Shares of Birlasoft Ltd. experienced a significant rally, climbing 12% during Thursday's trading session. This surge followed the announcement of the company's September quarter (Q2) results, which marked a crucial return to sequential revenue growth after approximately six consecutive weak quarters.
Q2 Performance Shows Turnaround Signs
The IT services firm reported Q2 revenue of $148.3 million, a 2.1% sequential increase in constant currency terms, surpassing analyst expectations. The Earnings Before Interest and Taxes (EBIT) margin also came in higher than anticipated at 13.4%.
Despite these positive indicators, the Birlasoft management expressed a cautious stance, stating that the company has “not turned the corner yet.” They noted that new sales hires are expected to take a couple of quarters to become fully productive, impacting immediate sales momentum.
Analyst Concerns and Outlook
Analysts largely retained their 'Hold' ratings on Birlasoft stock, pointing to several lingering concerns. A primary worry is the soft order book, with new total contract value (TCV) for the quarter recorded at $116 million, falling short of management's own expectations. Several significant deals reportedly slipped into Q3 and Q4.
“E&U recovery is two to three quarters away, client concentration keeps rising (top 5 at 44.2 per cent), and margins are held near 15 per cent only by reinvesting AI efficiencies,” noted Nirmal Bang Institutional Equities, reiterating a ‘HOLD’ rating.
Client concentration remains a factor, with the top five clients contributing 44.2% of revenue. While AI efficiencies are helping maintain margins near 15%, sustained growth is seen as dependent on stronger deal signings and effective conversion of AI-led opportunities.
Future Expectations and Price Targets
Birlasoft's management anticipates that the financial performance in the second half of the fiscal year (H2) will surpass that of H1, despite acknowledging that Q3 could be soft due to typical furlough periods. Efforts to revamp the sales team and focus on mining existing large accounts are expected to yield results over time, with timely closure of large deals being critical for improved revenue growth.
The consensus target price for Birlasoft stock is Rs 347, implying a 5% potential upside. Individual brokerage targets vary, with Axis Capital setting the highest target at Rs 420 (a 27% upside), while 360 One Capital Markets offered the lowest at Rs 310.