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Published on 16/09/2020 2:17:16 PM | Source: Emkay Global Financial Services Ltd

Buy Birlasoft Ltd For Target Rs.150 - Emkay Global

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Strong operating performance; retain Buy

* Bsoft’s June’20 quarter performance was strong across all operating parameters. A 3.6% QoQ revenue decline with EBIT margins at 10% (-50 bps QoQ) was significantly ahead of our estimates of 8% QoQ drop in revenue and 170bps sequential decline in margins.

* Net profit at Rs564mn (-18% QoQ,+35% YoY) came in ahead of estimate, aided by strong operating beat despite higher-than-anticipated forex losses. Strong order booking, coupled with very strong cash generation, led to a solid performance amid a difficult business environment.

* Client metrics continue to reflect the underlying positive thesis we have on the company, with the number of US$10mn+ clients increasing from 7 to 8 QoQ as the long-tail rationalization continues. Top 10/20 client revenue performance continues to benefit from strong growth in the Lifesciences segment.

* We raise FY21-23E EPS by 7-19%, driven by the June’20 quarter beat and increase in revenue/margin assumptions. Retain Buy with a revised TP of Rs150 vs. Rs125 earlier, as we roll forward to June’22E (Mar’22E earlier). BSOFT and PSYS remain our top Buyrated names in the small/mid-cap IT Services space. OW stance in sector EAP stays.

What we liked? Beat on both revenue and margin fronts; strong new order wins and a sharp reduction in DSOs that helped drive strong cashflow generation

What we did not like? 9%/12% QoQ decline in Manufacturing/E&U verticals

Defends margins well despite sequential revenue hit: Birlasoft reported a 3.6% QoQ US$ revenue decline in the June’20 quarter vs. estimate of ~8% QoQ dip while limiting the decline in EBIT margins to 50bps sequentially on a significant increase in offshore delivery of revenues and headcount rationalization (down by 360 people sequentially). Client metrics continue to move in the right direction, with the number of US$10mn+ clients increasing from 7 to 8 QoQ during the quarter, with the long tail of client accounts being rationalized further.

Raise FY21-23E EPS by 7-19%; Buy stays: We raise our FY21-23E EPS by 7-19%, driven by the June’20 quarter beat and increase in revenue/margin assumptions. We now build in 6.5% US$ revenue growth in FY21 vs. ~2% earlier while continuing to build in 10.3% revenue CAGR through FY21-23E. Our Buy rating stays with a revised TP of Rs150 (Rs125 earlier) as we roll forward to June’22E (Mar’22E earlier). Although a 38%/85% stock upmove in the past 1M/3M may warrant a pause in the near term, Birlasoft and PSYS remain our top picks in the small/mid-cap IT Services space. Our OW position in sector EAP continues.

 

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