This Small Cap Birla IT Stock Could Gain, “Buy” Says Emkay Global

Broking firm Emkay Global has a "buy" call on the stock of small cap IT Stock Birlasoft. The brokerage sees an upside potential of nearly 20% from the current levels of Rs 268. Let us take a look at why the brokerage is optimistic on the stock.

Birlasoft: Disappointing operating performance

According to Emkay Global, Birlasoft reported a disappointing operating performance in Q3FY23 and reported performance was further exacerbated by one-off provisions. Revenue fell 0.3% QoQ to USD148.4mn (flat CC), missed expectations, due to higher-than-usual furloughs and clients putting some projects on hold. "Adjusted EBITM declined 180bps QoQ due to higher furloughs, investments in capabilities, and strengthening leadership," the brokerage has said.

"The exact financial impact of bankruptcy filings by Invacare remains indeterminable currently. Birlasoft has made a provision of Rs1.5 bn against the outstanding receivables and contract assets and is taking legal advice on the matter," Emkay has noted.

Revenue declines marginally

Birlasoft's revenue declined by 0.3% QoQ to USD148.4mn (flat CC QoQ), below our expectation of USD149.9mn. Adjusted EBITM declined by 180bps QoQ to 11.2%, 220 basis points below our expectations. Reported EBITM fell ~1420bps QoQ to -1.1% on account of Rs 1.5 billion provision created against outstanding receivables and contract assets related to the Invacare deal. Revenue growth was led by the BFSI (5% QoQ) and lifesciences (1.3%), while E&U and manufacturing fell by 1.7% and 2.6%, respectively, due to furloughs and project holdups.

Buy Birlasoft stock with a price target of Rs 325 per share

Emkay Global has cut EPS estimates by 13-34% for FY23E-25E, factoring in Q3 performance and client-specific issue. "The stock's valuation remains undemanding; however, the stock's performance hinges on clarity on the impact of Invacare, revenue growth acceleration, and margin recovery in the coming quarters. We maintain BUY with a target price of Rs 325 at 16x Dec-24E EPS (earlier Rs380), considering reasonable valuation (>6% FCF yield) and anticipated turnaround in operating performance," Emkay Global has said in its report.

Quick summary of what Emkay Global “liked” and “did not like”

Liked:

Healthy deal intake, strong cash conversion, and moderating attrition (25.5% in Q3 vs.
27.4% in Q2).

Did not like:

Weak operating performance, MSA termination by Invacare, and weakness in E&U and manufacturing.

Disclaimer

The stock has been picked from the brokerage report of Emkay Global. 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 consult with certified experts before making any investment decision.