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Birlasoft Ltd>
  • CMP : 340.6 Chg : -2.55 (-0.74%)
  • Target : 440.0 (17.65%)
  • Target Period : 12-18 Month

25 May 2022

Announces buyback at | 500 per share

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 lifescience
  • Debt free and healthy double digit return ratio (with RoCE of >19%)

Birlasoft reported strong numbers on the margin front.

  • Revenue was up 2.2% in CC, 2.1% QoQ in dollar terms
  • EBITDA margins were up 66 bps QoQ to 15.8%
  • The company announced buyback of ₹ 390 crore at ₹ 500 per share
What should Investors do?

Birlasoft’s share price has grown by ~3.3x since it demerger (from ~₹ 114 in February 2019 to ~₹ 374 levels in May 2022).

  • We maintain BUY rating on the stock
Target Price Valuation

We value Birlasoft at ₹ 440 i.e. 22x P/E on FY24E EPS.

Key Triggers for future price performance
  • Revenue growth is expected to be achieved via client mining, cross sell, multi-year deals, expansion in Europe & APAC and focus on niche verticals
  • Aspiration to reach US$1 bn revenues, out of which US$800-850 mn organic growth while rest from inorganic opportunities
  • Expect dollar revenues to grow at 13.7% CAGR over FY22-24E
  • Margin expansion of 50 bps to 16.0% over FY22-24E
Alternate Stock Ideas

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

  • Growth in new logo acquisition, increasing deal size, expansion of sales & marketing and market share gains to drive revenues
  • HOLD with target price of ₹ 3,100

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Net Sales 2,550.7 3,291.0 3,555.7 4,130.4 17.4 4,829.4 5,384.7 14.2
EBITDA 306.4 391.9 529.2 640.1 27.8 758.2 861.6 16.0
EBITDA Margins (%) 12.0 11.9 14.9 15.5 - 15.7 16.0 -
Net Profit 271.9 224.3 320.8 463.8 19.5 502.5 569.9 10.9
EPS (|) 13.4 8.1 11.6 16.3 - 17.7 20.1 -
P/E 31.9 46.1 32.4 22.5 - 20.8 18.3 -
RoNW (%) 15.9 11.9 14.7 17.9 - 17.6 17.8 -
RoCE (%) 15.5 17.0 19.8 23.1 - 23.3 23.6 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

  • Revenue for the quarter grew 2.1% QoQ in dollar terms to US$146.4 mn. In rupee terms, the company reported revenue growth of 2.8% QoQ to | 1,101.4 crore. For FY22, the company reported 15.8%, 16.2% growth in revenues in dollar, rupee terms, respectively, to US$552 mn, | 4130 crore, respectively
  • Geography wise, US (82.2% mix) grew 1.2% QoQ. Europe (11.2% mix) grew 6.9% QoQ while RoW grew 5.3% QoQ. Vertical wise revenue from manufacturing grew 4.1% QoQ while energy & utilities grew 4.2% QoQ. BFSI vertical reported de-growth of -0.8% QoQ. Life sciences reported de-growth of 1.1% QoQ
  • The company reported TCV of US$222 mn, up 22% QoQ. For FY22, it reported TCV of US$696mn, out of which, US$444 mn were new deals for the year while US$252 mn were renewals. The company mentioned that since incremental deals are becoming shorter in size, TCV numbers may look flattish. Hence, renewals is the right number to look at
  • The company continued to guide aspiration of US$1 bn revenue in FY25. It mentioned that, out of this, organic contribution is expected to be in the range of US$800-850 mn while rest US$150-200mn would come from inorganic opportunity. The company mentioned that it is not looking for a series of tuck in acquisitions to reach revenue target and preference is for a single large deal. The company also mentioned that it can spend up to US$300 mn for the acquisition. It mentioned that it is looking at companies in the digital/cloud capabilities for acquisition. The company is confident that revenue growth in FY23 would be better than its reported FY22 growth
  • EBITDA margins improved ~66 bps QoQ to 15.8% aided by lower SG&A expenses. For FY22, the company reported EBITDA margins of 15.5% which was up 60 bps and in line with its guidance of 15%+ EBITDA margins. The company is confident of further EBITDA margin expansion inFY23 and called out following tailwinds for the same: i) Revenue growth ii) Further utilisation improvement iii) pricing improvement, the company has been getting price hikes in selected areas. iv) lower subcontractor costs, while the headwinds would be i) Higher salary costs ii) recovery in travel costs. The company added 1800 freshers in FY22 and planning to add 2000-2200 freshers in FY23
  • Attrition on LTM basis has increased ~290 bps QoQ to a high of 34.3% amid supply side challenges. The company mentioned that attrition may look higher on LTM basis while on quarterly annualised basis, it was down 30 bps from 34.7% to 34.3%. It mentioned that it is working on many initiatives to tackle high attrition such as i) salary hikes and promotions ii) long term career planning for key employees and rewarding them iii) the company is also hopeful that work from office will also help in reduction of the same
  • The company declared a final dividend of | 3 per share for FY22 while total dividend was at | 4.5 per share for the year. It announced buyback of | 390 crore (7.8 mn equity shares at | 500 per share price) at tender route. It mentioned that at this moment, they are unsure about who would be participating in the buyback including promoters
  • The company re-appointed Dharmander Kapoor as CEO & MD for three years effective from June 1, 2022
  • The company mentioned that DSO for the quarter increased due to some administrative delay at the client side and DSO is expected to trend downward, going forward.
Variance Analysis
   Q4FY22   Q4FY21   YoY (%)   Q3FY22   QoQ (%)  Comments
Revenue 1,101 903 22.0 1,072 2.8 Revenue grew by 2.2% in CC terms
Employee expense 630 535 17.6 607 3.8  
Gross Margin 472 367 28.4 465 1.4  
Gross margin (%) 42.8 40.7 213 bps 43.4 -57 bps  
Other expense 297 215 38.2 302 -1.7  
EBITDA 174.5 152.4 14.5 162.8 7.2  
EBITDA Margin (%) 15.8 16.9 -103 bps 15.2 66 bps Margins improved due to lower other expenses
Depreciation & amortisation 20 18 12.3 19 6.5  
EBIT 155 135 14.8 144 7.3  
EBIT Margin (%) 14.0 14.9 -87 bps 13.4 60 bps  
Other income (less interest) 23 5 344.4 13 77.3  
PBT 177 140 26.8 157 13.0  
Tax paid 41 38 7.6 35 16.1  
PAT 136 102 34.0 122 12.2  

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