Sharekhan Suggests Buy This Multibagger Small Cap IT Stock, Sees 20% Potential Upside

Sharekhan has placed a "buy" call on Birlasoft Ltd for a decent return of around 20% in 12 months with a target price of Rs335 per share. Birlasoft is a small-cap IT Software company of CK Birla group. It has a market capitalisation of Rs 7,632.64 crore.

Birlasoft is a multi-shore business application global IT services provider with a presence in the United States, Europe, Asia-Pacific and India. It operates development centres in the United States, China, Poland and India. Birlasoft counts Fortune 100 enterprises across manufacturing, banking & financial services, insurance, media and healthcare industries as clients.

Stock Outlook & Returns

The current market price (CMP) of Birlasoft stock stood at Rs 280.40 per share on NSE. Its 52 week low level recorded in October 2022 is Rs 268.95 and the 52 week high level recorded in January 2022 is Rs 585.85, respectively.
The stock in a week has moved down by 0.85%, whereas, in 3 months it fell by 17.14%. Over the past 1 year, it gave 32.81% negative returns. In the past 3 years, it gave a multibagger return of 324.85%. While in the past 5 years, it gave 121.75% positive returns.

Weak Q2; Guidance reiterated despite macro challenges

Birlasoft's Reported USD revenue at $149 million stayed flat sequentially and was 1.1% below our estimate of $151 million as service offerings posted weak sequential growth. The high sequential growth in BFSI vertical was offset by the continual sequential decline in Lifesciences and Energy & utilities vertical. EBITDA margins at 14.8% stayed flat sequentially as margin tailwinds of low travel costs and better productivity were offset by increased hiring and retention costs. Net profit at Rs. 115 crores declined by 4.7% q-o-q and was 7.9% below our estimate of Rs 125 crore due to lower than expected other income (owing to FX loss of -6.28 crores), which got partially offset due to lower tax rate on account of tax refund in USA. Company reiterated its double-digit revenue growth guidance and EBITDA of about 15% for FY2023. 

Key Positives & Negatives

According to the brokerage, the key positives are as follows:

Reported TCV of new deal wins at $138 million which was the highest in the last six quarters. Strong sequential growth of 7.4% in BFSI vertical. 

According to the brokerage, the key negatives are are as follows:

Sharp 6.1% sequential decline in Enterprise solutions and continual q-o-q decline in Lifesciences and Energy & Utilities vertical by 7.4% and 1.3% respectively. 
Number of active client increased only by 1 q-o-q to 301. 
High attrition rate at 27.4% and weak headcount addition. 

Management Commentary

Management maintained its double-digit revenue growth guidance of 10%-15% for FY23. EBITDA margin guidance of about 15%-17% in the long term. Management had a positive outlook for BFSI vertical but weak outlook for Lifesciences and Energy & Utilities. No material progress in its plan to acquire companies. Revision in estimates - We have fine-tuned our earnings estimates for FY23/24 owing to macro overhang and INR-USD reset and have introduced our FY25 earnings estimates. 

Valuation & Risks - Maintain Buy with a target price of Rs 335 per share

"We remain positive on the stock considering robust partnership with hyper scalers, healthy deal intake, robust demand from enterprise customers and inorganic opportunities. Hence, we maintain a Buy rating on Birlasoft with a revised price target (PT) of Rs. 335. At CMP, stock trades at reasonable valuation of 15.7x/14.3x/12.8x FY23E/FY24E/FY25E EPS," the brokerage has said. 

According to the brokerage, the key risks, Rupee appreciation and/or adverse cross-currency movements and/or constraint in local talent supply in the US would affect earnings. Further, macro headwinds and possible recession in the US are likely to moderate the pace of technology spends. 

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.