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Margin continues to improve…

Birlasoft Ltd’s (Birlasoft) dollar revenues increased 3.3% QoQ (up 2.3% YoY) to US$119.5 million, mainly led by healthy growth across verticals. The manufacturing vertical increased 2.9% QoQ, BFSI up 3.4% QoQ, lifescience up 5.1% QoQ. EBITDA margin increased 247 QoQ (up 350 bps YoY) to 16.4% mainly led by higher utilisation & SG&A rationalisation. PAT increased 39.4% QoQ (up 32.6% YoY) mainly led by higher operating margins and lower tax rate. The company has migrated to the new tax regime in the current quarter. Deal wins were at US$109 million (book to bill of 0.9x).

Healthy deal pipeline to drive double digit revenues

Birlasoft is witnessing healthy traction in cloud migration, app modernisation and workplace modernisation. Further, the company has partnered with Microsoft to drive cloud migration of on premise SAP and JD Edwards. In addition, Birlasoft has improved its annuity revenues to 67% and is targeting 70% annuity revenues in FY22E. This coupled with healthy deal pipeline & focus on multi-year deal wins gives the company confidence on achieving double digit revenues in FY22E. In addition, Birlasoft’s focus on client mining (as seen in the current quarter top 20 up 20% YoY), healthy order book, focus on niche verticals, cross selling opportunities and expansion in Europe & APAC bode well for long term revenue growth. Hence, we expect dollar revenues to increase at a CAGR of 9.4% in FY20-23E.

Sustained improvement in margins expected; going forward

Birlasoft reported healthy margins in the quarter led by higher utilisation and offshoring. Going forward, we expect margins to improve mainly led by pyramid rationalisation, rationalisation of support staff & sub-contracting cost and increase in annuity revenues & fixed price projects partially offset by investment in reskilling of employees & geographic expansion. Hence, we expect margins to improve 259 bps YoY to 14.5% in FY21E and another 130 bps YoY to 15.8% (the company has guided margins to sustain over 15%) in FY20-23E. Also, we expect PAT margins to improve further due to migration of the company to the new tax regime.

Valuation & Outlook

Acceleration in digital technologies, healthy deal pipeline, focus on multiyear, client mining, healthy order book, focus on niche verticals, cross selling opportunities and expansion in Europe & APAC bode well for long term revenue growth. In addition, cost rationalisation is expected to drive margins. Further, healthy cash balance could lead to inorganic expansion or healthy dividend payout. Hence, we maintain BUY rating with a revised target price of | 310 (18x PE on FY23E EPS) (earlier target price of | 220).

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