Birlasoft shares tank 7% on weak operational performance; analysts weigh in

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Birlasoft share price: Software company Birlasoft dropped as much as 7.35 per cent to hit an intraday low of Rs Rs 556.65 per share on Thursday, October 24, 2024.

 

The drop in Birlasoft share price on the back of weak operational performance in the September quarter of FY25 (Q2FY25).

 

The company’s earnings before interest and tax (Ebit) slipped 17.9 per cent annually to Rs 143.1 crore, as opposed to Rs 174.4 crore in the previous quarter (Q1FY25).

 

Ebit margin squeezed 270 basis points (bps) to 10.5 per cent in Q2FY25, from 13.2 per cent in Q1FY25.

 

Overall, Birlasoft’s net profit plunged over 15 per cent to Rs 127.5 crore in the September quarter of financial year 2025, from Rs 150.2 crore in the June quarter of financial year 2025.

 

However, the company’s revenue soared a little over 3 per cent quarter-on-quarter (Q-o-Q) to Rs 1,368 crore, as opposed to Rs 1,327 crore in Q1FY25. 

 

Analysts at Emkay noted that Birlasoft’s Q2FY25 nos were mixed. The company posted a sequential revenue growth of 2.6 per cent Q-o-Q, recovering from a lacklustre Q1, which aligned with Emkay’s estimates. 

 

However, the Ebitda margin dropped considerably by 260 basis points Q-o-Q to 12.1 per cent, falling short of the estimated 14.7 per cent. The decline, analysts noted, was due to planned investments in technology, domain capabilities, and partnerships, along with high initial costs related to consolidation deals involving onshore presence.

 

Looking ahead, Emkay forecasts that margins will likely remain subdued in Q3 due to anticipated wage hikes, expected to impact margins by approximately 150 basis points, although improvement is expected by Q4. 

 

Deal-win total contract value (TCV) saw a notable decline, down 19.3 per cent year-over-year on a trailing twelve-month basis, as client decision-making processes are still experiencing delays, analysts said. Nevertheless, TCV is projected to improve in the second half of the fiscal year, with some positive signs emerging, although more clarity is expected by the end of calendar year 2024. Revenue momentum is anticipated to continue despite seasonal weaknesses in H2FY25.

 

Consequently, Emkay has revised its FY25-27 earnings per share (EPS) estimates down by 5-16 per cent to account for lower margins. The brokerage has also adjusted its target multiple from 26x to 25x but maintained an 'Add' rating with a reduced price target of Rs 670, citing undemanding valuations.

 

Those at Nuvama Institutional Equities said Birlasoft appears to be stuck in a near-term vicious circle, forced to compromise on either growth or margins as transformational deals have dried up and consolidation/infrastructure deals are diluting its margins. 

 

“We are cutting FY25E/26E EPS sharply by -13.7 per cent/-8.2 per cent (on lower growth and margin expectations). We are also cutting the target valuation to 20x Sep-26E PE (from 22x) due to lower earnings growth. Maintain ‘Reduce’ with a target price (TP)of Rs 540 (earlier Rs 620),” Nuvama Institutional Equities said in a note. 

 

Birlasoft is a multi-shore business application global IT services provider with a presence in the United States, Europe, Asia-Pacific and India. At 11:01 AM, BirlaSoft shares were trading 3.60 per cent lower at Rs 579.20 per share. In comparison, BSE Sensex was trading 0.07 per cent lower at 80,025.09 levels.