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In-line performance; high attrition remains a concern

* Birlasoft’s Q3FY22 operating performance was broadly in line with our expectations. Revenue grew by 4.7% QoQ to USD143.4mn (5% CC). EBITM expanded by 30bps QoQ to 13.4% due to the offshore shift, revenue growth-led operating leverage and the absence of one-time contract related expenses.

* Revenue growth was broad-based and was driven by Manufacturing (9.1% QoQ), E&U (8.4%) and BFSI (2.4%). Management expects broad-based revenue growth momentum to continue in the coming quarters.

* It signed deals worth TCV of USD182mn in Q3, including net new TCV of USD121mn. Management noted an increase in smaller deals in the market, which augurs well for Birlasoft. The deal pipeline stood at USD1.2bn at the end of Q3.

* We tweaked EPS estimates by -0.9% to 0.8% for FY22E-24, factoring in Q3 performance. We retain Buy with a TP of Rs550 at 25x Dec’23E EPS, considering broad-based growth and strong earnings momentum (~27% EPS CAGR over FY21-24E).

What we liked? Steady operating performance, solid deal intake (TCV of USD182mn in Q3 vs. USD140mn in Q2)

What we did not like? Softness in Life Sciences vertical (declined by 3.5% QoQ) and spike in attrition (31.4% vs. 24.2% in Q2)

In-line performance; revenue growth momentum to sustain in Q4: Q3 revenue grew by 4.7% QoQ to USD143.4mn (5% CC). Revenue growth remained broad-based across verticals and services, led by Manufacturing (9.1% QoQ), E&U (8.4%) and BFSI (2.4%). The Life Sciences vertical saw softness in Q3 (-3.5% QoQ), but management expects growth to pick up in coming quarters. Among services, Enterprise Solutions led growth (6.3% QoQ), followed by Business & Technology transformation (4.2%) and Cloud & Base services (2.9%). Revenues from the Top-20 clients and non-Top 20 clients grew by 4.6% QoQ and 5% QoQ, respectively, in line with the company’s strategy to focus on strategic accounts and expand relationships. Client metrics continue to reflect a steady improvement in underlying trends, with the number of USD10mn+ clients increasing to 12 from 9 in Q3FY21. The deal intake in Q3 stood at USD182mn and management indicated that the deal pipeline was robust at USD1.2bn at the end of Q3 (vs USD1.1bn QoQ and USD0.7-0.8bn YoY). Management remains confident of sustaining revenue growth momentum on the back of broad-based demand, healthy deal intake, robust deal pipeline, higher billable days and absence of furloughs, and an anticipated uptick in Enterprise Solutions. Headcount declined 120 QoQ; however, management indicated that the average billable headcount grew in Q3.

EBITDAM expands 20bps QoQ: Q3 EBITDAM expanded by 20bps QoQ to 15.2%, driven by volume growth, better operating efficiencies (+90bps) and the absence of one-time contract expenses (+50bps), partly negated by the impact of incremental one month of salary hike (-70bps) and higher subcontracting costs (-50bps). Management expects attrition to remain elevated in Q4 and moderate thereafter. Management retains its target of delivering EBITDAM of over 15%. Revenue growth momentum, offshore shift, pricing, and flattening employee pyramid would support margins and negate headwinds from wage inflation, investments in digital capabilities and micro verticals domain capabilities.

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