Birlasoft - Robust Order Book Brings Strong Earning Visibility: HDFC Securities

HDFC Securities Retail Research

Birlasoft Ltd. has strong traction in virtual engagement, cloud adoption, and digital transformation work. The company’s focus on deepening relationship with existing large accounts and partners, vertical sales structure, leveraging of core and peripheral services, rampup of deal wins, and defined incentives of cross selling/ up-selling could drive revenue growth.

Besides, change in management, organisation restructuring, hiring of new vertical leaders could lead to recovery in growth momentum going forward.

The new Chief Executive Officer is focused on select verticals and Geo for which the company has hired vertical and Geo focused leaders.

We expect that Birlasoft could report revenue growth at 7% and 13% for FY24E and 25E, respectively.

Birlasoft signed deals worth $146 million in Q1 FY24, indicating a strong pipeline for future engagements, out of which new deal wins’ total contract stood at $ 80 million, down 29% YoY and down 30% QoQ as deal closures were pushed from Q1 to Q2.

Renewal deal wins stood at $ 66 million, down 10% YoY and down 62% QoQ.

The company has focused on adding service lines to its top 40 focused accounts, which contribute to ~75% of the revenue. The company expects to report $200 million of signings every quarter going forward.

We believe the base case fair of the stock is Rs 560 (23 times FY25E earnings per share) and the bull case fair of the stock is Rs 597 (24.5 times FY25E EPS) over the next two to three quarters.

Investors can buy in Rs 505-520 band and add further on dips in the Rs 446-456 band (18.5 times FY25E EPS).

Key triggers

• Robust order book brings strong earning visibility.

• Banking, financial services and insurance segment could perform sub-par growth going forward but greater push expected soon.

• Strategic alliance with various partners and ties up with Microsoft to establish Generative AI CoE to widen its service offerings.

• Margins are expected to rise going forward.

What could go wrong?

• Indian rupee appreciation against the USD/euro, pricing pressure, retention of the skilled headcounts, strict immigration norms or new local regulations and rise in visa costs are key concerns.

• Birlasoft has presence in a highly competitive industry which faces pricing pressure, deal re-negotiations, deferrals, retention of talent, etc., and which are expected to have a direct bearing on the company’s revenue growth and profitability.

• Birlasoft revenue from the U.S. contributed 84% and Europe 10% in Q1 FY24. This exposes the company to the risk of economic slowdown and client’s cautious approach on IT spending in these regions, as well as regulatory changes such as restriction on H1B visas. Any geopolitical risk or economic uncertainty could impact its business.

• The company has client concentration risk, top-five/top-10 clients/top-20 contributed 33.3%/49.6%/63.9% in Q1 FY24, any cancelation of deal from such clients could impact its revenue. However, the company’s established relationships with its top customers to mitigate this risk to an extent.

• Manufacturing, BFSI and healthcare segments contributed more than 85% to the revenue in Q1 FY24. Continue fall in spending for these segment could impact its revenue generation further going forward,  Birlasoft faces intense competition from tier-1 IT players and well-established tier-II players, which limits its pricing/bargaining power with customers. Additionally, the trading nature of its low-margin distribution business can drag its profits.

• Any change in the contract terms from large clients like non-renewal of contracts or higher discounts due to aggressive competition intensity can impact the sustainability and scalability from such clients.

• Birlasoft had signed a $240 million multi-year deal with Invacare in October 2019 to provide IT services to the manufacturer of wheelchairs, bariatric equipment, disability scooters and respiratory products. The deal was expected to be spread over a period of 10 years. However, Invacare has filed for bankruptcy protection in Feb 2023. As per the settlement agreement, Birlasoft would receive $2 million for disengagement services ending on May 31. The settlement is significant, as Invacare’s bankruptcy pushed Birlasoft into loss in the December quarter. The IT services firm had created a provision of Rs 151 crore against any outstanding receivables and contract assets. Further, any adverse development from client end could hit revenue generation and could increase receivable going forward.

• Higher than expected debt funded capex or acquisition leading to deterioration in profitability and could impact cash generation.

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