Strong Pipeline And Capability Investments Will Drive Future Success In Digital Services

Key Takeaways

• Revenue growth is rebounding due to delayed projects initiating, with ongoing deal wins indicating a positive revenue and earnings outlook.
  
• Margin improvement strategies focus on optimizing operations and leveraging existing client relationships, expected to enhance net margins.
  
• Ongoing pricing pressures, delayed projects, and a shift to lower-margin deals are impacting Birlasoft's profitability and potential long-term revenue growth.

Catalysts

Provides software development services in India, the Americas, Europe, the United Kingdom, and internationally.

• Birlasoft is experiencing a rebound in revenue growth due to the initiation and contribution of several delayed projects, which is expected to continue as more projects ramp up. This trend should positively impact revenue growth.
  
• Despite a challenging operating environment, the company is winning consolidation deals and gaining wallet share, which is anticipated to normalize engagements and potentially lead to enhanced margins over time. This could improve net margins in the long term.
  
• With a healthy proactive deal pipeline and a strong pipeline in both transformation projects and existing net new deals, Birlasoft anticipates better deal wins in the upcoming quarters, boosting future revenue and earnings.
  
• The company is focused on several internal levers to improve margins, such as optimizing the on-site to offshore revenue ratio, increasing utilization, and seeking pricing enhancements from existing long-term clients. Implementing these strategies aims to improve net margins.
  
• The company's investments in capability building are expected to yield results in terms of improved market recognition and stronger revenue growth in digital and data services, which can enhance both revenue and net margins.

Birlasoft Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Birlasoft's revenue will grow by 9.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.5% today to 12.1% in 3 years time.
• Analysts expect earnings to reach ₹8.5 billion (and earnings per share of ₹28.25) by about February 2028, up from ₹6.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.5x on those 2028 earnings, up from 24.0x today. This future PE is lower than the current PE for the IN Software industry at 33.8x.
• Analysts expect the number of shares outstanding to grow by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.01%, as per the Simply Wall St company report.

Birlasoft Future Earnings Per Share Growth

Risks

• Despite some new projects ramping up, there is ongoing pricing pressure in consolidation deals, leading to short-to-medium-term impacts on margins, which could weigh down overall profitability and earnings.
  
• The company's onsite revenue increase, primarily driven by subcontracting, has contributed to margin pressure due to a higher mix of lower-margin business, creating potential impacts on the net margins.
  
• Delayed client decision-making and project starts, partly due to macroeconomic factors and specific sector challenges (e.g., Life Sciences), can affect order book strength and future revenue growth predictability.
  
• The focus on short-term and vendor consolidation deals, with the majority being onsite-heavy, indicates potential exposure to higher costs and margin squeeze before transitioning to offshore, influencing net margins and earnings.
  
• A shift in resource allocation from potential high-margin transformation projects to lower-margin annuity deals could limit long-term revenue growth opportunities and an ability to enhance net margins.

Valuation

• The analysts have a consensus price target of ₹647.917 for Birlasoft based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹710.0, and the most bearish reporting a price target of just ₹540.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹70.4 billion, earnings will come to ₹8.5 billion, and it would be trading on a PE ratio of 31.5x, assuming you use a discount rate of 14.0%.
  
• Given the current share price of ₹534.35, the analyst price target of ₹647.92 is 17.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.