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Birlasoft - Ambitious, or super normal?

Our coverage of the midcap IT stories here at Valuepickr has missed Birlasoft, and I thought it’s time we keep a record of the investment thesis, and it’s development for posterity.

What’s the play?

Giant IT services companies like TCS and Infosys are the middlemen between customers that want to adopt modern solutions to cut costs, and pure tech companies such as Microsoft, Google, etc. that form their backbone.

We’ve seen the following trends in the last few years:

  1. Having modern digital solutions to legacy problems are often an avenue to improve productivity and improve margins for companies. Covid has accelerated this spend, and will be a key driver of growth going forward.

  2. Smaller IT companies have realised they can’t compete with giant incumbents and have healthy margins at the same time. The emerging solution seen across the pack is that they pick a few verticals and become the best solutions provider in their own niche.

Goal is to carve a niche in our verticals where we are better than the big players. We can’t solve every problem, but what we choose to solve, we can do much better than anyone else. - Dharmender Kapoor, interview with BQ, June 2021.


Okay, what are their verticals?

They have four main verticals. From the 2021 annual report:

Birlasoft helps customers in manufacturing to accelerate their Industry 4.0 adoption.

  1. BFSI - to leverage open APIs and automate both front-office and back-office transformation;
  2. Energy and Utilities - to enhance field collaboration and real-time service excellence, optimize operations and improve asset performance;
  3. Life Sciences - to automate drug discovery and pharmacovigilance processes.

Here’s how the revenue mix has changed over the years:


Why now? What has the journey been in the last few years?

The story becomes interesting after 2015, when Birlasoft brought in Anjan Lahiri, and he worked on the company until 2019 when two things happened. They merged with KPIT Technologies and became the digital enterprise company of today, and Anjan Lahiri stepped down due to urgent personal reasons.

After this, they revamped the board, with Mr. Dharmender Kapoor taking over as MD, and in the last two years have onboarded senior talent. Their current CFO has been on the IBM senior management for 20 years, and this trend has continued if one looks at their hiring on Linkedin.


How has their business model evolved?

  1. They’ve started focusing on their top clients and have trimmed tail accounts. Furthermore, they’ve started selling more to their top clients across their verticals. This is seen through three data points in FY21:
  • Lower $1 million deal wins, more $5 million deal wins.
  • 97% of new deals are from existing clients.
  • Increasing TCV trend in deal wins, FY21 was their best year.
  • Annuity has improved from 60% in FY20 to 70% in FY21.
  • Deals are now multi service rather than single service. New deals don’t necessarily fall into one vertical.

  1. They are constantly working on internal efficiency to improve operational metrics. The key metric management mentions repeatedly is the Days Sales Outstanding, and Utilisation rate:

Revenue per headcount across the quarters:

Q1FY22 Q4FY21 Q3FY21 Q2FY21 Q1FY21
Operating Profit (lakhs) 15100 15200 14400 11900 11300
Technical Employees 10445 9994 9416 8992 8865
Profit/Employee 1.44 1.52 1.52 1.32 1.27

This has been steadily improving, with a drop in the latest quarter. Management commentary on the same:

We lost $1 million of bottomline due to covid. Employees in India took leave when the second wave hit, and we didn’t dock their pay. Without this, the quarter would have been even stronger.

Accounting for this, the profit/employee for this quarter would be 1.52 as well.

The last data point is important while considering the difference in wage costs between India and the US.

From the latest earnings call on the onshore/offshore mix (paraphrased):

We usually hire locals (onshore) if there is a crunch, as the hiring lead time is a lot quicker than in India where there is a 3 month lead time. When we hire offshore, we replace onshore subcontractors. Clients are also on the same page with starting projects on site and finishing it offshore. We improve our margins, they get comfortable with deal structure.


Okay, numbers are improving. Do they have ambition?

Paraphrasing what Mr. Kapoor said in June’s interview with BloombergQuint:

By 2025, we want to have 7500 Cr. of revenues (3500 Cr. today, implies ~18% CAGR). We will do this by:

  • Growing top 30 accounts by > 20%;
  • Platform strategy: partnership with Azure / AWS to offer solutions across the value chain;
  • New channel for sales; good partnerships already in place.

Expecting profit CAGR to be much higher than revenue CAGR in the next 4 years. Profitability will grow. 3-4 quarters ago, this target of billion dollars was a dream. 2 quarters ago it became aspirational. Today, I’m far more optimistic and it’s looking like it can be a reality.

Absolutely no doubt that I and other top management will continue to work at Birlasoft until this goal is met. They’re motivated, excited, and handsomely incentivised to stay. We have our plans set in place for the next 3/4 years.


Financials and Cash Flows

  • Are currently debt free and have 1100 Cr. of cash in hand.

Risks

  1. The vision is entirely dependent on Mr. Kapoor and his close circle. If they leave in the next few years, big questions to ask.

  2. Dependent on their partnerships with SAP, Microsoft, AWS. Currently a Microsoft gold partner, which gives them benefits to companies searching for solutions providers.

  3. Execution - Reliant on better deal wins and client mining to meet their 7500Cr. target.

When we acquired KPIT, used to think 75 million dollar deal wins were a great target for a quarter. Today, 200 million dollars should be the average every quarter.

However, Q1FY22’s deal wins have fallen short of their own metrics.

  1. Their target of 1 billion dollars is a nice headline, but it implies a mid teen CAGR going forward. This is something we have heard from other midcap IT companies like FirstSource. Hence, is their target super normal?

Disclosure: Invested from lower levels, no recent transactions.

With current valuations, it’s becoming increasingly difficult to find low hanging value fruit. This post isn’t necessarily to offer a slam dunk investment opportunity, but to track a company here that may become more attractive/unattractive going forward.

Two amazing sources of information on the company:

From our very own board member:

Finally, to those with a BQ Blue membership, the BQ Edge series with White Oak is a lovely window into the smaller IT companies.


Will write further posts on management commentary, and takeaways from the earnings call.

20 Likes

Many big guys are holding it too ( Ashish Kacholia 1.2% and Ashish Dhawan 2.9%)
But Im only skeptical because they did sell some of their holdings (0.6% and 0.8% respectively.)

We shouldn’t analyse businesses and make decisions based on big investor churn. There are any number of reasons to sell a business, we don’t know what their strategy is for portfolio allocation, and what they want to do with the money.

Institutions also vary from underweight to overweight depending on valuations and the market cycle. Also the Sharpe ratio for each of their entry levels is different.

IDFC Sterling Value Fund averaged down until March 2020, and decided to trim their position as the stock price moved up. They would have decided for Birlasoft, we want to hold X% in our portfolio this quarter and have sized accordingly.

Lots of new entrants in June, from Tata Digital India to Aditya Birla Sun Life.

This is only one of many things to think about with the business, but I don’t think one can be skeptical purely based on this movement.

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Highlights from the Q1FY22 earnings call, and my takeaways from the BQ management interview. Posting takeaways from both, as similar themes were addressed.


  1. Was the quarter disappointing by your own standards?

No, Q4 is usually the strongest quarter for IT companies in India, as Q1 in the US is when they take on their new initiatives. If we look at FY21, the biggest revenue driver was the cross selling. We didn’t have
new accounts as there was a travel ban. We didn’t travel and meet new clients. This has resumed and is looking strong going ahead.

Our EBITDA is in line with the market’s impact due to covid. Attrition and Covid has had an effect on everyone. No surprises here.
Q2 will have a wage hike for most of the IT companies, but we’re fully prepared and have looked at recovering wage hike effects through
different segments. Confident to beat margin expectations, will see this effect in Q3 and Q4.

  1. Large client wins have increased. Tell us the nature of the deal wins

There was a key trend in the last 10-15 years for IT sector, where we saw some really huge deals. Now, clients prefer smaller deals and for a shorter period of time. Companies want to be more agile, and want to see results every year in real time. The cumulative TCV may be
as large as we saw in the last decade, but we’ll only see that through multiple renewed contracts rather than in one go.

This year will be even better, as there is significant focus on mining our largest clients. We put a huge amount of focus on our platinum and gold accounts, and those are doing really well. We will see them moving from one basket of revenue to the higher basket of revenue. There are quite a few customers moving in this direction. Cross selling is already happening.

Demand has been really strong, and supply side is where we have constraints. This has come after many years in the IT industry, and is
very welcome. What’s also important is the work culture, because we see hybrid work culture sustaining for a very long time. Processes
and procedures on hiring will be very different going forward, and we’re adapting to a model that will bring us a great edge in the long
term. The high demand teaches us many things that we need to do.

  1. On attrition

Key personnel are stable. Attrition is in junior levels, where talent move across different companies. This is a part of the industry. Despite the attrition, we’ve added on 500 employees. This isn’t a quarter/quarter story but a multi year story. When we hire from colleges, we train and upskill them so our pyramid stays intact. We should also focus on upskilling and offshore/onshore mix as much as the attrition.


  • Tax rate for Q1 is 24.9%. This is due to a new regime, and will be 26-27% going forward.

  • Spent 1.5 million dollars on Capex this quarter.

  • Expect travel expenses to come back in H2FY22.

  • Expecting 14-17% growth this year with top accounts.

  • Digital services saw significant growth. Key point → developing relationship with our OEMs. For client → we will remain technology agnostic. On the backend → work on building all relationships to have freedom to choose best solution for client.

  • With Microsoft, progress is very good. It began at one type of solution on the cloud, now we go and sell across the board. This partnership
    is scaling up very well for us.

  • By the end of this quarter, we’ll know more about wave 3 and we can be more confident of guidance. I would rather underpromise and
    overdeliver.

  • Pipeline is 15% higher than Q4. Quarters will improve.

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Thanks for introducing a nice company to this forum, an excellent post.
Am reminded of Prof. Sanjay Bakshi’s analogy of honey pot and the flies. If focused verticals are giving an edge over competition, wouldn’t others follow the same strategy
Disc: Invested 2 percent

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Birlasoft Named as a Leader in SAP S/4HANA System by Information Services Group (ISG), a leading global technology research and advisory firm.

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How much % of the revenues is digital?

Is there a way to segrate digital vs non digital? Can anyone explain?

https://www.tijorifinance.com/company/kpit-technologies-limited/#revenuemix

Strategic partnership with an “In the spotlight” SaaS Company - Freshworks and yet still no movement in Birlasoft.

Off late, their order wins QoQ have been little lumpy to the comfort of street to win best valuations. I think once the order win and pipeline becomes more consistent and stabilizes, there can be rerating to valuation levels of other top midcap IT.
Disc: Small tracking position, I maybe wrong in my assessment

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is ownership title clear between lodhas & birlas ??
some court cases were going on since last few years