B&K Securities Initiates Coverage On Birlasoft With A 'Buy'

B&K Securities has initiated coverage on Birlasoft Ltd. with a 'buy' as it expects the company to benefit from an increased client spending on digital services.

Global demand for information technology services is experiencing a huge tailwind backed by increased spending on cloud and digital, B&K Securities said in a report. Today, with Birlasoft's 60% revenue coming from the two segments, and 40% from enterprise solutions, it is well-positioned to leverage on that, it said.

Gartner expects outsourced IT services spend to grow at an annualised rate of 8.6% over 2020-25. The Indian IT industry, according to Nasscom, is expected to grow to $350 billion by 2025 from $198 billion in 2021.

B&K Securities has set the price target on the CK Birla Group-backed Birlasoft at Rs 650 apiece, an implied return of 29.13%. At the current market price, the brokerage said, the stock is trading at 23 times and 19 times the estimated FY23 and FY24 earnings per share.

The stock is "attractively d" among peers, and considering the high growth opportunity and margin expansion, it's expected to be rerated, the brokerage said.

All 10 analysts tracking the company maintain a 'buy', according to Bloomberg data. The 12-month consensus price target implies an upside of 9.4%.

Other Highlights From Report:

• Focus on building a relationship with Microsoft earlier, now with Amazon Web Services, and aim to engage with Google will make it hyper-scaler technology agnostic for clients.

• Birlasoft is strengthening product and solution capabilities to capture the opportunity in digital and cloud.

• Balance between digital and enterprise solution makes it a strong contender among peers.

• Including inorganic, Birlasoft has the potential to reach $1-billion revenue in FY25E with 16% EBIT margin

• Expects the software company to deliver revenue growth of 18% and profit after tax of 25% over FY22-24E.

• The return on capital employed is seen to reach 30% in FY24E against 24% currently.

Shares of the company were trading 0.69% lower as of 1:52 p.m. on Wednesday compared with a 0.36% fall in the benchmark Nifty 50.