Birlasoft Limited (BSOFT) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Q2 FY '27 earnings conference call of Birlasoft Limited. [Operator Instructions] I now hand the conference over to Mr. Abhinandan Singh, Head, Investor Relations, Birlasoft. Thank you, and over to you, Mr. Singh.

Welcome, folks. By now, you would have received or seen our results that were announced earlier today. Those are also available on our website, www.birlasoft.com. Joining me on this call this evening are our CEO and MD, Mr. Angan Guha; and our Chief Financial Officer, Mr. Chandrasekar Thyagarajan or Chandru as we call him. We will begin the call today, as usual, with opening remarks from both Angan and Chandru. But before I hand over the floor to Angan, a quick reminder that anything that we say on this call on the company's outlook for the future could be a forward-looking statement involving significant uncertainty, and therefore, that must be heard or read in conjunction with the disclaimer that appears in our investor update, which you would have received and is also uploaded on our website as well as filed with the stock exchanges. With that, let me hand over the floor now to Mr. Angan Guha, our CEO and MD. Over to you, Angan. Yes.

Yes. Thank you, Abhi. Good morning, and good evening to all of you, wherever you are, and thank you for joining us today as we share some perspectives on our performance in the second quarter of the current fiscal. As you would have already noticed, we've delivered a revenue growth of 2.1% in both constant currency and dollar terms quarter-over-quarter. In rupee terms, revenue during the quarter grew by 2.7% sequentially. I'm also pleased to note that the Life Sciences among our verticals and the ERP business amongst our service lines, both have registered their second consecutive quarter of sequential growth in Q2. Manufacturing business as well as the BFSI business also witnessed sequential growth. The E&U vertical continued to remain soft due to a particular ramp down of work in one client. Our EBITDA margins for the quarter considers the fact that the organization-wide compensation revision that came into effect from July 2026, but remains within the range that Chandru, our CFO, had called out in the last quarter. We have also seen robust cash flows, collections, as well as our cash balances and the DSOs have improved. Chandru will provide more color on this in his remarks. Deal signings during the quarter came in at $116.1 million TCV, up 9% year-on-year and for the first half at $285 million, which is an uptick of 15% year-on-year. Our deal wins during the quarter includes several AI-led engagements. To just name a few, we have secured a strategic AI-led transformation opportunity involving large-scale platform modernization, cloud adoption, and business transformation from a leading European logistics organization. This engagement showcases Birlasoft's AI-driven delivery life cycle, AI DLC approach, combining architectural excellence, AI-assisted engineering automated testing, acceleration migration, and disciplined program execution to modernize a mission-critical platform at scale. Similarly, for a global industrial manufacturer, we have won a 3-year AI-led managed services engagement to support their ERP systems and drive business innovation. Similarly, again, we've been selected by one of the largest medical devices manufacturers in North America to provide a range of services from program governance, AI and data COE, and core digital transformation. This strengthens the company's long-term relationship with the client as a provider of core transformation services to their IT organization. As I have previously pointed out, we now have a growing base of engagements where we are deploying advanced AI-powered capabilities. We continue to make these investments, both in our technology as well as in our domain areas. During Q2, the quarter that just went by, Birlasoft earned the AWS AI Services Competency status which recognizes our ability to deliver GenAI, Agentic AI solutions on the AWS platform at production scale. AWS awarded the competency after reviewing several live client programs covering Agentic AI and AI-led modernization of legacy applications, intelligent document processing and governed analytics. This makes Birlasoft an AWS validated AI partner, and this is already helping us win many more clients and businesses. The new multi-year AI engagement with a global logistics company that I mentioned earlier was secured on the strength of this competency. Birlasoft is now an OpenAI select partner. This will enable us to continue working with OpenAI to help enterprises build, deploy, and scale AI solutions responsibly and effectively. Our core enterprise Agentic AI platform, Cogito; our AI-powered test engineering platform, Linux; and our Agentic AIOps and AMS platform, Sigma; together drive our differentiated AI-led offering. Around a third of our core today, up from almost 25% a few months ago, is now generated using Agentic AI tools. We have reimagined engineering workflows for 20-plus of our top services offerings with an AI-first approach. At the same time, humans in the loop controls remain in place for security, governance, quality, and reliability. We continue to embed AI across our service offerings, reimagining engineering workflows and equip our people to work on Agentic AI through our AI development life cycle. In terms of the outlook, with the demand environment remaining unchanged, and H2 of our current financial year is expected to reflect some furloughs in 3Q, we still remain committed to investing in our tech capabilities and our sales organization. Given the pipeline, ongoing conversations, and seasonal uptick in renewals, we are well positioned to drive better financial performance in H2 FY '27. At this point, I will ask Chandru to share his perspectives on the quarter under review. Chandru?

Thank you, Angan, and a very warm welcome to all of you joining us today on this call. Let me take you through some of the financial highlights for Q2 FY '27. Our consolidated revenue for the quarter stood at $143 -- $148.3 million, which represents a quarter-on-quarter growth of 2.1%. In rupee terms, revenue for Q2 FY '27 was INR 1,416.2 crores, a sequential growth of 2.7%. Growth during the quarter was led by manufacturing, BFSI, and our Life Sciences and Services verticals, which grew quarter-on-quarter by 5.2%, 3.6%, and 2.1%, respectively. As Angan noted in his remarks, the E&U vertical, which has historically been a steady growth engine for us, recorded some softness due to a ramp down of work for a customer in Europe. While we do not expect any further downside on that front, we do not see a bounce back in the short-term either. Among service lines, digital and data grew by 3.4% quarter-on-quarter and ERP grew 2.9% quarter-on-quarter. The infra service line was affected by the drop in revenue in our E&U vertical, as mentioned earlier. As you may recall, an organizational-wide compensation increase was rolled out effective July 2026. Considering that and the ongoing investment we are making in our business, our EBITDA performance has been strong with EBITDA for the quarter under review at INR 2,153 million or INR 215.3 crores, $22.5 million in dollar terms. Consequently EBITDA margin for Q2 was 15.2%. This is within the range we had indicated earlier. This robust margin performance was enabled by a combination of factors, including continued focus on operational efficiencies, productivity improvements, and better quality of revenue. These have helped to partly offset the headwinds from higher wage costs. Our PAT stood at INR 159.6 crores, which is $16.7 million. Our effective tax rate for the quarter stood at 29%. Coming to some key balance sheet items. We have maintained our robust track record on collection and our cash flow generation has been good during this quarter 2. Collection during the quarter were $164 million, resulting in our DSO touching our 2-year best of 51 days. Our cash and cash equivalent as of 30th September 2026 stood at $300.4 million. You may have already noted that the Board has recommended an interim dividend of INR 3 per share in line with our continued commitment to reward our shareholders. We remain focused on investing in capabilities for future growth while keeping a close eye on cost and efficiencies. Thank you very much. With this, I will now open the floor for question.

[Operator Instructions] First question is form the line of Sandeep Shah from Equirus Securities.

Congrats on a good execution. Just one question in terms of earlier quarters, we have highlighted to exit from some of the low-margin businesses. So where are we in that context? And second, is it fair to assume our annuity business could have increased materially versus what it was a year back. So if you can give some clarity on the same.

So look, our annuity business is obviously going up. And -- but more importantly, the quality of revenue is really going up. So from that perspective, I think the team has done a good job in executing in terms of getting in higher quality of revenue, and that is reflected in some of the financial parameters that Chandru spoke about earlier. Now as far as getting out of negative accounts, I think that job is done and over. It's done and dusted. And now, like I had said, Sandeep, even in the last call, the entire focus is to really drive sales, drive pipeline, and drive order book. So we've kind of cleaned up our balance sheet significantly. So that part is now done and dusted.

And when you say better 2H versus 1H, are you implying Q3, Q4 constant currency sequential growth could be better or in line with Q2?

Yes. So Sandeep, as you know that Q3 is always a very soft quarter because of furloughs, lesser working days, holiday season, et cetera. So our job is to execute for Q3 also, but it is a little hard to give guidance. And we -- as you know, we don't give guidance for Q3. But what we can indicate though, Sandeep, we are pretty confident that H2 performance, financial performance will be better than H1 performance. But as a management team, our complete focus is going to be on sales and delivering a strong order book for H2. I'm sure the revenues will follow.

And just the offshore contribution has been going up materially Q-on-Q, Y-o-Y. So if you look at in this quarter also, it has gone up. So the volume growth should be materially higher versus the headline growth in this quarter?

Yes. So Sandeep, on the offshore going up, as Angan pointed out, this has been a concerted effort for us for over 4 quarters now, working on the quality of our revenue, working through how we actually deliver to our customers in order for us to give them the best value, right? We expect this effort to continue and, therefore, we expect the improvement to stay on as we go forward, Sandeep.

And just last question, Chandru, in terms of any view you can give in terms of margin movement in the second half and what was the revision for a higher depreciation and amortization cost in this quarter? And can we consider 3Q level as a normalized level to continue in 3Q, Q4 or ahead?

Yes. As Angan also pointed out, we do not provide guidance, Sandeep. But just to give you some color on the margin profile. We have, as you know, been we very tightly watching our cost efficiency over the past several quarters, right? And there you see us steadily going to with a margin -- at an EBITDA margin of around 15%. There could be small ups and down given some of the seasonal impact as Angan pointed out. But our endeavor is to continue pushing at the 15% level. And this is in spite of, one, the salary increase program, which we believe is an investment on resources that we have the -- we wanted to do. Second, also the investment that we're making in our sales and service line capabilities, which is a continuing effort for us, right? That's on the margin profile. Now if you look at the depreciation and amortization, there are a couple of factors that lead to it. One, we've started to reinvest in our physical infrastructure, particularly our tech by infrastructure. And that investment is obviously driving some increase in depreciation and amortization. We are also refurbishing some of our offices, moving to better offices, et cetera. That's the other reason why there's a slight growth. But we expect that this will steady up and this will get absorbed in the overall business as we go forward.

The next question is from the line of Dipesh Mehta from Emkay Global.

Couple of questions. First about quarter 2, whether quarter 2 revenue performance was in line with management expectation at the beginning of quarter or it surprised you in terms of performance? So that is question one. Second question is about the EBITDA margin. If you can give, let's say, how the some puts and takes in terms of wage hike, investment, and rupee depreciation benefits laid out for quarter 2? And considering the wage hike is behind, should we expect quarter 2 margin to be floor for the remaining part of the year and we can, let's say, try to improve from where we are? And last question is about the deal intake. Net new deal intake, let's say, even on H1 basis seems to be softer. Can you provide some sense how one should look this? And whether it could have some ramification on growth? Surprisingly, this quarter, growth is divergent compared to some of these net new dynamics. If you can provide some color around it.

Yes. Thank you, Dipesh, for your questions. First of all, the revenue was in line with the management expectation. We knew that the quarter 2 will be a strong quarter, relatively strong quarter. As you might recollect, our quarter 1, our growth was only 0.3%. So from that perspective, the team did a good job on execution. But quite frankly, on the order book, I think we did not do a good job. I mean we expected ourselves to do better. Unfortunately, some of the deals got pushed out to Q3, not that we lost any deals, but they got pushed out to Q3 and Q4, which is why you see a soft quarter in terms of the deal signings. That said, the overall deal signings obviously has grown 15% year-over-year on a half year basis. Now if I were to look at H2, as you know, that Q4, 4Q for us is the quarter where there are a lot of renewals that happen, and we are in discussions. So these renewals will come through. As far as net new is concerned, which is why, to Chandru's point earlier, we're investing a lot more in sales and capability. It's an ongoing exercise and the complete management focus is to create more pipelines and deliver more signings. Now our pipeline is steady. It has actually gone up a little, so which is good news. But as we are hiring more and more salespeople, it takes about a couple of quarters for them to show results. But our direction is very clear. Our direction is to completely invest in sales, stay invested in sales, stay invested in capability building so that we can secure our long-term growth.

Yes. Let me take the question on margin, Dipesh. First point you were asking was about what's the quarter-on-quarter walk on margins, right? So I can give you some high-level commentary on that. One, we already spoke about increment. Increment is up about 170 basis points of margin on a quarter-on-quarter basis. We also had -- as Angan talked about, there was investment in our sales and service line capability where we had some dip in margins coming from that. Now with these 2 dampeners, if you will, there are 2 things that played well for us. One, the operating efficiencies that we've been pushing over the past few quarters, that's given us an offset. The other offset that we also got was from improved quality of revenue, as we spoke about earlier, which is coming from the tail accounts trimming that we've done in the past financial year and also working through our revenue model itself. It's a slow but steady process, as you can imagine. All of this have somewhat set off the impact of the wage increase and the impact of the investments we are making, but not completely. As I mentioned in the previous quarter as well, we do expect that we should catch up in the next couple of quarters and be able to negate the impact of the wage increase. Your second question on margin was whether this trajectory, do I see it improving? The expectation is that it will stay in this range as we continue to make investments, Dipesh, and that's an ongoing effort. In fact, I do fully expect that there will be some ups and downs given the seasonality of revenue. But that's a short-term problem that we will get over. But on a steady-state basis, our endeavor is to stay at or about the 15% range.

Maybe I can squeeze 2 more. On the furlough side, do you think furlough to be in line with last year? Or you expect any changes in furloughs considering one of the clients where you say indicated some ramp down in E&U side? So that is one. And second is about, let's say, just want to understand whether we have benefited from some short-term projects which ramp up quicker, which led to, let's say, better revenue conversion. I think a couple of -- maybe around 2 years back or 1.5 years back, you indicated some of the short-term program, which led to, let's say, some better revenue conversion come back to deal intake. Are we witnessing some of those programs, let's say, started and helping us to have better revenue conversion.

Yes. So Dipesh, look, currently, as you know, Dipesh, we've said that for a couple of quarters now that our focus is to drive better quality revenue, right? So technically, we do not focus on short-term projects. We focus on really long-term deals with annuity deals. But equally, there are certain times when we pick up a project, a project that needs to be implemented within an 11-month period or a 12-month period or an 18-month period. But as a process, we are not focusing on short-term deals at all, right? So the benefit that we got in Q2 was true ramp-up, true execution capability that the team showcased and did a lot of work to deliver. As our pipeline grows and order book grows, we continue -- we will -- we hopefully will continue to see a lot of momentum on that, right. On the furloughs, we believe that the furloughs will be no different than what we saw last year. It will be in the same range. We don't see -- at least as of today, we don't see any extra furloughs from what we saw last year. But look, it's a dynamic world. If something were to change in the next 30 days, I don't know. But at least as of today, the furloughs are at the same levels as we witnessed in the past fiscal.

Next question is from the line of Girish Pai from BOB Capital Markets Limited.

Angan, few quarters back in one of the media interviews you kind of indicated that FY '27 is going to be a positive growth year. That is one point. And in the opening remarks, you said 2H is going to be better than 1H. But when I look at last couple of years, FY '25 and FY '26, 4Q has been a dip versus 3Q, a fairly sharp dip vis-a-vis 3Q. How will things be different this year compared to the past 2 years?

Yes. So look, Girish, we -- like I said, we don't give guidance, but fairly suffice to say that this year, the reason we are more confident of H2 becoming better than H1 is based on what we know today. The last couple of financial years, we got surprised by a couple of clients, which led to a sharp dip in 4Q. As of today, again, I'll have to say it carefully that as of today, based on all our client conversations and the deals that we are fighting, we do not see a sharp dip in 4Q. In fact, if we can execute order book between now and, let's say, January or February, we expect 4Q to be a strongest quarter, but that is as of today. Now if some surprises come in, then obviously, we'll have to account for it at that point in time. But like Chandru has also mentioned and I have also mentioned, we've invested heavily in sales. We've invested heavily in our capability. And our complete job and the focus of the management team is to work on creating pipeline and deliver good order book growth between October and March so that the revenues can follow.

A few more questions. On advanced AI services, are you getting better margins? And was that a contributor to your performance, margin performance in the second quarter? And what is the delivery mix in the advanced AI services? I see that offshore mix has actually improved. And I'm sure that AI services have also been increasing as a percentage of your revenue. So what is the delivery mix in these advanced AI services? And how the margins in the advanced AI service that you're providing? And what's the trend there? Are these margins improving over the many quarters now? Or are they trending down because of the competitive intensity?

Yes. So a great question, Girish. So look, like we've mentioned, and I'll try and answer this question in 2 buckets, right? So the first bucket is our own efficiencies. Clearly, more and more code is being written by machines with human in the loop, and that is helping us in margin uptick. That's an industry norm, and I don't think we are any different, but we are executing on that flawlessly. Most of the conversations that we are having with existing clients as well as new clients, it is very, very competitive because in so many cases, you will have to commit to a productivity gain or a better time to market for our clients while you do a deal. But what we are confident about and what we are happy about is the kind of efficiencies that we are being able to drive, thanks to using agentic-AI bots to write code is increasing every quarter. I mean even in this quarter, we had a 10% increase in terms of machines writing code. And that is helping us in margins, which we are going to be reinvesting back in our sales and capability.

I want to inquire about the offshore/on-site mix of advanced AI services. I'm not talking about AI services, which address the core business, which is the legacy business. I'm talking more of the advanced AI services. Is it more offshore oriented? That's point #1. Second is, there has been this move by a lot of the larger players to address the mid-market segment. Accenture and a couple of others have talked about it. Are you feeling more competitive pressure here?

Yes. So Girish, look, first of all, advanced AI services, obviously, our offshore intensity is much more than the on-site intensity, right? But quite frankly, with more and more machines driving some of the outcomes, and we sign into an outcome, location is becoming agnostic for us. But clearly, based on the performance that we have seen in the last couple of quarters, advanced AI services, the intensity is far more offshore than it is on-site. Now as far as mid-market is concerned, we play a very significant role in the mid-market, as you know, from our client intensity. We are at least not seeing tremendous pricing pressure. However, when the deal becomes competitive, right, that is when we see immense amount of pricing pressure. But the capability that we have invested in and the differentiation that we are driving today, we are reasonably confident that we will be able to maintain margins. In fact, the margin improvement that we can deliver, we will restart investing in our business.

Next question is from the line of Ravi Menon from Axis Capital.

If I look at the, given trailing 12-month book-to-bill, we've actually had much better book-to-bill, but you seem a lot more confident. You've seen pretty broad-based growth this quarter. And you also delivered good growth this quarter, right? So just trying to understand how you're able to do that despite new deal wins actually still being kind of below high watermarks, even just like 3 quarters back, but this seems to be. But what's the time? Is it a lot of smaller deals coming through or if I could call it, framework deals where that doesn't show up in TCV? What explains this?

Yes. So Ravi, it's a combination of the last 2 things that you -- what you talked about, right? So we've bought a lot of -- we've opened a lot of MSAs, right, where we are working with partners as well as our own differentiated capabilities that we've been able to deliver, where we will land and then we will expand, right? So that is a clear motion we are seeing a lot of interest in. And currently, we are seeing a lot of intensity. But look, the job is half done. I'm not saying that we are out of the woods yet. We need to do a lot more work because we need to win larger and larger deals. Now the framework deals are coming in. We are signing more MSAs. We are opening newer and newer accounts, but they have to eventually land up in terms of delivering the revenues. The second part is also true that our deal sizes are becoming larger as we go forward and which is why the capability as well as the sales investment, we are doing is in order to convert that rhythm for deal making. But equally, like I said right upfront at before, as the call started, we ourselves are not very pleased with our order booking performance. We need to do much, much more, if we need to secure our future growth. We are pretty confident based on at least the conversations that we are having, like we said, Chandru and I said, H2 will be better than H1, but we really need to deliver a lot more order book to secure the future quarters, right, which is FY '28 and beyond, which is what we are working on now.

Chandru, a question on the other expenses side, this -- what's led to the increase here, almost like, I would say close to 78% quarter-on-quarter?

Give me a minute, Ravi, I'm collecting the data here. Can we move to the next question? I'll come back to you in a couple of minutes.

Sure. One more thing on the healthcare vertical. I know it's a relatively small number and fluctuates quite a bit, but the margins seem to have dropped this quarter. So what led to that?

Yes. So Life Sciences, like you said, Ravi, it's a very, very small business, right? We believe the margins will stabilize going forward. It is one program that led to this drop, but we are not unduly worried because Q4 onwards, it will get back to where it was in Q2.

More broadly on demand, you're saying that it is pretty similar that there is no change in the demand. But we've seen at least for a lot of your larger peers, BFSI seems to be doing well. How are you seeing that segment playing out for you?

Yes. So BFSI continues to be a strong segment for us, Ravi. As you know, we've delivered growth even in Q2. Q3 traditionally, again, as you know that it is a furlough quarter. So Q3, we expect BFSI to be slightly soft only because of furlough. But structurally, there is no change. Structurally, we will continue to grow financial services strongly Q4 onwards. So we are pretty bullish as far as our financial services growth is concerned, and that is our focus area as well.

Now, same -- are those -- yes, sorry, Chandru, go ahead.

No. Well, you finish asking your question. I can.

Yes. I was asking about this Anthropic mid-market focused firm that they launched, Ode. Have you started coming across them anywhere? Are you in partnership with them? Just if you could talk about that.

Yes. So I can't talk about that right now because we are under NDA, but we are working on multiple areas as far as some of these partners are concerned. That's all I can say at this point. But you've seen our OpenAI announcement, I'm sure, Ravi. That's a big announcement. We are very excited with that.