This smallcap tech stock rallied over 300% in one year, 22% this week

Birlasoft, the smallcap software services provider, clocked more than 300 percent gains in the last one year following the sustained momentum in the IT space. In fact the stock surpassed Rs 300 mark for the first in its history in May 2021, and hit a record high of Rs 341.80 on May 27, registering more than 22 percent rally in the current week, especially after healthy earnings growth with robust deal wins in the quarter ended March 2021.

Analysts, who cover this stock, reiterated their bullish view with a “buy” call following quarterly earnings, and expect strong earnings, at least, in the coming couple of years.

“We maintain buy on Birlasoft with a revised target price of Rs 335, given strong earnings growth potential and reasonable valuation,” said Sharekhan which expects the company to report revenue growth at a 15 percent CAGR over FY2021-FY2023 and earnings to record a growth of 27 percent CAGR.

Net cash improved to Rs 1,119 crore at the end of March 2021, implying 15 percent of market capitalisation of Rs 7,439 crore on May 21. The market cap on May 27 stood at Rs 9,100 crore, implying over 22 percent growth from last Friday’s closing.

Birlasoft, a part of the $2.4 billion diversified CK Birla Group, combines the power of domain, enterprise and digital technologies to reimagine business processes for customers and their ecosystem.
The net profit at Rs 99 crore in Q4FY21 grew by 2.7 percent sequentially and 43.3 percent year-on-year. Revenue in rupee terms rose 2.5 percent quarter-on-quarter to Rs 902.9 crore and the same in dollar terms grew by 3.2 percent to $123.3 million during the quarter, mainly led by healthy growth across verticals.

The manufacturing vertical increased 3.7 percent QoQ, energy & utilities up 3.2 percent QoQ, and lifescience up 4.0 percent QoQ.

The company reported impressive operating performance in Q4, with EBIT (earnings before interest & tax) rising 8.4 percent sequentially to Rs 134.6 crore and margin improving 81 bps QoQ to 14.9 percent. Margin improvement was largely led by growth leverage, reversal of bad debt provisions and higher billing days offset by wage hike and higher recruitment costs.

In the pandemic year, FY21, profit increased by 43 percent to Rs 320.8 crore and revenue rose by 8 percent to Rs 3,555.7 crore compared to previous year, while the dollar revenue grew by 3.4 percent to $479.6 million during the year.

Birlasoft said it signed deals of total contract value (TCV) $326 million during the quarter (including renewals of $164 million) and $888 million in FY21.

“The pipeline has improved (up from $600 million as of start-FY21 to $1.2 billion currently), while a proactive approach is leading to higher conversion along with a rise in the share of annuity business (over 70 percent in Q4 versus 60 percent in Q1),” said Elara Global Research which reiterated buy with an unchanged target of Rs 316.

“Growth foundation post corporate restructuring, improving deal wins, expected recovery in ERP services lends comfort on 12 percent USD revenue CAGR estimated over FY21-23 while continued cost optimization initiatives should help sustain over 15 percent EBITDAM margins. Strong cash generation, net cash of Rs 1,119 crore and improving pay-out provide cushion,” said the brokerage which reiterated that the sharp rally in the stock price has raised expectations of consistent execution, which remains the key to further rerating.

ICICI Direct also maintained a buy call on the stock with a revised target of Rs 315 (against Rs 310). “Improving client mining, healthy deal pipeline, cross selling opportunities, increase in deal sizes, project ramp ups, reversal of discounts and anticipated higher net new growth bode well for long term revenue growth. Further, robust margins and healthy cash balance (inorganic expansion or healthy dividend payout) prompt us to maintain buy rating,” it explained.

Birlasoft recommended a final dividend of Rs 2.5 per share, taking the total dividend for FY21 at Rs 3.50 per share, with dividend pay-out ratio of 30.2 percent for FY21.

The management is confident of strong double-digit growth in FY22, led by ramp-up of large deals, robust deal pipeline, strong top accounts mining, and favourable demand environment across verticals.

“The all-round improvement on all operating metrics is very reassuring and sets the foundation for continued momentum into FY22. With due focus on a robust customer centric strategy to win more transformational, multi-services and long-term deals, combined with operational rigor, we are confident of accelerated growth in FY22 and beyond,” said Dharmender Kapoor, Managing Director and Chief Executive Officer at Birlasoft.

Among other analysts, Emkay Global upgraded Birlasoft share to buy with revised price target of Rs 330 (against Rs 290), with improving earnings predictability (annuity revenue increased to 70 percent in Q4FY21 from 60 percent in Q1FY21), strong earnings trajectory (around 27 percent EPS CAGR over FY21-23E) and robust cash generation.

The brokerage raised its FY22 and FY23 EPS estimates by 4.2 percent and 2.7 percent respectively, factoring in Q4 performance beat, and increasing revenue/margin assumptions as well.