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Birlasoft Share Price: Market pundits are of the opinion that the ongoing rally in Birlasoft, the software arm of CK Birla Group, will continue its upward trajectory as the company reported a 43.3% rise in its net profit Rs 99 crore in the fourth quarter in FY21 from Rs 69 crore due to sharp cost controls.

Shares of this smallcap IT company have become the talk of the town as they have rallied 323% in the last 12 months. The scrip zoomed from Rs 72.9 on May 26 2020, to Rs 308.5 apiece at yesterday’s close.

To put it in perspective, an investment of Rs 10,000 in this stock has now grown to Rs 42,318. On the other hand, Sensex has rallied 65% whereas the BSE SmallCap index has rallied 120% during the same period.

Restructuring
In January 2018, the management of KPIT proposed a merger and demerger with the C.K.Birla Groups privately held IT Services company, Birlasoft. In the first leg of the restructuring, a merger of KPIT and Birlasoft took place to create a $700 million-plus entity.

In the second leg, both the entities were demerged with KPIT Technologies taking the automotive engineering and mobility solutions business, that evolved out of the engineering business of KPIT

While Birlasoft emerged as a new digital business IT services company, focusing on mid-tier IT space, formed by combining Birlasoft with KPIT’s IT business.

The rationale behind the merger and demerger process was to enhance the potential of growth, profitability thereby creating value for the individual businesses.

Fuelling the rally

In Q4FY21 Birlasoft’s revenue from operations declined marginally to Rs 902.8 crore for the quarter ended March 2021 compared to Rs 907 crore in the year-ago period. EBITDA margin improved by 48 basis points q-o-q to 16.9% despite wage hikes, led by revenue growth, lower bad debt provision, and higher billing days.

The company informed that the revenue for Top 5, Top 10 & Top 20 clients grew by 21.1%, 19.8%, and 19.2% respectively in FY21.

On an FY21 basis, the company earned revenue of Rs 3,557 crore 8% higher than FY20. Whereas its earnings before interest tax depreciation & amortization (EBITDA) came in at Rs 529 crore jumping by 35% as EBITDA margins expanded by 299 basis points to 14.9%. The net profit of the company stood at Rs 320 crore surging 43% compared to the previous financial year.

It reported a record deal win rate of $888 million in total contract value (TCV), with the highest ever order book of annuity and digital deals. The company is eyeing the $1 billion mark of total income.

Outlook & Brokerages view 

The management is confident to achieve double-digit growth in FY22 and is looking to keep its EBITDA margins at 15%+. The payout in the next few years is likely to rise gradually. Looking for M&A opportunities with a revenue size of $150-200 million.

Anand Rathi | Target price: Rs 350

Net new total contract value (TCV) of $429m ($433m in FY20), Birlasoft ended FY21 on a high. In renewals, it booked $459m ($236 in FY20), reflecting the rising share of its annuity business. It guided to double-digit growth in FY22, its first year of industry-level growth after the acquired business was integrated. Tailwinds from rising offshore helping offset some supply-side pressure. Raise target multiple to 20x FY23e EPS (from 18x), reflecting steady execution and strong deal wins in Q4. Also, raise our FY22e/FY23e EBITDA 6% /3%.

Sharekhan | Target price: Rs 335

Raise earnings estimates for FY2022E/FY2023E on account of impressive margin performance in Q4FY2021, strong deal wins, improving annuity revenue, and sharpening focus on top 30 accounts. Company’s revenue and earnings to clock a 15%/27% CAGR over FY2021-FY2023E, led by ramp-up of large deals and anticipated strong growth in top accounts. At the CMP, the stock trades at 18x/15x its FY2022E/FY2023E earnings. Further, net cash on the balance sheet stood at Rs. 1,119 crore (~15% of market capitalisation) and free cash flow generation to remain strong.

(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)