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BIRLASOFT LTD

Current market price -: 277 Rs (Price on the date of publishing this report)

BirlaSoft is an almost debt free company, part of  CK Birla Group which has a rich heritage of 158-year of building sustainable communities. BirlaSoft is engaged in enterprise solution and digital technologies which includes Computer programming, consultancy and related activities. As of the latest balance sheet financials and the recent management comments the company is hungry for growth and is armed with cash and equivalents of 630 crores ripe for stellar growth in the coming period.

About Birlasoft and its Business strategy

Incorporated in 1990, Birlasoft combines the power of domain, enterprise and digital technologies to reimagine business processes for customers and their ecosystem. The Company has strong Enterprise solutions capabilities coupled with Digital capabilities, making it a formidable competitor in the market. 

Birlasoft has unique, industry leading capabilities from the Enterprise Product and Cloud solutions domain such as SAP, Oracle, JD Edwards, Salesforce.com, Service Now etc. 

The company has the highest level of partnership with SAP, Oracle as well as with Salesforce, a position unmatched by any other similar company. This Partnerships along with a strong referenceable customer base, enables Birlasoft to be an engaged and dependable partner of choice, bringing strong digital capabilities in ERP, Cloud enablement, RPA, Analytics, CRM, Digital and advisory services.

Birlasoft also possess significant ‘Digital’ capability in Analytics, RPA (Robotic Process Automation), Digital portals, User Experience and Digital advisory services. A large set of solutions and offerings continue to demonstrate the Company’s capabilities and presence in Application development, support and maintenance for next generation services in the digital world. The Company’s services and solutions are closely aligned with client priorities, making them the pivot around which Birlasoft can deliver value. 

About KPIT

KPIT Technologies Limited was incorporated in 1990, which provided software development, global IT consulting and product engineering solutions to its clients, predominantly in automotive & transportation, manufacturing and energy & utilities verticals. It was also engaged in the production of integrated systems, under product engineering solutions vertical. The Company was engaged in two business segments comprising of the enterprise resource planning business of Oracle and SAP, digital business IMS and EPLM business; and an engineering business which included solutions of electronic or mechanical engineering and usage of the data for diagnostics, maintenance and tracking of assets and related connectivity solutions including data and analytics beyond embedded or mechanical engineering and their connectivity and integration with backend IT systems and platforms. As on March 31, 2018, the Company had 17 subsidiaries, including step-down subsidiaries. 

BirlaSoft- KPIT Merger

In 2018, Birlasoft announced a complex process of merger and demerger whereby it will first merge with KPIT and then split the combined company into two units. KPIT, which is listed, got board approval for amalgamation with Birlasoft and then a demerger of its engineering business into KPIT Engineering (KEL). The IT company, which is Birlasoft, is focussed on digital and enterprise solutions.

Why Merger?

Explaining the strategy, the company operated across verticals such as manufacturing, life sciences, energy & utilities and BFSI (banking, financial services and insurance). Instead of being “everywhere”, it narrowed down on segments where it had an advantage.

For instance, in the manufacturing vertical, accounting for 38 per cent of its revenues, focus was on hi-tech offerings. In life sciences, focus was on medical devices. In an otherwise cluttered BFSI segment, Birlasoft targeted niche segments such as property and casualty insurance, risk assessment management or capital market solutions and services. The BFSI vertical accounts for 18 per cent of its turnover. Another 15-odd per cent comes from the energy and utility vertical, otherwise a high margin business.

An example of the focus on micro verticals is the changing mix of the contribution to top-line. Life sciences was 14 per cent a year-ago. Now, it has risen by 14 percentage points to 28 per cent. Similarly, BFSI is expected to grow to nearly 22-25 per cent of turnover, in the next few quarters. Thus it was necessary to focus on the strategic alignment of its business across major business verticals and exit from those where they saw limited growth or did not possess key expertises.

Effective January 1, 2019, Birlasoft (India) Limited and the IT services business of KPIT Technologies Limited merged to form a leading publicly listed Enterprise Digital and IT Services company named Birlasoft Limited. 

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Birlasoft has created a niche in the mid tier IT services companies following the merger with KPIT. Its core values of being an engaged and dependable challenger, combined with the strong client references and capabilities in the ERP segment has positioned us as a strong partner of choice for implementation, upgrades and cloud migration of ERP platforms 

The shares of the former KPIT Technologies Limited (NSE: KPIT) traded as ex-engineering business since January 24, 2019. The name of the former KPIT Technologies Limited (NSE: KPIT) and its stock ticker, changed to Birlasoft Limited and NSE: BSOFT respectively, after the change in name with the Registrar of Companies effective February 8, 2019. The shares of the former KPIT Technologies Limited’s Engineering Services business got listed on the stock exchanges and began to trade on April 22, 2019 with the Company name and ticker as KPIT Technologies Limited and NSE: KPITTECH respectively. 

As part of the multi-billion dollar diversified The CK Birla Group, Birlasoft with its 10,000 professionals, is committed to continuing its 158-year heritage of building sustainable communities. 

CK BIRLA GROUP

The CK Birla Group is a diversified US$ 2.4 billion conglomerate that has a history of enduring relationships with renowned global companies. 

With over 25,000 employees, 41 manufacturing facilities, 21 service delivery locations and numerous patents and awards, the Group’s businesses are present across five continents. CK Birla Group operates in three industry clusters: technology and automotive, home and building, and healthcare and education. The companies are strengthened by shared guiding principles that include a focus on long-term value, trust-based relationships and philanthropy. Each business is transforming to build on the collective strength and synergies of the Group’s size and span. 

Strategic Alliance with Esker 

Esker, a worldwide leader in AI-driven process automation solutions and pioneer in cloud computing, and Birlasoft Ltd [BSE: 532400, NSE: BSOFT], part of the USD 2.4 billion diversified, The CK Birla Group and a global enterprise digital and IT services company, team up to offer Esker’s comprehensive suite of Procure-to-Pay (P2P) and Order-to-Cash (O2C) automation solutions to enterprises globally.

Esker’s relationship with Birlasoft started with a need for a solution for the medical device industry that could automate its invoicing, accounts payable and order management processes. Esker’s solution would automate both P2P and O2C processes—while reducing overall IT spend. Birlasoft identified Esker for these capabilities and its AI-driven solution to quickly remove inefficiencies and redundancies, working with the new global ERP systems.

Strategic Alliance with Microsoft

Birlasoft recently announced a global strategic alliance with Microsoft and said it has plans to scale its cloud business to 100 million dollars (about Rs 748 crore).

With this collaboration, Birlasoft is strategically positioned to support its enterprise clients with their cloud transformation needs, right from infrastructure to business applications. Building on the current collaboration, Birlasoft will focus on delivering end-to-end services on Microsoft Azure, Microsoft 365, and Microsoft Dynamics 365 to its clients.  Together with Microsoft, Birlasoft will create innovative industry solutions and enable customers in focus industries to adopt Microsoft cloud technologies and services.

Strategic Alliance with Invacare

The large deal acquisition of Invacare Inc. as a full service customer, demonstrates the ability to win high value deals encompassing a comprehensive client transformation by implementing new age solutions such as SAP S/4HANA, and upgrading the underlying e-commerce platform to help open digital channels for growth

It has signed a multi-year agreement worth USD 240 million (around Rs 1,700 crore) with Invacare Corporation, wherein the C K Birla Group firm will deliver IT-as-a-Service to the US-based company.

Invacare manufactures wheelchairs, bariatric equipment, disability scooters, respiratory products and other homecare products. 

Birlasoft will accelerate Invacare’s business transformation by modernising systems, taking responsibility for the provision of service desk, applications, server, network and telephony support. Birlasoft will build a new analytics platform and move the Invacare data centre to the cloud. As a part of the IT transformation, Birlasoft will also implement a new product lifecyle management system, and Invacare customers will benefit from a new e-commerce portal to access products, spares and supplies, it added.

Financials

For the 3rd Quarter Ended Dec 2020
  • Company Reported 32.6 per cent rise in consolidated net profit at Rs 96.3 crore for December quarter of the ongoing financial year
  • Revenue from operations grew 5.7 per cent to Rs 880.7 crore
  • The company signed deals worth USD 109 million in total contract value (TCV) during the quarter. Its active client count was at 295.
  • In dollar terms, the company’s net profit grew 28.3 per cent to USD 13.1 million, while revenue was up 2.3 per cent to USD 119.5 million in December 2020 quarter from the year-ago period.
  • Birlasoft’s headcount stood at 10,399 at the end of December 2020 quarter, while attrition rate was 10.9 per cent.
For the Year Ended March 2020
  • Revenues from operations (consolidated) increased to Rs 32,909.69 million, a growth of over 29.00% as compared to the previous year. 
  • Earnings before interest, tax, depreciation and amortization was Rs 3,919.19 million on consolidated basis 
  • Net profit after tax (consolidated) decreased by 4.70% to Rs 2,243.48 million. 
  • In US Dollar terms, revenues from operations for the year on consolidated basis was $ 464.00 million as against $ 366.23 million during the previous year, a growth of 26.70% 
  • Standalone sales for the financial year 2019-20 grew by 45.90% to reach Rs 14,621.64 million. 
  • Net profit after tax increased by 32.90% to Rs 1,407.54 million. 
  • Cash and bank balances of the Company increased from Rs 3,617 M as on March 31, 2019 to Rs 4,496 M as on March 31, 2020 on account of improved operational efficiencies on a YoY basis. 

Going Forward

Annuity-based offerings would also allow Birlasoft to penetrate into APAC markets (Asia-Pacific countries) and Europe. It would also reduce risk of over-exposure into the US – which is witnessing increased protectionist measures and stringency in visa norms – that account for 74 per cent of turnover.

May be in two years we will have 66-68 per cent of the turnover from the Americas and 15-16 per cent from Europe (up from the existing 12 per cent). Rest of the World’s contribution is likely to improve to a significant 17-18 per cent (from 13 per cent)as said by the management.

Management’s Comments

Recent comments made by management indicate that they are very confident of reporting 15-plus per cent EBITDA margins, even as direct costs, such as that for travel for employees, are being restored post the Covid lockdowns. The company reported over 16 per cent EBITDA margin for the quarter ended December 31, 2020.

According to Dharmender Kapoor, CEO and MD, Birlasoft, new contracts/deals are being pursued aggressively in the January-March quarter, and there has been an increase in contract size from existing clients. The company is expected to end the fiscal with nearly 70 per cent annuity revenues.

Further Platform tie-ups with companies such as Microsoft, Salesforce, AWS (Amazon Web Services) and even Google are being strengthened and explored in a bid to boost revenues.

COVID IMPACT

The global spread of the coronavirus has resulted in simultaneous supply and demand shocks, and will materially slow down economic activity across all sectors. The Indian IT services industry is also expected to see an adverse impact over the short term . As a result the IT Services market is facing an unprecedented set of challenges as a result of COVID-19. 

Birlasoft is witnessing healthy traction in cloud migration, app modernisation and workplace modernisation. Further, the company has partnered with Microsoft to drive cloud migration of on premise SAP and JD Edwards. In addition, Birlasoft has improved its annuity revenues to 67% and is targeting 70% annuity revenues in FY22E. This coupled with healthy deal pipeline & focus on multi-year deal wins gives the company confidence on achieving double digit revenues in FY22E. In addition, Birlasoft’s focus on client mining (as seen in the current quarter top 20 up 20% YoY), healthy order book, focus on niche verticals, cross selling opportunities and expansion in Europe & APAC bode well for long term revenue

Some of the new opportunities seems to have been emerged post COVID-19: 

  • WFH, a model of engagement for the continued delivery of Run the Business (RTB) has opened up opportunities for a more sustained way of working. This in turn is forcing organisations to increase their focus on cyber security, infrastructure, operational resilience and business continuity. 
  • Virtual engagements across business functions is driving the need for collaboration tools for voice, text and video. Application development is rapidly moving towards a location independent agile delivery model, and secure borderless workspace. This has also created additional need for data security, increased storage and productivity tools. 
  • Digital modernisation and acceptance is increasing due to the need to augment revenue which is under pressure through traditional channels. This will entail a rapid adoption of digital enablement through transformation, cloud migration and mobility trends. 
  • Increased cloud adoption, automation, digitisation of processes will drive the growth of Artificial Intelligence and Machine learning paradigms to become the new norm. 
  • Health and Safety including contactless services will impact organizations to deliver a safe workplace for employees and services for their end clients. 
  • Commercial models will lean towards a consumption based service delivery for continued cost measures and financial acumen. Customers will seek partners who can provide services in an agile, adoptable and shared risk basis. 

Birlasoft, with 50% revenue from Enterprise Solutions and ~38% from Digital is well positioned to leverage the opportunity of digitization of services at a faster pace. The Company identifies itself as a Digital Enterprise Company and aims to deliver superior business value by combining the strength of its domain and technical capabilities.

AWARDS

The CK Birla Group was recognized as India’s Most Admired & Valuable Power Brand Company for the year 2020, at the India Leadership Conclave & Awards 2020 held, via a virtual ceremony, on 26 December, 2020. In its 11th edition, this Network 7 Media Group’s flagship annual event has been successfully bringing together the finest minds of the society under one platform.

This year’s theme was Rebuilding India: Opportunities in the Pandemic. The India Leadership Conclave (ILC) 2020 conferred awards on those companies and individuals who have shown remarkable resilience and achievements in a very tough and hostile environment.

Conclusion-:

Birlasoft a part of $2.4 billion CK BIRLA Group being completely deft free makes is a very unique IT Company. The management is very confident of achieving 15% EBIT margins In the coming period and further maintaining those margins. Additionally management is also aiming for a billion dollar company in terms of revenues in the coming 4-5 years which compared with the current revenues is more than double . Going by the rough numbers and taking into account the management’s comments this translates into operating profit of $152 million up from $53.26 million which is 186% flat growth or about 23% CAGR over 5 years period. Additionally company has cash balance of Rs 630 crores which can be used for inorganic expansion via takeovers and also many mutual funds have recently added BirlaSoft to their portfolios. Thus this is what makes it worth Exploring for long term.

Please note that above expressed are our own views. Users are requested to take their own decision regarding investments. No member of DARKHORSESTOCKS would be responsible for any loss.

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