Recommendations from IT Consulting & Software Sector
This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon
Birlasoft Limited
COMPUTING THE RIGHT PROFITS
HERE IS WHY
Good dividend yield of 2.75 per cent.
Diversified revenue stream.
Zero borrowings.
Birlasoft Limited is a part of C K Birla Group and was incorporated in 1995. It is a global provider of IT solutions and services with operations across USA, Europe and the APAC region. With its 10,000+ technical force, the company has been providing various digital and IT-related services to its client in the areas of software development, package implementation, application management as well as testing domain, enterprise and digital technologies. The revenue is diversified and sourced from various segments – discrete manufacturing, hi-tech and media (19.3 per cent), BFSI (19.7 per cent), energy and utilities (19.1 per cent), automotive (12.7 per cent), life sciences (14 per cent), CPG, and retail and process manufacturing (15 per cent).
The company continues to maintain a healthy financial risk profile with a strong capital structure marked by zero debt as on September 30, 2019. It does not have any long-term debt as on March 31, 2019 and only has working capital borrowings of Rs 38.12 crore, which became zero as on September 30, 2019. Birlasoft has entered into strategic alliances with various business partners to widen the gamut of its service offerings. Its key alliances include Oracle, JD Edwards, SAP, Infor and Microsoft. The company is a Microsoft Gold Certified partner with competencies in multiple technology areas, including Microsoft Dynamics’ partner for enterprise solution implementation and Microsoft Azure Cloud, among others.
It, predominantly with its enterprise digital offerings in the areas of ERP, customer experience, CRM and digital transformational services, is poised with digital transformation being ‘top of mind’ for IT executives globally. As per Gartner,the shift from brick-and-mortar businesses to digital businesses will be the main driver for the uptick in IT spending. This bodes well for Birlasoft Limited. Around 53 per cent of its business is derived from ERP-centric services (integrated enterprise solutions and SAP); around 30 per cent of business from high-growth digital services like Cloud, CRM, BI and data analytics (digital transformation); and around 17 per cent from custom application services and other horizontals in IT-related services.
After the merger of KPIT’s IT business with Birlasoft, it has strengthened its position in SAP, Oracle, JDE and other related areas of enterprise services with core digital strengths in custom application development and maintenance, sales force, data and analytics. It is now positioned to capture increasing opportunities in the enterprise digital space. Going forward, the management plans to increase the share of digital services, which are of high margin. This will result in better PAT margins. Further, zero debt will make the income statement look healthier. In addition, the synergies of merger with KPIT will surely help Birlasoft in the long run.
On a consolidated basis, the company has shown good year-on-year growth in gross sales, EBITDA and PAT for the past three years. Gross sales have grown from Rs 3,323 crore in FY16-17 to Rs 3,942 crore in FY18-19, showing a CAGR of 8.91 per cent. EBITDA and PAT have shown CAGR of 15.70 per cent and 12.49 per cent respectively. In the same period, its RoCE has improved from 17.35 per cent in FY16-17 to 20.94 per cent in FY18-19. Currently, the company is trading at a PE of 9.45x. By virtue of these factors, we recommend our reader-investors to BUY this stock.
