Add Birlasoft Ltd for the Target Rs 350 by Emkay Global Financial Services Ltd
Birlasoft reported modest performance in 1Q. Revenue was down 0.1% qoq to $145.2mn (0.3% CC), above our estimate of $144mn. EBITDAM fell by 230bps qoq to 16.1%, largely due to the absence of certain one-offs (170bps) in 4Q. Deal intake was steady, at $169mn (book-to-bill 1.2x), with a new net TCV of $57mn. Birlasoft expects deal momentum to sustain in 2Q, with further improvement in 2H based on pipeline, client conversations, and anticipated better execution, which would help FY27 deal signings exceed FY26 levels. Industry-wide pricing pressure from upfront sharing of AI-driven productivity gains has created a temporary disconnect between order bookings and revenue conversion, expected to normalize over the next 3-4 quarters. Birlasoft reiterated its focus on expanding sales capabilities, investing in AI platforms, and maintaining EBITDAM above 15% despite near-term wage hike headwinds. We cut FY27-29 estimates by 1-2%, given 1Q performance and higher ETR assumptions. Anticipated recovery in revenue growth trajectory and undemanding valuation (cash at ~35% of market cap) augur well for stock performance, but consistency in performance is key for a sustainable rerating, in our view. We retain ADD with TP of Rs350, at 14x Jun-28E EPS.
Results summary
Revenue declined 0.1% qoq to $145.2mn (0.3% CC), above our expectation of -0.5% CC. EBITDAM fell by 230bps qoq to 16.1%, owing to the absence of certain one-offs (170bps), investments in sales, and domain capabilities, partly negated by operational efficiencies. Net profit stood at Rs1.61bn, below our estimate of Rs1.64bn, mainly due to higher taxes. Active client count stood at 213 (down by 8 qoq), reflecting continuing rationalization in tail accounts. Top 5/10 client revenue grew 2.8%/1.7% qoq. Total headcount was down ~3% qoq, at 11,057. Attrition narrowed by 130bps, at 11.7%. What we liked: Revenue and margin beat, robust cash generation (~108% OCF/EBITDA). What we did not like: Softness in Manufacturing and E&U, continued weakness in Americas.
Sequential growth in BFSI and LSS helped offset softness in other verticals
BFSI and Lifesciences and Services (LSS) delivered sequential growth of 5.1% and 2.3%, respectively, in USD terms, while Manufacturing and E&U registered sequential declines. Among services, Infra and ERP grew 0.8% and 0.9% qoq, respectively, while Digital and Data fell 0.8%. Americas declined 1.4% qoq, while RoW grew 6.8%.
Earnings call key takeaways
BFSI is expected to remain one of the strongest-performing verticals throughout FY27. LSS is expected to remain a key contributor, supported by new AI-led engagements and improving demand. Manufacturing continues to face structural challenges, driven by changing client investment priorities, and remains the weakest vertical in the portfolio. E&U is expected to remain weak through 2Q, and is expected to recover from 3Q. Quality of deal pipeline has improved, with a higher proportion of output- and outcome-based contracts. Wage hikes effective 1-Jul-26 will result in a 170-200bps impact, with around half of this expected to affect the 2Q P&L. However, a significant portion is anticipated to be recovered through productivity improvements. ETR is expected to be at 29-30%.
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