Birlasoft has good growth prospects. Buy for target price of Rs 530 (23% upside): HDFC Sec

Birlasoft

The next large mid-tier

Birlasoft (BSOFT) is a leading mid-tier IT services company with a scalable services portfolio. The recent leadership changes can propel growth as well as improve the quality of revenue. BSOFT’s return potential is a combination of both earnings growth trajectory and multiple rerating, supported by an acceleration in growth, resilience & scalability of the services portfolio and strong relative positioning. Over the next five years, we expect BSOFT to attain the current scale of Persistent Systems, which is currently at 1.7x, 2.0x and 3.1x of revenue/PAT/market cap compared to BSOFT. Based on our mid-tier IT assessment framework, client cohort analysis and industry checks, we are positive about BSOFT’s growth prospects. We initiate on BSOFT with a BUY recommendation and a TP of INR 530, based on 21x Jun-25E with 20% EPS CAGR over FY23-26E.

 Growth acceleration ahead: BSOFT’s lower annuity mix gets offset by a high deal velocity (higher than mid-tier peers). It also has a strong track record of large client mining (USD 10mn+ logos doubling in the last three years and T10 growth higher than peers), supported by its proactive (non-RFP) wins and account rationalisation. Growth is expected to accelerate ahead with (1) uptick in the BFSI vertical (under-indexed currently); (2) recent leadership refresh (hires from tier-1 IT), which can improve the quality of revenue and new logo addition (empirical evidence in the sector- Ex: 17); (3) pipeline build-up indication from uptick in job posting; and (4) reduction in growth skew of manufacturing and life-sciences (80% of incremental revenue historically).

 Resilience and scalability of the services portfolio: BSOFT’s portfolio in Oracle and SAP (large installed base) and the pivot of enterprise to cost optimisation and vendor consolidation can provide greater resilience in the current macroeconomic environment. Our checks suggest an uptick in this segment of technologies, which is supporting mission-critical operations (a less discretionary part of tech spend) and BSOFT’s pedigree is ahead of even some tier-1 IT. The next growth frontier for BSOFT is Microsoft (strong track record recently) and Salesforce to scale its cloud footprint.

 Strong relative positioning: Based on our mid-tier IT assessment framework (Ex: 25), BSOFT scores are at the midpoint of the peer set (higher than the median on services portfolio and lower on growth/execution). We reckon that the disconnect with valuation (at the lower end of the peer set) can converge to a median, supported by growth acceleration, large scope to improve margin (sub-con higher than peers), strong cash generation, and capital allocation (improving return metrics).