Birlasoft Says On Track To Transition From ‘Mario To Super Mario’

Edelweiss Securities Ltd. has called mid-cap information technology companies that are growing in size as turning from “Mario to Super Mario”, a pun of videogame of the 1990s. Among them, the brokerage has listed Birlasoft Ltd. as a potential sector outperformer, citing its performance in the fourth quarter.

Birlasoft Q4 Highlights (QoQ)

• Revenue rose 3.2% sequentially in the three months ended March.

• Operating income rose 6.2% even after salary hikes.

• The company recorded $326 million worth of new deals.

Dharmender Kapoor, managing director and chief executive officer at Birlasoft, is confident of an improved 2021-22 fiscal. While there are a lot of unseen elements, he said the company will deliver better growth over FY21, while maintaining the 15% Ebidta margin.

Kapoor said there is a probability of more than one round of wage hikes to retain talent and may also have to pay fresh talent more. But he said Birlasoft has made provisions for some of these uncertainties. While the company has cut the costs that it could have easily done, there is still room, he said.

According to Edelweiss, the company can take margin higher from the current 15% to over 17% in FY23. Kapoor said economies of scale can make that possible.

“We were a small company, and we knew we cannot be everything to everyone.” Kapoor told BloombergQuint's Niraj Shah in an interview. “We had to identify niches where we can be better than the bigger players.”

He said the company has changed its approach and is not married to a particular technology. While Birlasoft is known as an enterprise resource planning (software used to manage a client’s processes), Kapoor said the revenue is evenly between split between ERP and digital. Cross-selling to customers has helped win business from existing clients, who contributed 95% of new deals, he said.

Kapoor is optimistic about larger deal wins. The company will be able to manage a run rate of nearly $200 million dollars on average every quarter, and will look to improve upon that, he said, adding that it will help Birlasoft meet its $1-billion revenue target in four years.

“We want to be a billion-dollar company by 2025. It was an aspirational target two quarters ago but is looking now that it can be a reality,” he said. “Our profit growth will be higher than the revenue growth in this journey.”

Brokerage View

Edelweiss Securities

• The brokerage has a 12-month price target of Rs 551 apiece for Birlasoft, implying a potential upside of about 41%.

• The target estimates a valuation of 25 times estimated earnings in the second quarter of FY23.

• The brokerage said it's at a 17% discount to peer Persistent Systems Ltd.’s multiple and 28.5% discount to Larsen & Toubro Infotech Ltd. valuations.

• That’s because Birlasoft’s annuity business is still lower than optimum (70% versus 80% for mid-cap peers).

Elara Securities

• Reiterated ‘Buy’ rating with an unchanged target price of Rs 316, lower than the current share price of Rs 391.

• It maintained valuation at 18 times estimated earnings per share of Rs 17.5 in FY23.

• Growth foundation post corporate restructuring, improving deal wins, expected recovery in ERP services lends comfort on 12% dollar revenue CAGR estimated over FY21-23E.

• Continued cost optimisation initiatives should help sustain 15%+ earnings before interest, income taxes, depreciation, amortization, and management fees margin.

• Strong cash generation, net cash of Rs 1,100 crore and improving payout provide cushion.

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