What’s Driving Investor Interest in Birlasoft Ltd (NSE : BSOFT) ? Q2 Results Released!

Birlasoft Ltd. (NSE: BSOFT) was established in 1990 as part of the diversified CK Birla Group, one of India’s leading business and industrial houses. Birlasoft is the global technology services division of the CK Birla Group with a strategic ownership interest by GE Capital.

Birlasoft combines the power of domain, enterprise and digital technologies to reengineer business processes for customers and their ecosystem. The company’s consulting and design approach increases company productivity by helping customers run their businesses.

Birlasoft offers IT services worldwide from development centers in India and Australia. The IT services divisions of BSOFT and KPIT have merged to form a leading publicly traded company, Enterprise Digital and IT Services.

Management cited headcount growth, investment in building solutions and the nature of P&P’s hardware purchases as key factors, while gross margin remained strong. It expects the trajectory of margins to continue to improve.

Management mentioned that clients take longer to make decisions when placing orders. At the same time, clients are also extending the timeline of existing projects, meaning it may take them longer to complete a project, so the outflow of money is less for them, but they are still likely to continue projects, according to management.

Birlasoft had strengths primarily in digital business outside of ERP, while KPIT IT Services had core strengths in enterprise software solutions and capabilities in digital transformation services.

Over the past two years, the company has strengthened its global partnerships and alliances with key platform players and OEMs to provide customers with a wider range of solutions to accelerate the execution of digital transformation.

Birlasoft enjoys strong partnerships with SAP, Oracle, Salesforce.com, ServiceNow, Microsoft, Amazon, etc. With recent collaborations with Microsoft, Birlasoft has strategically positioned itself to support its enterprise clients with their cloud transformation needs, from infrastructure to enterprise applications.

Despite the challenges, the company was able to maintain its business momentum and deepen client engagement across geographies on T25 accounts. New orders this quarter came mainly from the autonomous diagnostics sector, while two new OEMs came from China (among the top 4 EV companies in China).

The demand environment continues to remain robust, especially in digital, cloud, and reinitiation of transformation programs. This demand is powered by customers looking at shorter and sharper returns and focusing on cost containment while improving their spend on value-driven initiatives. The deal pipeline is robust and traction
from both new and existing customers is good.

Management also sees a strong pipeline in electrification. In addition, the company is focused on retaining top talent and creating talent that is likely to drive earnings and churn in the coming quarters The company reported $138 million in new wins, the most in six quarters. It grew by 23% quarter-on-quarter and 33% year-on-year.

TCV’s total trading wins only reached $166 million (down 10% quarter-over-quarter) as TCV’s trading wins fell 62% quarter-over-quarter to $28 million. Vertical BFSI grew strongly at 7.4% quarter-on-quarter in the second quarter, but manufacturing growth moderated to 1.2% quarter-on-quarter.

Other verticals such as Lifesciences and Energy & Utilities fell 7.4% and 1.3% quarter-on-quarter, respectively. Despite macro uncertainty and deal shelving by cautious clients, management maintained double-digit FY23 growth in the 10% to 15% range and said it would approach the 10% mark.

The global economic and geo-political situation continues to remain volatile. Fluctuations in major currencies due to unstable economic conditions impact revenue and profits of the IT industry. This trend is expected to continue and
further volatility is expected due to the conflict in Eastern Europe region and unprecedented COVID-19 situation.

The Company has in place a Hedging Policy to minimize the risks associated with foreign currency rate fluctuations. The Company enters into forward contracts for hedging foreign currency receivables from its wholly owned subsidiaries and end customers.

EBITDA margins remained unchanged at 14.8%. Unfavorable margins due to low service delivery costs, low travel costs, higher offshoring mix and productivity improvements were offset by unfavorable margins in the form of high recruitment costs, increase in retention costs and additions reported in July 2022. Net profit in Rs. 115 million crowns decreased by 4.7% quarter-on-quarter.

Geographically, growth was led by the Americas (+11.2% quarter-on-quarter); growth in ROW and Europe moderated by 6.2% and 0.6%, respectively. Despite challenging macro conditions, there were no cancellations. However, there are delays in customer decisions and project postponements.

Birlasoft said the margin in Q2 was impacted by wage hike (covering 65-70% of employees), while there would be a spillover of 100 basis points in Q3 to cover wage hikes for the rest of the workforce. Subcontracting costs in absolute dollar terms stagnated quarter-on-quarter. Towards the end of Q2FY23, the company reduced the number of subcontractors, which is likely to benefit margins in Q3FY23.

The company also said that for some projects (including one large client where delivery was moved offshore from site to site due to a compliance requirement), it is moving to an offshore site delivery model to improve margins by saving on higher subcontractor costs.

The company mentioned that BFS was strong due to the increase in business as the sector now forms the legs of the cloud transformation. However, Lifesciences continues to see revenue decline due to rationalization part of the revenue, some projects completed and new projects yet to start and some client vacations affect the growth. However, the company expects the lifesciences vertical revenue to recover going forward. Birlasoft also said earnings in other sectors such as Hi-tech and Manufacturing were stable.

Going forward, BFSI and the manufacturing sector are expected to continue to grow strongly. In the life-science vertical, the focus should be on increasing the share of annuity income. Digital and enterprise solutions are expected to do well.

The company has transformed after its integration phase and has been able to expand margins, increase business volumes, compete with larger players and win larger business due to domain expertise and vertical focus coupled with increasing TCVs that drive revenue and we believe the growth trajectory continues.

Even with the new set of macroeconomic challenges including the war in Ukraine, inflation, high gas prices, talent shortages, aggressive Federal Reserve rate hike, and continuing supply chain hiccups: the outlook on IT
spending remains bullish, and projections indicate an overall increased spend on IT and Tech globally.

Despite challenging macroeconomic conditions, management is confident of achieving double-digit growth (close to 10%) in FY23, driven by strong demand, better execution, lower attrition and healthy wins.

Software Services and IT Services are forecast to be the two fastest growing categories of technology spending in 2022, and Birlasoft with its balanced business from Enterprise and Digital is placed well to tap into this opportunity.

Following the merger, the company witnessed a significant turnaround in terms of industry position as well as operational performance and profitability, leading to a significant re-evaluation. We believe that with strong growth visibility, healthy financials, no debt, robust TCV growth, top client growth, and Annuity’s growing ability to acquire larger business, the company is expected to continue its growth path toward the stated $1 billion revenue milestone. USD by FY25E.