IGI Logo

Healthy operational performance…

Birlasoft Ltd’s (Birlasoft) dollar revenues increased 3.2% QoQ to US$123.3 million, mainly led by healthy growth across verticals. The manufacturing vertical increased 3.7% QoQ, E&U up 3.2% QoQ, lifescience up 4.0% QoQ. EBITDA margin increased 48 QoQ (up 401 bps YoY) to 16.9%. Overall TCV for FY21 was at US$888 million (up 33% YoY and book to bill ratio of 1.9x). Birlasoft recommended a dividend of | 2.5/share.

Healthy deal wins, annuity revenues key growth drivers

Birlasoft is aiming to achieve a target of US$1 billion in revenues in the next four years (implying a CAGR of 20%). The company aims to achieve this via organic (which we believe would be 14% CAGR) and inorganic revenues of US$150-200 million. Birlasoft has significantly improved its annuity revenues from 60% in FY20 to 70% in FY21. Going forward, we expect the company to continue to improve annuity revenues, cross sell to clients and focus on niche verticals. This coupled with Birlasoft’s focus on client mining (top 20 accounts up ~18% YoY in FY21), expansion in Europe & APAC, improving growth in top 30 accounts, healthy deal pipeline (up from US$600 million to US$1.2 billion), healthy order book (healthy mix of mid-size deal with potential to be growth drivers), increase in deal sizes, project ramp ups, reversal of discounts, focused ERP channel sales (with higher focus on cross selling digital) and anticipated higher net new growth (due to opening of US & Europe) bode well for revenue growth in coming years. Hence, we expect dollar revenues to increase at a CAGR of 13.6% over FY21-23E.

Margins to improve despite headwinds

Birlasoft reported an improvement in margins in Q4FY21 due to revenue growth (0.8%), higher billing (1.5%) and lower bad debt (1%) partially offset by higher wage hikes (2.1%) and higher recruitment (added 652 employees). Going forward, there are margin headwinds due to higher employee cost, lower utilisation and reskilling of employees. However, we expect the company to offset these headwinds with pyramid rationalisation, rationalisation of support staff & sub-contracting cost, higher offshoring and revenue growth. Hence, we expect margins to improve ~90 bps to 15.8% in FY21-23E. Also, we expect PAT to improve due to migration to the new tax regime.

Valuation & Outlook

Improving client mining, healthy deal pipeline, cross selling opportunities, increase in deal sizes, project ramp ups, reversal of discounts and anticipated higher net new growth bode well for long term revenue growth. Further, robust margins and healthy cash balance (inorganic expansion or healthy dividend payout) prompt us to maintain BUY rating with a revised target price of | 315 (18x PE on FY23E EPS) (earlier target price | 310).

To Read Complete Report & Disclaimer Click Here

https://secure.icicidirect.com/Content/StaticData/Disclaimer.html

Above views are of the author and not of the website kindly read disclaimer