Birlasoft Ltd

IT - Software Services

Birlasoft Ltd

IT - Software Services

Emerging Market Leaders

CMP
Rs. 506.00
Rating:
Buy
Target
Rs. 700.00
December 14, 2021

Stock Info

BSE
532400
NSE
BSOFT
Bloomberg
BSOFT:IN
Reuters
BIRS.NS
Sector
IT - Software Services
Face Value (Rs)
2
Equity Capital (Rs cr)
56
Mkt Cap (Rs cr)
14078.52
52w H/L (Rs)
513.95 - 194.15
Avg Daily Vol (BSE+NSE)
2,258,728

Shareholding Pattern

(as on 30-Sep)
%
Promoter
40.66
FIIs
17.38
DIIs
21.97
Public & Others
19.99
Source: Ace equity, StockAxis Research

Price performance

Return (%)
1m
3m
12m
Absolute
20.24
23.66
156.48
Sensex
-4.28
-0.22
25.65
Source: Ace equity, StockAxis Research

Indexed Stock Performance

Birlasoft Ltd Sensex
Birlasoft Ltd
Source: Ace equity, StockAxis Research

Increased spending on Digital & Cloud to aid in overall growth of the company

Company Profile:
Birlasoft Ltd. (BSOFT) was incorporated in 1990 as part of CK Birla Group, one of India’s premier commercial and industrial houses. BSOFT combines the power of domain, enterprise, and digital technologies to re-imagine business processes for customers and their ecosystem. It offers IT services worldwide from development centers in India and Australia. BSOFT and KPIT’s IT services business has merged to form a leading publicly listed Enterprise, Digital, and IT Services company.

Birlasoft

Consolidated Financial Statements

Rs in Cr Net Sales EBITDA EBITDAM PAT EPS ROE P/E EV/EBITDA
FY19 3942.30 453.60 11.50% 289.50 10.30 16.90% 9.30 4.90
FY20 3291.00 390.20 11.90% 224.30 8.10 11.90% 7.50 2.60
FY21 3555.70 518.20 14.60% 320.80 11.60 14.70% 21.90 11.40
FY22E 4125.00 684.80 16.60% 468.60 16.90 18.50% 29.90 19.50
FY23E 4908.80 854.10 17.40% 586.20 21.10 19.50% 23.90 15.30

Investment Rationale

Focus on annuity business & new deal wins to drive growth:
The company has consistently focused on sustainable and profitable growth. Consistent focus on mining existing clients, rationalize the client base, focus on large deals benefitted the company to bring in more consistency in business. BSOFT has significantly improved its annuity revenues from 60% in FY20 to 70% in FY21. The company continued to maintain its annuity based revenue contribution at 71% during Q2FY22 and expects to maintain the same at 70% by the end of FY22. Going forward, it is expected that the company will continue to improve annuity revenues, and focus on niche verticals. The company expects the net new deal win momentum to improve as travel restrictions in US and Europe eased out. This coupled with BSOFT’s focus on client mining, expansion in Europe & APAC, improving growth in top 30 accounts, healthy deal pipeline, increase in deal sizes, project ramp ups, and focused ERP channel sales bode well for revenue growth in coming years.

Birlasoft

Significant traction in digital and cloud business:
BSOFT significantly improved its growth in Digital and Cloud business (60% of revenues). It reported revenues of USD 81 million in Q2FY22 against USD 55 million in Q4FY19. Digital and cloud business started showing traction in FY22. In H1FY22, “Business Transformation service” reported 26% YoY growth and “Cloud services” reported 26.5% YoY growth. BSOFT is well positioned to leverage the opportunity of digitization of services at much faster pace.

Well-placed to capitalize on opportunities in the Enterprise digital place:
BSOFT generated 41% of revenues from enterprise solutions business during Q2FY22. BSOFT has built unique and strong capabilities by combining enterprise applications with the most modern platforms, software and digitization processes. Further, the company’s alliances with key platform players and OEMs such as Microsoft, Google, SAP, Oracle, JD Edwards, Salesforce.com, ServiceNow helps the company to provide services to its customers with a broader range of solutions and participate in enterprises’ digital transformation journey. Only 10-15% of total SAP installations (30,000-35,000) across the globe have moved to cloud. This indicates huge growth opportunity for IT service providers The Company’s strong relationships with SAP and Oracle would help it to participate in enterprises’ cloud migration journey as both SAP and Oracle are focusing aggressively on Cloud. Further, the company partnered with Microsoft to scale its current Microsoft channel business to $100 million in the next 2-3 years from current level of $23-$25 million.

Rationalizing long tail of clients:
With focus on mining existing large clients, BSOFT also continues to focus on rationalizing the long tail of clients. The company reduced number of active clients to 280 in Q2FY22 as compared to 400 in FY19. The management is still looking to become leaner to re-prioritize resources towards building deeper relations with clients and earning higher margins.

Birlasoft

Margins to remain sustainable going forward:
BSOFT missed its Q2FY22 margin guidance slightly as attrition spiked to 24% and travel restrictions continued, leading to higher subcontracting costs (16% of revenue). Employee additions (net) were steady for the last three quarters, averaging ~555. It expects wage pressure and attrition to start easing by Q4FY22. The management expects margins to improve and stabilize at 16% for FY22 (EBITDA margins for Q2FY22 – 15%) despite wage hike in Q2FY22 on the back of higher revenue growth, higher off-shoring and cost optimization measures. The management expects EBITDA margins to be at ~18% by FY2025 and subsequently EBIT margins will stand at ~16% (13% in Q2FY22), led by moderation in subcontractor expenses, pyramid management, strong growth in enterprise business and higher offshoring.

Birlasoft

Focusing on building strong global partnership:
BSOFT has strong global partnership in the ERP space and now are focusing on building partnership in the digital & cloud space. They have already tied-up with Mircosoft, AWS, and now aiming towards engaging with Google which will make them technology agnostic for clients. Recently, they partnered with Freshworks, where BSOFT is committed to bring digital-first solutions to clients to expand business capabilities and improve the end user-experience. The company has basket of solutions which they have developed over the years to capture growth in the digital and cloud space.

Change in leadership and incentive structure:
In 2020, BSOFT promoted Mr Dharmendra Kapoor as the company CEO who served as COO of BSOFT. Under him, the company started focusing more on cross-selling and annuity based business to bring in sustainable and profitable growth. Over the last two years, BOSFT has focused on hiring talents from tier-1 companies such as IBM, Accenture, and Infosys. Also, the company changed its incentive structure to incentivize meritocracy and make the organization more effective & agile. The incentive structure has led to new deal wins from existing clients along with renewal of deals.

BSOFT aims to reach $1 billion revenue by 2025
The management aspires to reach $1billion annual revenues by FY2025 against current annual revenue run-rate of $548 million. Of the targeted $1 billion revenue, $800-850 million would come from organic and the rest from inorganic activity ($150-200 million). This also indicates that organic/overall revenue growth would remain strong, clocking a 16%/22% CAGR over next four years. Management believes that the strong revenue growth would be driven by strong deal intake, addition of new clients, acceleration of cross selling, higher annuity revenue, strong strategic partnership and alliances and building capabilities around macro services in its targeted verticals.

Strong industry tailwinds:
An accelerated shift to cloud and increased spending on digital technologies such as cloud, artificial intelligence (AI), machine learning, data and analytics, cyber-security, collaboration tools, and engineering post COVID are expected to drive demand for IT services going ahead. Enterprises across the globe are now using these new-age technologies to enhance digital experience, reduce costs, increase efficiencies, and create greater operating resilience and agility within the organization. Most large global companies are shifting technology investments from capital expenditure to operating expenses as it would provide scalability. According to Gartner, IT services and enterprise software spending are likely to remain strong, clocking CAGR of 9.1% and 12%, respectively over FY20-FY25, which will be significantly higher than the average growth during the last decade.

Outlook & valuation

Global demand for IT services is experiencing huge tailwind backed by increased spending on Cloud and Digital. BSOFT has transformed its business significantly from enterprise business to enterprise digital solutions in the last few years. The company management aspires to clock $ 1 billion in annual revenues by FY25. It expects growth to pick up in FY23 led by higher spends on legacy modernization by clients, strong partnerships with hyper-scalers and closure of multiple transformative deals. Based on our estimates, the stock is currently trading at 24x FY23E earnings and we initiate our coverage on BSOFT with a ‘BUY’ rating.

Financial Statement

Profit & Loss statement

Yr End March (Rs Cr) 2019 2020 2021 2022E 2023E
Net Sales 3942.30 3291.00 3555.70 4125.00 4908.80
Growth % 7.60% -16.50% 8.00% 16.00% 19.00%
Expenditure
Material Cost 7.60 - - - -
Employee Cost 2433.50 1997.50 2115.80 2516.30 2994.30
Other Expenses 1047.60 903.20 921.70 924.00 1060.30
EBITDA 453.60 390.20 518.20 684.80 854.10
Growth % 19.80% -14.00% 32.80% 32.10% 24.70%
EBITDA Margin 11.50% 11.90% 14.60% 16.60% 17.40%
Depreciation & Amortization 105.50 82.60 80.40 88.70 99.20
EBIT 348.00 307.60 437.80 596.10 755.00
EBIT Margin % 8.80% 9.30% 12.30% 14.50% 15.40%
Other Income 40.40 44.70 30.00 30.10 28.40
Interest & Finance Charges 18.90 16.10 13.00 - -
Profit Before Tax - Before Exceptional 369.50 336.20 454.80 626.20 783.40
Profit Before Tax 387.10 336.20 454.80 626.20 783.40
Tax Expense 85.20 111.90 134.00 157.60 197.20
Effective Tax rate 22.00% 33.30% 29.50% 25.20% 25.20%
Exceptional Items 17.60 - - - -
Net Profit 301.90 224.30 320.80 468.60 586.20
Growth % 15.40% -25.70% 43.00% 46.10% 25.10%
Net Profit Margin 7.70% 6.80% 9.00% 11.40% 11.90%
Consolidated Net Profit 289.50 224.30 320.80 468.60 586.20
Growth % 14.50% -22.50% 43.00% 46.10% 25.10%
Net Profit Margin after MI 7.30% 6.80% 9.00% 11.40% 11.90%

Balance Sheet

Yr End March (Rs Cr) 2019 2020 2021 2022E 2023E
Share Capital 54.80 55.30 55.50 55.50 55.50
Total Reserves 1622.60 1837.10 2124.40 2482.10 2957.40
Shareholders' Funds 1713.50 1892.40 2179.90 2537.60 3012.90
Minority Interest - - - - -
Non Current Liabilities
Long Term Burrowing - - - - -
Deferred Tax Assets / Liabilities -143.30 -120.00 -88.20 -88.20 -88.20
Long Term Provisions 63.70 69.50 80.30 70.00 70.00
Current Liabilities
Short Term Borrowings 38.10 - - - -
Trade Payables 214.80 190.40 131.80 178.90 210.40
Other Current Liabilities 404.20 343.20 423.40 423.40 423.40
Short Term Provisions 57.30 77.80 79.20 79.20 79.20
Total Equity & Liabilities 2354.30 2567.30 2906.20 3280.90 3787.70
Assets
Net Block 588.10 751.00 698.20 745.50 806.30
Non Current Investments - - - - -
Long Term Loans & Advances 81.60 110.60 56.90 56.90 56.90
Current Assets
Currents Investments 190.90 33.00 55.30 69.30 69.30
Inventories - - - - -
Sundry Debtors 710.70 740.20 518.20 683.90 804.40
Cash and Bank 377.20 630.10 1043.00 1176.70 1502.20
Short Term Loans and Advances 51.30 120.80 144.90 144.90 144.90
Total Assets 2354.30 2567.30 2906.20 3280.90 3787.70

Cash Flow Statement

Yr End March (Rs Cr) 2019 2020 2021 2022E 2023E
Profit After Tax 301.90 224.30 320.80 468.60 586.20
Depreciation 105.50 82.60 80.40 88.70 99.20
Changes in Working Capital -537.00 -91.00 84.50 -118.60 -89.00
Cash From Operating Activities -71.60 309.90 557.80 438.70 596.40
Purchase of Fixed Assets -89.80 -54.40 -24.90 -120.00 -160.00
Free Cash Flows -161.40 255.60 533.00 318.70 436.40
Cash Flow from Investing Activities 124.80 -43.80 -444.40 -120.00 -160.00
Increase / (Decrease) in Loan Funds -8.90 - - - -
Equity Dividend Paid -55.40 -99.60 -55.40 -110.90 -110.90
Cash from Financing Activities -116.20 -179.70 -96.90 -110.90 -110.90
Net Cash Inflow / Outflow -62.90 86.50 16.50 207.80 325.50
Opening Cash & Cash Equivalents 465.10 361.70 449.60 466.10 673.90
Closing Cash & Cash Equivalent 361.70 449.60 466.10 673.90 999.40

Key Ratios

Yr End March 2019 2020 2021 2022E 2023E
Basic EPS 10.30 8.10 11.60 16.90 21.10
Diluted EPS 10.30 8.10 11.60 16.90 21.10
Cash EPS (Rs) 14.10 11.10 14.50 20.10 24.70
DPS 2.00 2.00 3.50 4.00 4.00
Book value (Rs/share) 61.20 68.40 78.60 91.50 108.70
ROCE (%) Post Tax 15.70% 12.90% 16.20% 19.90% 21.10%
ROE (%) 16.90% 11.90% 14.70% 18.50% 19.50%
Inventory Days 1.10 - - - -
Receivable Days 70.20 80.50 64.60 65.00 65.00
Payable Days 17.30 22.50 16.50 17.00 17.00
PE 9.30 7.50 21.90 29.90 23.90
P/BV 1.60 0.90 3.20 5.50 4.70
EV/EBITDA 4.90 2.60 11.40 19.50 15.30
Dividend Yield (%) 2.00% 3.30% 1.40% 0.80% 0.80%
P/Sales 0.70 0.50 2.00 3.40 2.90
Net debt/Equity - - - - -
Net Debt/ EBITDA -1.20 -1.70 -2.10 -1.00 -1.20
Sales/Net FA (x) 5.60 4.90 4.90 5.70 6.30