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Deal momentum delayed

Birlasoft reported Q1FY23 revenue at US$148.6mn, up 1.5% QoQ (I-Sec: 1.8%) and 2.3% QoQ in CC terms (ISEC: 3%). Soft growth in Q1FY23 was due to – 1) delay in ramp up of two large deals which had an impact of ~US$2mn, 2) normalisation of revenue within a client in lifesciences segment and 3) supply constraints (new hire joining ratio dropped). Company reported new deal wins of US$112mn (-10% QoQ, 19% YoY) and US$73mn of renewals. New deals declined QoQ because one large engagement got delayed. Including renewals of US$73mn, total deal TCV was healthy at US$185mn. Management aspires to grow at the same (~15%) or higher rate in FY23 vs FY22, implying 4-5% CQGR in next three quarters which we believe is difficult to achieve given the weak macro environment. We model 12.5% growth for FY23

Birlasoft reported in line EBIT margin of 13%. Sequential drop of 100bps QoQ in margin was due to high cost of hiring, mid and junior level employee promotions and lower utilisation (82.5%, -270bps QoQ). Utilisation dropped due to delayed ramp up of the two deals. In Q2FY23, management expects headwinds from wage hikes to result in 2.5-3% QoQ higher employee expense as a % of revenue. It expects margins to remain flat QoQ led by levers of improvement in utilisation and revenue growth leverage. But we believe improvement in utilisation will be slow due to higher fresher hiring (added 280 freshers in Q1 and expects to add 500 freshers in Q2). LTM attrition (adjusting for less than 6 months exits) dropped 150bps QoQ to 27.9%, but is still at elevated levels.

Our EPS estimates decrease by 1.4% / 1.8% for FY23/24E due to a slight cut in revenue estimates by 0.4% / 1% in FY23/24E and cut in margin estimate by 10bps for FY23. We model 12.3% / 11.1% revenue growth for FY23/24E and 13.2% / 13.6% EBIT margin for FY23/24E. We estimate EPS of Rs18.2 / 20.8 for FY23/24E, less than consensus EPS estimates by 5% / 9%, respectively. Birlasoft is currently trading at 19x / 17x on FY23E / FY24E EPS of Rs18.2 / Rs20.8. We value the stock at 16x FY24E EPS to arrive at revised target price of Rs333. Maintain HOLD.

* Revenue below estimates: Birlasoft reported Q1FY23 revenue of US$148.6mn, up 1.5% QoQ (I-Sec: 1.8%) and 2.3% QoQ in CC terms (I-Sec: 3%). Soft revenue growth was largely due to the delay in ramp up of two large deals which had an impact of US$2mn on revenue. One of the deals got delayed as client was undergoing M&A. Out of these two deals, one deal started ramping up in Q2FY23 and other is yet to start.

Revenue growth was led by BFSI (5% QoQ US$) and manufacturing (2.8% QoQ US$). Lifesciences was flat at -0.4% QoQ US$ led by normalisation of revenue for a client post the completion of a large contract. A large part of impact due to normaliation was captured in Q1FY23 revenue with impact of ~US$0.5mn expected in Q2FY23. Energy & utilities declined by 3.9% QoQ US$.

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