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Birlasoft’s operating performance outperformed our estimates in Q3. Revenue grew 1.9% QoQ (1.8% in cc), ahead of our estimates of 1.1% QoQ cc growth. In Q3, Birlasoft managed to negate the impact of furloughs through some shortterm project execution and change requests. EBITDA margin expanded 20bps QoQ to 16%, despite the impact of incremental two months of wage hike, offset by operational efficiencies, improving utilization, and reducing sub-contracting costs along with higher contribution of short-term and change request projects. There is a conscious strategy to focus on short-term projects, which may increase some revenue volatility, in our view. Deal wins for 9MFY24 have increased 9% YoY, but net new deals have fallen ~3%. As per management, there has been no material improvement in the demand environment, as customers continue to remain cautious. We have increased our FY24-26E EPS estimates by 2-5%, factoring in Q3 performance beat. We maintain REDUCE, given rich valuations with a revised TP of Rs760 at 26x its Dec-25E EPS.

Results Summary

Revenue grew 1.9% QoQ (1.8% in cc) to USD161.3mn, above our estimates of USD159.9mn. All service offerings reported sequential growth during the quarter – Data and Analytics (1.1% QoQ), Digital and Cloud (1.9%), ERP (0.6%), and Infrastructure (9.6%). Among verticals, Energy and Utilities (7.8% QoQ), Manufacturing (1.9%), and Lifesciences (1.5%) reported growth, while BFSI reported a decline of 0.5% QoQ. Both North America (1.8% QoQ) and ROW (2.6%) reported growth in the quarter. EBITDA margin expanded 20bps QoQ to 16%, higher than our estimate of 15.2%. TCV of deals fell to USD218mn (book to bill of 1.4x) from USD271mn in Q2 (9MFY24 – USD635mn, up 9% YoY). Net new deals declined to USD94mn in Q3 from USD167mn in Q2 (9MFY24 – USD341mn, down 3% YoY). Total headcount inched up by 0.3% QoQ to 12,356. What we liked: Strong operating performance and healthy cash conversion (141% OCF/ EBITDA). What we did not like: Weaker deal wins (especially net new) and muted headcount addition (-1.4% YoY).

Earnings Call KTAs

i) The company has undertaken multiple sales and efficiency initiatives, of which one of them is Optimus. It is an internal tech transformation program, which focuses on the next wave of profitable growth, industrializing delivery, becoming a partner of choice in emerging technologies, enhancing the employee experience, and building a best-in-class talent pool. ii) Total TCV for 9MFY24 is up 9% YoY and management aims to wrap up Q4 with sequentially higher deal TCV signings, positioning the company well for FY25. iii) Revenue in Q3 was driven by deal ramp-ups, ability to pursue and execute short-term projects, and change requests, partially offsetting the impact of furloughs. iv) Energy and Utilities grew 7.9% QoQ due to the ramp-up of new deals. v) BFSI declined 0.7% QoQ and was impacted by higher furloughs. vi) The number of active clients stands at 272 in Q3 (vs. 299 in Q3FY23), reflecting continuous efforts of rationalizing tail accounts. Management highlighted that rationalization of tail accounts is largely over and may review it depending on the demand environment. vii) The company witnessed growth across infrastructure, which grew 9.6% QoQ, digital and cloud grew 2.1%, reflecting ramp-ups in a few new cloud teams, as well as some one-time revenue. The ERP service line continues its sequential growth trajectory in Q3 (up 0.5%), whereas data and analytics recorded 1.1% sequential growth. viii) Management highlighted that senior leadership hiring is largely done barring some strategic roles like Chief Strategy Officer.

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