AI Investments And Cogito Will Transform Future Service Offerings

Key Takeaways

• Strategic investments in AI capabilities and potential new deals are poised to elevate revenue and earnings growth substantially.
  
• Cost management and client base expansion efforts aim to stabilize revenue and improve financial performance.
  
• Birlasoft faces revenue challenges due to weak quarters, competitive disadvantages, insufficient order bookings, and uncertainties in key verticals.

Catalysts

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

• Birlasoft is making strategic investments in AI and gen AI capabilities, including creating a gen AI Center of Excellence and platform called Cogito, which is expected to drive future growth in revenue through innovative solutions and services.
  
• The company anticipates significant deal closures, including a potential new logo in Europe, which could lead to increased revenue and improved earnings once these deals are finalized and services commence.
  
• Despite short-term revenue challenges due to higher furloughs, Birlasoft's strong cash generation and robust balance sheet position it well for potential strategic acquisitions, which could enhance revenue and earnings growth.
  
• Birlasoft is focusing on expanding its client base and mining existing top clients more effectively, which should support revenue stabilization and growth as demand conditions improve.
  
• The company is actively managing costs to improve EBITDA margins over time, with a focus on cost takeout initiatives and operational efficiencies, which should enhance net margins and overall financial performance.

Birlasoft Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Birlasoft's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.6% today to 12.2% in 3 years time.
• Analysts expect earnings to reach ₹8.2 billion (and earnings per share of ₹27.94) by about April 2028, up from ₹5.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.3x on those 2028 earnings, up from 19.3x today. This future PE is lower than the current PE for the IN Software industry at 30.3x.
• Analysts expect the number of shares outstanding to grow by 0.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.9%, as per the Simply Wall St company report.

Birlasoft Future Earnings Per Share Growth

Risks

• The company experienced a seasonally weak quarter with higher-than-usual furloughs, which had a negative impact on revenue and may continue into future quarters. This indicates potential ongoing revenue challenges.
  
• Margins may face pressure due to ongoing pricing pressures in competitive deals and an unfavorable business mix, with infrastructure outperforming applications. These factors could hinder future profitability.
  
• The ERP business witnessed a decline, contrary to other companies experiencing growth in SAP S/4HANA upgrades, indicating potential competitive disadvantages or execution issues, impacting future revenue growth.
  
• Current levels of order booking are not sufficient to sustain double-digit growth, suggesting challenges in achieving future revenue targets and impacting overall earnings growth potential.
  
• Uncertainty in key verticals like manufacturing and life sciences, exacerbated by client-specific challenges and policy shifts, poses a risk to robust and stable future revenue streams.

Valuation

• The analysts have a consensus price target of ₹516.643 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 ₹670.0, and the most bearish reporting a price target of just ₹370.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹66.8 billion, earnings will come to ₹8.2 billion, and it would be trading on a PE ratio of 27.3x, assuming you use a discount rate of 14.9%.
• Given the current share price of ₹399.65, the analyst price target of ₹516.64 is 22.6% 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.