Birlasoft Ltd — Q3 FY25 earnings call

Call held 11 Feb 2025

Management summary

Birlasoft reported a challenging Q3 FY25 with constant currency revenue degrowth of 1.1% QoQ, impacted by higher furloughs and project ramp-downs. Despite these headwinds and recent wage hikes, the company maintained a 12% EBITDA margin and demonstrated strong cash generation with $226 million in TCV signings. Management acknowledged predictability issues in FY25 but expressed confidence in improving predictability and returning to growth in FY26 through strategic investments and new deal closures, including a potential new logo in Europe.

Highlights

  • Deal signings during the quarter saw a sharp increase, delivering $226 million in TCV, making it the best quarter for deal signings in the current fiscal.

  • EBITDA margin was maintained at 12% sequentially, despite absorbing compensation hikes effective October 1, 2024.

  • Cash and balances stood at $240 million, an 8.2% QoQ and 18.3% YoY increase, reflecting continued strong cash generation.

  • Operating cash flow for Q3 was $29.9 million, representing 155% of EBITDA, with DSO at 53 days.

  • BFSI vertical grew 1.8% QoQ, and Digital & Data business grew 2.4% QoQ, contributing 57% to overall revenues.

Concerns

  • Revenue experienced a constant currency degrowth of 0.1% YoY and 1.1% QoQ, and a rupee decline of 0.4% QoQ.

  • Higher-than-usual furloughs, extending into January 2025, resulted in a softer revenue performance and will cause some softness in Q4.

  • Project ramp-downs were observed in healthcare and manufacturing, having a near-term impact on revenues.

  • PAT stood at $13.8 million, which is 9.3% lower QoQ, primarily due to lower Other Income from depreciated non-dollar currencies.

  • The ERP business witnessed a sequential decline of 5.7% and has underperformed for the last two quarters.

Key financials

  1. Revenue 160.8 Mn -0.1%YoY
  2. Revenue 13,627 Mn +1.5%YoY
  3. EBITDA 19.3 Mn -2%QoQ
  4. EBITDA Margin 12%
  5. PAT 13.8 Mn -9.3%QoQ
  6. Operating Cash Flow 29.9 Mn
  7. DSO 53 days

What they filed

Q1 FY27: revenue up 7.3%, net profit up 51.9% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue1,368 1,363 1,317 1,285 1,329 −3%1,348 −1%1,349 +2%1,379 +7%
EBITDA165 163 174 159 213 +29%245 +50%249 +43%223 +40%
Net profit128 117 122 106 116 −9%120 +3%176 +44%161 +52%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

  • BFSI
    1.8% Revenue Growth
  • Digital & Data
    2.4% Revenue Growth57% Share of Revenue
  • ERP
    -5.7% Revenue Decline

Order book

high confidence

Inflow this quarter

$226 Mn

Pipeline

deal pipeline tcv

Healthy deal pipeline, expecting good TCV performance in Q4, including a potential large deal and a new logo in Europe.

Cancellations & deferrals

  • deferred: Higher-than-usual furloughs, with some extending into January, impacting Q3 and Q4 revenue performance.
  • descoped: Some amount of project ramp downs in healthcare and manufacturing, having a near-term impact on revenues.
Q3 saw the best deal signings this fiscal at $226 million TCV, with expectations for good TCV performance in Q4, including a new logo in Europe. However, the current order book is not sufficient for double-digit growth.

Source: Prepared remarks

Capital allocation

high confidence
  • Liquidity Cash $240 Mn Cash and balances increased by 8.2% QoQ and 18.3% YoY, driven by strong cash generation, resulting in a robust balance sheet.
    Our cash and balances at the end of the third quarter stood at $240 million, up 8.2% quarter-on-quarter and about 18.3% year-on-year. We have, over the past several quarters, demonstrated our ability to consistently generate strong cash flows.

Guidance & targets

Profitability

  • EBITDA Margin Profitability · Q4 FY25 onwards · Medium confidence improve margins quarter-over-quarter
    But to answer your question, we want to improve margins quarter-over-quarter. Q4 some furloughs have hit. And hopefully, we will not have any furloughs in Q1, so margins will see an improvement.

    — Angan Guha

Revenue

  • Furlough Impact Revenue · Q4 FY25 · High confidence half as much as Q3
    So, to that effect, we have some cushion. But look, Sandeep, we've never witnessed furloughs in our business in Q4, let alone even in Q3 in, let's say, Life Sciences business. So, it's a new world for us. But to answer your question specifically, the amount of furloughs we saw in Q3 and the amount of furloughs we will see in Q4, Q4 will be half as much as Q3.

    — Angan Guha

  • FY26 Growth Revenue · FY26 · Medium confidence get the company back to growth
    We need to grow revenues for the company. And I will admit that FY '25 has been a bad year for us. And FY '26, we need to get the company back to growth.

    — Angan Guha

Predictability

  • Predictability of Results Predictability · next year (FY26) · Medium confidence far better
    I'll probably be able to give you a complete view after Q4 is over. But I can only tell you that predictability will be far better next year. That is something that we are committing to.

    — Angan Guha

Order Book

  • Medium-sized Deals Closure Order Book · first 6 months of this calendar year (H1 CY25) · Medium confidence at least a couple of medium-sized deals
    But if I look at between, let's say, January and, let's say, April, May, June, in the first 6 months of this calendar year, our attempt will be to close at least a couple of medium-sized deals, not large deals.

    — Angan Guha

What to watch in Q4 FY25

Q4 TCV Performance

next quarter (Q4 FY25)
Current $226 million in Q3
Target Good TCV performance

Why it matters

TCV is a leading indicator for future revenue growth, and management expects a strong Q4.

Looking at the conversations that we are currently having with our clients and including one potential large deal and a new logo in Europe, we also expect a good TCV performance in Q4 as well.

Risks & concerns

  • Higher-than-usual furloughs extending into Q4

    high

    Furloughs were higher than usual in Q3 and are extending into January, impacting Q4 revenue performance, though Q4 impact is expected to be half of Q3.

    Management acknowledged

  • Decline in predictability of results in FY25

    high

    The company's predictability has suffered in FY25 due to client-specific performance issues and late-arriving furloughs.

    Management acknowledged

  • Project ramp-downs in healthcare and manufacturing

    medium

    Some project ramp-downs occurred in Q3, particularly in healthcare and manufacturing, which will have a near-term impact on revenues.

    Management acknowledged

  • Unchanged demand environment and 'hold & wait' approach from clients

    medium

    The demand environment has not materially changed, with clients largely adopting a 'hold & wait' approach, especially in verticals like Life Sciences.

    Management acknowledged

  • Underperformance of ERP business

    medium

    The ERP business has not performed well for the last two quarters, declining 5.7% QoQ in Q3.

    Management acknowledged

  • Potential future pricing pressures

    low

    While not currently observed, pricing pressures are a potential future risk, especially in competitive deal environments.

    Management acknowledged

  • Unfavorable business mix impacting margins

    low

    If the Infrastructure business continues to outperform Applications, it could lead to a margin impact in the medium term.

    Management acknowledged

Q&A highlights

6 direct
Impact of furloughs and project ramp-downs on Q4 revenue outlook Partial
So Shradha, again, we don't give a guidance usually. Our job will be to execute for the quarter. I can only tell you that while there are going to be furloughs and there are going to be some amount of ramp downs, equally, we have won $226 million worth of deals. So, part of it, we will try and mitigate.

Analyst sought specific Q4 revenue guidance given headwinds, but management reiterated focus on mitigation without providing numbers.

Asked by Shradha Agrawal

Underperformance of ERP business and S/4 HANA opportunity Direct
So Shradha, look, again, if you look at the ERP business of ours, our ERP business is equally split between Oracle, SAP. And of course, we have a JDE competence as well. This service line, quite frankly, has not been doing well for the last two quarters. We have brought in more leadership to help this service line get back to growth.

Management acknowledged ERP underperformance and outlined steps (new leadership) to turn it around, noting S/4 HANA benefits larger players first.

Asked by Shradha Agrawal

Predictability of growth outlook and reasons for its decline in FY25 Direct
See, as a management team, the two things that we ourselves are not very proud of is the fact that this year, the current financial year, which is Q1, Q2, Q3 or even Q4, our predictability has suffered, right? There are two reasons for the predictability issue. One is because our real estate, the clients that we serve, have been impacted slightly from their own performance standpoint.

Management candidly admitted to a decline in predictability in FY25, attributing it to client-specific issues and late furloughs, and outlined corrective actions.

Asked by Sandeep Shah

New business TCV decline and whether it's an internal Birlasoft issue Direct
The answer number two, Sandeep, it is also a manifestation of the real estate that we hold. Where our real estate, the companies that we serve, our top 20 accounts, though they are financially very strong, there's no problem financially, if their growth struggles a little bit then we obviously have a problem. Which is why I was telling Shradha also that while the focus will be to grow our top 25 accounts, absolutely, and we will get them, we absolutely will get them back to growth, we have a plan to do that, we will also focus equally on creating new logos because our existing real estate at some point in time will plateau out, Sandeep.

Management linked TCV decline to client concentration and the need to focus on new logo acquisition to diversify and drive future growth.

Asked by Sandeep Shah

Aspiration for 15-16% EBITDA by FY26 and plans for large cash balance (M&A/shareholder returns) Partial
Our aspiration remains the same. That's where we want to get to. But I think the path to that could become a little slower given what we have seen what we are seeing from a Q4 standpoint, right? So, I think I would say that from that standpoint. On your second question on given the cash that we are holding, do we have any plans as of now to return to the shareholders? I would say, no, at this point of time. We're really looking at conserving cash for any potential opportunity that would come up in the future.

Management indicated a slower path to margin aspiration and no immediate plans for returning cash to shareholders, preferring to conserve it for M&A opportunities.

Asked by Sandeep Shah

Confidence in FY26 growth despite Q4 headwinds, and its link to potential large deals Direct
Now again, when I talk about a reasonable size deal, and I will not call it a large deal, a reasonable sized deal considering our company's size, if we close that in this quarter, that revenue will start only flowing from Q1 and Q2. So that gives us a little bit of more confidence for next year.

Management clarified that a potential new deal, while not 'large', would provide confidence for FY26 growth by contributing revenue from Q1/Q2.

Asked by Sudheer Guntupalli

Future headwinds for margins beyond current investments Direct
Now, the other question Sudheer that you asked is in terms of what could the other possible impact on margins be, right? So, the one possible impact is our business mix. If our Infrastructure business continues to outperform our Applications business, then obviously in the medium term there could be a margin impact. So that would be one. Second is the pricing pressures. Now, up to date, we have not heard from any of the clients asking for a discount.

Management identified potential future margin headwinds, including an unfavorable business mix shift (Infrastructure vs. Applications) and potential pricing pressures, though not currently observed.

Asked by Sudheer Guntupalli

Vertical-wise outlook for Life Sciences, Manufacturing, and E&U Direct
Healthcare on the other side has been hit by client-specific issues where, like I was telling the other members in the call, saying that there are customers of ours who are financially very strong, but they are facing headwinds in their own businesses and their revenue growth. That is in our real estate. And that is simply affecting our performance as well. ... E&U, I think will pick up. ... Manufacturing will be soft for another couple of quarters.

Management provided a detailed vertical outlook, expecting E&U and Financial Services to lead growth, while Healthcare and Manufacturing face ongoing challenges but are expected to recover.

Asked by Dipesh Mehta

3 min read 8 chapters

Detailed narrative

Q3 FY25 Performance Overview

Birlasoft reported a consolidated revenue of $160.8 million for Q3 FY25, reflecting a constant currency degrowth of 0.1% year-on-year and 1.1% quarter-on-quarter. In rupee terms, revenue was ₹13,627 million, showing a 1.5% YoY growth but a slight QoQ decline of 0.4%. The EBITDA margin stood at 12%, nearly flat sequentially, despite absorbing the impact of compensation hikes effective from October 1, 2024. PAT for the quarter was $13.8 million, a 9.3% QoQ decrease primarily due to lower other income.

Revenue Headwinds: Furloughs & Project Ramp-downs

The quarter's performance was significantly impacted by higher-than-usual furloughs, which extended into January 2025, leading to a softer revenue outcome. Management noted that the Q4 furlough impact is expected to be half of Q3's. Additionally, some project ramp-downs were observed in healthcare and manufacturing verticals, contributing to near-term revenue pressure. These factors, combined with an unchanged demand environment, posed challenges to growth.

Margin Resilience & Wage Hike Impact

Despite the organization-wide wage increase effective October 1, 2024, Birlasoft successfully maintained its EBITDA margin at 12%. This resilience was attributed to exchange rate benefits from a strong dollar and operational savings. Management expressed commitment to sustaining and improving its margin profile, although the path to achieving higher aspirations might be slower due to ongoing Q4 headwinds.

Strong Cash Generation & Balance Sheet

The company demonstrated robust cash generation, with cash and balances reaching $240 million by the end of Q3, an increase of 8.2% QoQ and 18.3% YoY. Operating cash flow for the quarter was $29.9 million, representing 155% of EBITDA. The Days Sales Outstanding (DSO) improved to 53 days, which is among the best in the industry, highlighting efficient collections and a healthy balance sheet.

Deal Wins & Pipeline Health

Birlasoft reported strong deal signings in Q3 FY25, securing $226 million in Total Contract Value (TCV), marking it the best quarter for deal signings in the current fiscal year. While a significant portion came from renewals, net new deals were also observed. The company anticipates good TCV performance in Q4, driven by ongoing client conversations and the potential closure of a 'reasonable sized' deal with a new logo in Europe, particularly in the manufacturing space.

Vertical Performance & Outlook

The BFSI vertical showed resilience with a 1.8% QoQ growth, and the Digital & Data business grew 2.4% QoQ, contributing 57% to overall revenues. However, the ERP business declined 5.7% QoQ and has underperformed for two consecutive quarters, prompting new leadership appointments. Healthcare (Life Sciences) has been impacted by client-specific headwinds for four quarters, but management is strengthening the team and expects a comeback. E&U is projected to pick up, while Manufacturing is expected to remain soft for another couple of quarters.

Strategic Investments & GenAI Focus

Birlasoft continues to invest in bridging capability gaps and scaling existing strengths, particularly in AI/GenAI, AI-driven quality assurance, Data, and Product & App Engineering. The company's GenAI Centre of Excellence and proprietary platform, Cogito, are accelerating GenAI-based solutions. New in-house applications like B-Hive (conversational bot) and Solución (ServiceNow integrated solution) are aimed at enhancing competitive advantage and capitalizing on improved demand conditions.

Predictability Challenges & Future Outlook

Management acknowledged that predictability has suffered in FY25 due to external factors like client performance and late furloughs. To address this, the company is focusing on expanding its client base with new logos, deepening engagement with top 20-25 clients, and leveraging past capability investments. While the current order book is insufficient for double-digit growth, management is confident that these corrective actions will improve predictability and lead to a better growth trajectory in FY26.

This is an AI-generated summary of a publicly available earnings call transcript.
View original transcript

More Information Technology earnings calls