ICICI Direct sees an upside potential of 21% in Birlasoft share!!! 


About the stock: Birlasoft share has strength in non-ERP digital businesses like CRM, B & data analytics, app development & enterprise solution. 

The company caters to manufacturing, BFSI, energy & utility and life science. 

Debt free and healthy double digit return ratio (with RoCE of >19%) Q3FY22 Results:  

Birlasoft share reported strong Q3FY22 results. 

Dollar revenues increased 4.7% QoQ to US$143.4million. 

EBITDA margin improved 20bps QoQ to 15.2%. 

Deal wins wereat US$182million (of which net new were US$121million). 

CMP (Current Market price): Rs 445.
Target: Rs 540 (21%).
Target period: 12 months.

What should investors do? 

Birlasoft share price has grown by ~3.9x since its demerger (from ~ ₹ 114 in February2019 to ~ ₹ 445 levels in January 2022). 

ICICI direct continues to remain positive and retain their BUY rating on the stock. 

Target Price and Valuation:  

ICICI direct values Birlasoft share at ₹ 540i.e. 23x P/E on FY24E EPS. 

Key triggers for future price performance: 

Client mining, multiyear deals, cross sell, expansion in Europe & APAC will help in revenue growth in near future. 

Expect dollar revenues to grow at 16.3% CAGR. 

Margin expansion of 230 bps to 17.2% over FY21-24E. 

Alternate Stock Idea:  

Apart from Birlasoft share, in ICICI Direct’s IT coverage they also like Mastek. 

Revenues will see a growth due to increasing sizes of deals, sales and marketing expansion and new logo acquisition. 

BUY with target price of ₹ 3,360. 

Key takeaways of recent quarter & conference call highlights: Revenue for the quarter grew 5% QoQ in CC while it was up 4.7%QoQ in dollar terms toUS$143.4mn.  

Geography wise, US grew 5.6% QoQ while Europe grew 6.7% QoQ.  

BFSI and manufacturing grew 9.1% (aided by stable oil prices and few large deals) and 2.4% QoQ, which drove revenue growth for the quarter. 

EBITDA margins improved ~20bpsQoQ to 15.2%. EBITDA margin headwinds were (-70bps) wage hike, (-50bps) increase in sub cons costs, which was mitigated by (+90bps) operating leverage and (+50) bps one-off benefit. 

PAT for the quarter was up 9.1% QoQ to US$15.2mn due strong operating performance.  

TCV for the quarter was at US$182mn, which was up 30% QoQ, out of which US$121mn were new deals, which was up 16% QoQ. 

The company continue to maintain that it is aspiring to reach US$1bn annual revenues by FY25.  

Management is focusing on the following points: 

  1. Investments in existing and newer capabilities. 
  1. Business from existing clients. 
  1. Looking for M&A. 

Some of the building blocks for the same, which the management called out are i) strategic investments in existing capabilities and newer capabilities, ii) repeated business from existing clients, iii) they are also looking for M&A.  

The company also mentioned that deal pipeline remained strong at US$1.2bn, which has improved significantly by 50% on a YoY basis. 

The company is also looking to achieve 18% EBITDA by FY25. The levers for margin expansion are i) moderation of subcontracting cost, going forward, at 12-13% of revenues vs.16% currently as travel opens ii) higher intake of freshers iii) higher offshoring  

Attrition on LTM basis has increased ~600bps QoQ to 31.4% amid supply side challenges.  

The attrition rate will remain higher in Q4FY22 which will reduce in Q1FY23. This is the expectation of the management in the near future. 

The management mentioned that attrition will remain at elevated levels in Q4FY22 while it is expected to come down from Q1FY23 onwards only.  

The company also indicated that attrition in the medium term is likely to settle at 18-20%. 

The company indicated that on a net basis, there was a decline of 120 people, which could be attributed to optimization of the bench strength, which took place at the end of the quarter.  

The company also indicated that they are looking to increase fresher hiring as they are likely to welcome 1500 freshers in the next 12 months vs. 900 in the last 12 months. 

The company indicated that revenue from life sciences dip for the quarter since there was project closure of one of the transformation deals. 

Birlasoft share also indicated that revenues in this project were received as per certain milestone-based payments and project closure impacted growth. 

The management also indicated that energy vertical is also showing good growth for the past two to three quarters due to stabilization of crude prices. 

In case crude oil prices are not much volatile, they expect energy vertical to also help in revenue growth. 

Enterprise solutions will show positive movement as clients have started to understand the need to strengthen their legacy platforms and will be a major growth driver in this area.  

Margins in enterprise solutions are better than digital. 

Their partnerships with Google and Microsoft have helped them to improve the cloud revenues. 

The management reckons that clients are now accelerating cloud transformation, which should help in their growth journey. 


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