is looking to cut the tail. Birlasoft mentioned that it is looking to exit FY24 at around 16% EBITDA margins on account of i) revenue recovery ii) Absence of Invacare related costs (they will be out of Invacare deal on June 1, so two months costs will be there for Q1FY24 iii) moderation of attrition. The company is also targeting 15-16% EBITDA margins for FY24 from 14% in FY23 (ex-Invacare impact) on pyramid optimisation, operational efficiency and some pricing is also built as well as wage hike impact (in Q2) is also taken in consideration for that margin range
  • On the M&A front, the company mentioned that it is currently focused on the organisation restructuring and implementing it efficiently. Hence, it mentioned that it is not a conducive time for M&A now
  • The company during the quarter won TCV of US$286 mn, up 23.8% QoQ with net new TCV win of US$114 mn. Birlasoft added that it won a large deal in Q4 from a client with US$50 mn+ revenue with new TCV signing in the deal of 40%. The company also mentioned that its deal pipeline is broad based and remains robust. However, it cautioned that deal closure is taking longer
  • Revenue from its Top five, 10, 20 clients grew 4%, 2.1% & 0.2% QoQ, respectively. The company mentioned that it has not witnessed any impact of macros on the top clients other than the one that it has already disclosed till now
  • The company’s LTM attrition declined 340 bps QoQ & 730 bps YoY to 22.1%. Birlasoft also added that its utilisation improved 80 bps QoQ to 84.8%
  • The company’s net headcount during the quarter declined by 337 to 12,193
  • The company declared final dividend of | 2 per share during the quarter taking the total dividend for FY23 to | 3.5 per share



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