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Robust operating performance; upgrade to Buy

* Birlasoft reported in-line revenue performance in Q4, while EBITM surprised positively. Revenue grew 3.2% QoQ to USD123.3mn (3.0% CC). Despite the impact of salary hike, EBITM expanded 80bps QoQ to 14.9% and came in 220bps ahead of our expectations.

* Deal intake remained strong in Q4, with a TCV of USD325mn (net new USD162mn), taking total deal intake to USD888mn for FY21 (up ~33% YoY). With strong deal intake and a healthy deal pipeline (USD1.2bn vs. USD0.6bn in Q4FY20), Birlasoft expects acceleration in revenue growth, and is confident of delivering double-digit revenue growth in FY22.

* Revenue growth was broad-based and was led by Lifesciences (4% QoQ), Manufacturing (3.7%), Energy & Utilities (3.2%) and BFSI (1%). Management expects all verticals to register growth in FY22, with Manufacturing and Lifesciences verticals leading growth.

* We raise FY22E/23E EPS by 4.2%/2.7%, factoring in Q4 performance beat, and increase revenue/margin assumptions as well. With improving earnings predictability (annuity revenue increased to 70% in Q4FY21 from 60% in Q1FY21), strong earnings trajectory (~27% EPS CAGR over FY21-23E) and robust cash generation, we upgrade the stock to Buy with a revised TP of Rs330 at 18x FY23E EPS (earlier 16x with a TP of Rs290).

What we liked?

Strong deal intake of USD325mn in Q4 (USD162mn net new) and pipeline (USD1.2bn vs. USD0.6bn in Q4FY20), broad-based growth and EBIT beat (80bps expansion QoQ).

What we did not like?

Continued weakness in SAP business.

Broad-based revenue growth; FY22 revenues to grow in double-digits:

Q4 revenue grew 3.2% QoQ to USD123.3mn and growth was broad-based. Revenue growth was led by Top - 20 clients (4.9% QoQ), in line with the company’s strategy of focusing on top strategic accounts and expand relationships. Client metrics continue to reflect steady improvement in underlying trends, with the number of US$5mn+ clients increasing to 22 from 21 in Q3FY21 and 17 in Q4FY20. Management indicated that the tail account rationalization program is over and expects stability in active clients (active clients declined by 4 QoQ/87 YoY).

Management remains confident on accelerating revenue growth and delivering double-digit growth in FY22, implying at least 2.7% CQGR, driven by: 1) strong deal intake (USD888mn in FY21, up ~33% YoY); 2) robust deal pipeline (USD1.2bn vs. USD0.6bn in Q4FY20) and improving win rates; 3) growing annuity revenue (70% in Q4); and 4) broad-based demand.

EBITDAM to sustain at 15% with upward bias in FY22:

Q4 EBITDAM expanded by 50bps QoQ to 16.9% on revenue growth (80bps), lower bad debt provisions (100bps) and higher billable days (150bps), offset in part by wage hikes (210bps) and higher recruitment costs (50bps). Management expects EBITDAM to sustain at 15% with an upward bias in FY22 as it anticipates headwinds on account of wage hike and investments in capability building and talent, which would be partially offset by revenue growth-led operating leverage, higher offshoring and other efficiencies.

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