Birlasoft shares surge 6% on above-estimate Q2 profit, margins; should you buy the IT stock?

Birlasoft shares price soared more than 6 percent on November 1, a day after the company reported better-than-expected operating performance in the September quarter. The company’s revenue and net profit grew more than estimates, due to account mining and deal ramp-ups.

Analysts believe that Birlasoft, under the leadership of the new CEO, has come out strong post-bankruptcy of their key U.S client Invacare. Brokerages remain cautious on the stock, given that the macro environment remains challenging.

At 11:00 am, Birlasoft shares were trading at Rs 579.50 on the National Stock Exchange.

According to analysts at Nuvama, Birlasoft’s total contract value (TCV) has started to show green shoots, after being tepid. TCV is the potential revenue from a given customer. It includes all recurring subscription revenue as well as one-time fees that may be associated with the contract, such as implementation fees.

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Analysts like Birlasoft because of its operating performance beat, strong performance in Americas and Digital and Cloud, moderation in attrition, and healthy cash conversion in Q2 FY24. Birlasoft has guided for Q3 growth to be muted, considering the impact of furloughs and lower working days. It will be focusing on in-quarter execution to negate its impact and expects growth to recover from Q4.

Should you buy, hold or sell Birlasoft stock?

Given Birlasoft’s fair valuations, Emkay Global has retained a ‘Hold’ rating on the stock with a revised target price of Rs 540, up from Rs 520 earlier. The brokerage upgraded its FY24-26 EPS by 1.4-3.5 percent, factoring Q2 beat. Nuvama Institutional Equities also has a ‘Hold’ rating on the stock as it believes that the current valuation adequately captures the near-term growth potential, and leaves limited upside potential.

Analysts at HDFC Securities Institutional Equities (HSIE) believe that Birlasoft’s return potential is a combination of earnings growth trajectory (accelerating) and multiple rerating, supported by resilience and scalability of service portfolio, strong relative positioning, and recent leadership refresh.

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“While growth acceleration and deal velocity are supported by changes in incentive structure and latent demand in ERP services, the margin upside is premised on improving business mix (BFSI traction), streamlining delivery organisation and sub-contracting optimisation,” it said. The brokerage has a ‘buy’ rating on the stock with a target price of Rs 650.

Meanwhile, Nomura also has a ‘buy’ call on Birlasoft with a target price of Rs 630 per share. According to the international brokerage, the company’s strong deal wins momentum improves medium-term visibility. Analysts raised FY24-26 EPS by 2-3 percent, saying that the new CEO’s strategy is working.

Key risks

According to Nuvama, Birlasoft (pre-merger) had strengths primarily in non-ERP digital businesses, while peer KPIT’s IT services with horizontal-led strategy had core strengths in Enterprise Solutions. “Over the past two years, the management had done a good job of streamlining all the moving parts–building a team, integrating relevant parts of KPIT, cleaning up tail accounts, building relations with Microsoft and AWS and consistently by focussing on deal pipeline,” the brokerage noted.

However, the company also probably erred in not building on adequate staff strength, which hit them hard, during times of high attrition across the industry, it added. The company is undergoing a transition with the new CEO Angan Guha at helm, and in this phase, it has been hit further by the bankruptcy of one of its largest clients.

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“We believe the company is likely to underperform its peers, in the near to medium term, as the new management takes its time to navigate through these multiple issues,” said Nuvama.

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