Birlasoft Ltd

Market Capitalization: 5,409 Cr	Current Price:  195 (19 Sep 2020)
Stock P/E: 22.7	Debt to equity: 0
Sales Growth (3Yrs): -0.3%	Profit Growth (3Yrs): 0.1%
ROCE: 19.3%	ROE: 12.6%
Promoter holding: 40.8%	Cash Cycle: 53 days
Asset Turnover: 1.32	Net Profit Margin: 7.0%

ABOUT THE COMPANY

Birlasoft Ltd (Birlasoft), a CK Birla group company, became a listed company on 15 January 2019. Birlasoft (the unlisted company) was merged with KPIT Technologies Ltd (listed company). The companies were later demerged resulting in two companies, one catering to engineering side (KPIT Technologies) and other catering to IT services side (Birlasoft). Birlasoft had US$145 million of IT services revenues and KPIT’s IT division had US$330 million revenues resulting in a combined entity of US$475 million. Birlasoft provides global IT solutions and services across USA, Europe, and APAC in the areas of software development, Product life cycle management, package implementation, digital transformation, application management, and testing. As on 31 June 2020, Company has 356 active clients and 9,908 employees. The charts below demonstrate the revenue split across geographies, industry vertical and service vertical along with top client’s concentration.

BUSINESS PROSPECTS

Improved Focus on Cross Selling and Client Mining

Birlasoft has transformed its business following the merger with KPIT’s IT division. There is renewed focus towards adding new logos, cross selling, rationalizing its big clients and client mining. It is streamlining its client portfolio by focusing on the top 50 clients and driving deeper engagement through cross-selling and client mining. To make this happen, it has hired premium talent from Tier 1 companies and strengthened its leadership. This will improve revenue per client which is lower compared to some of its midcap peers. Birlasoft and KPIT have complimentary skills. While Birlasoft has strength in non-ERP Digital businesses like CRM, BI & Data Analytics, KPIT IT Services has core strengths in Enterprise Software Solutions like Oracle, JD Edwards, SAP, etc. This has enabled the company to win larger end to end deals. It won record contract of INR 5,017 crore Total Contract value (TCV) for FY20 of which 65% was new deal wins. The company has signed a multi-service deal worth INR 1,800 crore TCV with an U.S. based healthcare major Invacare Inc. This is a good platform and could open doors to similar deal wins in the future. The company has devised a strategy to emphasis on top 50 clients for developing a deeper engagement model with clients, based on their business imperatives, current engagements and industry led relationships. Also, the company will mine its top 150 customers by focusing on cross selling and leveraging core & peripheral services to drive revenue. Birlasoft has aligned its sales structure across verticals to enhance cross selling opportunities, multi service deals and client mining.

Margins have Scope to Improve

Over the last few quarters, Birlasoft has reduced cost leading to EBITDA margin improvement from 7.9% in Q4FY19 to 12.3% in Q1FY21. The management believes there is further scope for margin improvement as its EBITDA margins are lower compared to midcap peers. Birlasoft is aiming for more fixed-pay contracts as this will give more impetus to its margins. In addition, the company intends to increase annuity revenues from current 60% to around 75% by next year. It also has higher proportion of support staff (10% compared to 7% for midcap peers). With renewed focus on cost restructuring and vertical orientation of the business, support staff costs can be brought down to match its midcap peers. The company is aiming for better utilization of its staff and reorganization of smaller accounts to improve its margins and reach 15% EBITDA margins by Q1FY22. Further, migration to the new tax regime could lead to better PAT margins and improved profitability.

Renewed Focus on Growth and Larger Deal Wins

Birlasoft has launched a comprehensive ‘Challenger’ model to drive growth from top multiservice accounts with a major emphasis on Client management, monitoring of cross-selling and business transformation while deepening and expanding the client relationship model. The Company is also focusing on widening the service technology offerings that compliment and align with the business imperatives of the customer, which helps in building annuity revenue and long-term client relationships. Strategic tie-ups are also being continuously evaluated with an objective to manage competition, enhance technological competence, and grow inorganically. Birlasoft has cash and cash equivalent of INR 822 crore along with churning out approximately INR 250 crore of free cash flow in FY20. This provides the company ammunition to manage uncertain times and grow inorganically if needed. COVID-19 and work from home model has opened opportunities as organisations are forced to focus on cyber security, infrastructure, operational resilience, virtual engagement and agile delivery model. This will entail a rapid adoption of digital enablement through transformation, cloud migration and mobility trends. Birlasoft is well positioned to tap this opportunity as 50% of its capabilities are in Enterprise Solutions and around 38% in Digital thus enabling it to deliver superior digital transformation for enterprises. The company is focusing on select tech and micro verticals like medical devices, process manufacturing, re-insurance, and personal finance to upstream companies. This focus on niche space will enable Birlasoft to develop expertise in these fields and grow its revenues while competing with larger rivals. Apart from this focus on niche segment, the company is adding to its partner network in Europe and APAC region to expand its footprints in these geographies. Birlasoft end user industries are mainly in least affected industries like Lifesciences, Retail, Energy and Utilities, and Manufacturing thus propelling its business in these tough times.

KEY RISKS

• Covid-19 could push key clients to reduce IT Spends/Rationalize costs.
• Concentration of business in United States. Needs to de-risk by expanding to other geographies.
• Though the merger with KPIT IT division was completed last year, Birlasoft could still run into challenges integrating the organization in terms of culture, application landscaping, people, processes etc.

KEY POSITIVES

• Birlasoft’s cash collection ability has improved in these tough times as evinced in DSO at 60 days, reducing by 12 days QoQ.
• Attrition is down from 21.7% in Q1 FY20 to 16.5% in Q1 FY21 indicating improving employee satisfaction and better retention.
• Improved Free Cash generation and thus cash & cash equivalents at end of Q1 FY21 stands at INR 822 crore, up by INR 156 crore QoQ.
• The company is showing improved deal win traction as it added further INR 1,347 crore TCV win in Q1 FY21. It won TCV INR 5,017 crore in FY20.
• The company is debt-free.

VALUATION AND CONCLUSION

Birlasoft historical revenue growth has not been anything great. However, the company has been growing at much steady and faster pace along with improvement in margins following the appointment of Dharmander Kapoor as CEO in June 2019. Its integration with KPIT Technologies has benefitted the organization and enabled it to win larger deals by providing a wider gamut of services. Going forward, Birlasoft’s focus on niche verticals, cross selling, client mining combined with geographic expansion could lead to long-term improvement in revenue profile. It is well positioned to tap the growth opportunities along with improving margin profile via larger deal wins, better utilization, cost efficiencies and tax rationalization. The company is well positioned to grow its revenues and profits at healthy rate over the next few years and thus looks attractive at current PE of 22.7.

Disclaimer: Have personal investments in Birlasoft at the time of writing this note. Information in this blog is for educational purposes only. The articles  may contain external links , references and compilation of various publicly available articles. All copyrights and trademarks of images belong to their respective owners and are used for Fair Educational Purpose only.