Should you purchase the IT stock? Birlasoft shares rise 6% on above-estimate Q2 earnings and margins

 Should you purchase the IT stock? Birlasoft shares rise 6% on above-estimate Q2 earnings and margins

In the short to medium term, Birlasoft is probably going to do worse than its competitors while the new management takes its time resolving these many problems.

Birlasoft has projected reduced growth for Q3, taking into account the effects of furloughs and fewer working days.

On November 1, the price of Birlasoft's shares shot up by more than 6%, the day after the business revealed operational results for the September quarter that were better than anticipated. Due to account mining and deal ramp-ups, the company's revenue and net profit increased more than anticipated.

According to analysts, Birlasoft has recovered well from the bankruptcy of its principal US customer, Invacare, under the direction of its new CEO. Brokers are still wary of the stock because of the macro environment's continued difficulties.

Birlasoft shares ended the day on the National Stock Exchange at Rs 579.50 at 11:00 am.

Analysts at Nuvama claim that after being tepid, Birlasoft's total contract value (TCV) has begun to show signs of life. The potential income from a certain consumer is known as TCV. It comprises all recurring subscription income in addition to any one-time costs—like setup fees—that could be related to the agreement.

Birlasoft is well-liked by analysts because to its superior operational performance, robust results in the Americas, digital, and cloud segments, moderate attrition, and robust cash conversion in Q2 FY24. Birlasoft has projected a reduced growth rate for Q3, taking into account the effects of decreased working days and furloughs. To mitigate its effect, it will be concentrating on in-quarter performance, and it anticipates growth to rebound from Q4.

Should you purchase Birlasoft stock, keep it, or sell it?

Emkay Global has maintained a "Hold" recommendation on Birlasoft's shares, with a revised target price of Rs 540, up from Rs 520 previously, in light of the company's reasonable values. The brokerage increased its FY24–26 EPS by 1.4–3.5%, taking the Q2 beat into account. A 'Hold' recommendation is also given to the company by Nuvama Institutional Equities, which feels that the present price of the stock sufficiently accounts for its potential for near-term growth and offers little room for upside.

Birlasoft's return potential, according to analysts at HDFC Securities Institutional Equities (HSIE), is a result of both an accelerating trajectory for earnings growth and multiple rerating, which are bolstered by the service portfolio's resilience and scalability, strong relative positioning, and a recent leadership change.

"While an increase in growth and deal velocity are supported by changes in incentive arrangements and lingering interest in ERP services, the margin upside is premised on strengthening business mix (BFSI traction), compressing delivery organisation and hiring subcontractors optimisation," it said. The stock is rated as a "buy" by the firm, with a target price of Rs 650.

A 'buy' call has also been issued by Nomura on Birlasoft, with a target price of Rs 630 per share. The multinational brokerage claims that the company's excellent pace in closing deals enhances its medium-term visibility. Analysts increased FY24–26 EPS by 2-3%, citing the success of the new CEO's approach.

main hazards

Nuvama states that although rival KPIT's IT services with a horizontal-led approach had core capabilities in Enterprise Solutions, Birlasoft's (pre-merger) competencies were predominantly in non-ERP digital companies. "Over the past two years, that leadership had done a good job of streamlining every one of the shifting parts--building a team, incorporating relevant parts of KPIT, cleaning up tail accounts as well, building relations with Microsoft as well as AWS and consistently by focused on deal pipeline," the brokerage said.

But it also highlighted that the corporation most likely made the mistake of not hiring enough people, which hurt them greatly during periods of significant employee churn in the sector. With Angan Guha as the new CEO, the firm is going through a change. During this time, one of its biggest customers filed for bankruptcy, significantly hurting the company.

"We believe the company is probable that underperform its peers, in the short- to medium-term, as the newly appointed leadership takes its time to navigate around these multiple issues," Nuvama said.