Birlasoft Limited (BSOFT) Earnings Call Transcript

Ladies and gentlemen, good evening, and welcome to the Birlasoft Limited Q3 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhinandan Singh, Head of Investor Relations, Birlasoft Limited. Thank you, and over to you, Mr. Singh.

Thank you, and welcome, folks. By now, you 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 CFO, 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. Before I hand over the floor to Angan, a quick reminder that anything that we say on this call and 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 have received and is also uploaded on our website as well as filed with the stock exchanges. With this, let me hand over the floor now to Mr. Angan Guha, our CEO and MD. Over to you, Angan.

Thank you, Abhi. So good evening and good morning to all of you wherever you are and wish all of you a very happy New Year. Thank you for joining us today as we share some perspectives on our Q3 FY '26 performance. Our performance during the third quarter, which, as all of you know, is a seasonally weak quarter, demonstrates our ability to hold our revenue steady, secure solid order book, drive operating efficiencies and generate strong cash flows. Our revenue for the quarter grew 0.3% in constant currency and 0.1% in dollar terms to $150.8 million. We have delivered a stable performance despite it being a seasonally soft quarter, which is usually a quarter with a lot of furloughs. Growth in our manufacturing vertical, which reflects some ramp-ups in projects that were won earlier, enabled us to offset the impact of furloughs and weaker traction in other verticals, including BFSI. On the margin front, we have done much better, recording a quarter-on-quarter expansion of 212 basis points in our EBITDA margins, which now stands at 18.2%. You will recall that this comes on the back of a similar expansion even in Q2. The margin expansion has been driven by several contributing factors, including improvement in the quality of our revenues, ongoing efforts to optimize our cost structures and some one-offs. We have seen our cash collections. And as a result, our cash balances have risen as well. Chandru, our CFO, will provide more color on all of this in his remarks. On the deal front, too, the story has been much better in Q3. You would recall that on the last call, we had called out that a couple of deals that were committed to us, but we couldn't sign it in Q2 -- had moved to Q3. That has now shown up in our third quarter results. As a result, our TCV for the third quarter stands at $202 million, which is up 89% quarter-on-quarter, which is nearly half -- out of the $202 million, nearly half of it is new engagements. Many of these deals were won on the back of our domain expertise and AI-led capabilities. For instance, in BFSI, we won a strategic engagement with a leading payments and card client to build conversational AI and agentic capabilities for its eGRC platform. Similarly, we have secured a multiyear engagement to design, build and deploy AI agents across a customer's business ecosystem in the manufacturing vertical, encompassing end-to-end business analysis and the development of scalable packaged AI solutions. In the manufacturing vertical, again, we've deployed an AI-enabled smart manufacturing material tracking solution, driving real-time inventory control for a large global company. These will add to our growing base of engagements where we are already deploying advanced AI capabilities, and we will continue to make investments that are necessary to build a differentiated value proposition in the marketplace. Now in terms of the outlook going forward, as all of you know, from our perspective, we have not seen any material change in the demand environment, and we've discussed this even in the past. Customers continue to focus on optimizing their spends and discretionary spending, therefore, remains constrained. While some verticals such as BFSI and ENU are steadier than others, our exposure is higher to manufacturing-led customers across both manufacturing and life sciences and services verticals. In this backdrop, our focus is on shoring up our deal pipeline, driving order book while we are building on our capabilities on domain and technology. At this point, I would like to request Chandru, our CFO, to share his perspectives for the quarter. Chandru, over to you.

Thank you, Angan, and a very warm welcome to all of you joining us today on this call. Allow me to take you through the financial highlights for quarter 3 FY '26. As you would have all seen, we have reported consolidated revenue of $150.8 million for the third quarter, representing a dollar term growth of 0.1% and a constant currency growth of 0.3% quarter-on-quarter. In rupee terms, the quarter 3 revenue was INR 13,475 million or INR 1,347.5 crores, a growth of 1.4% quarter-on-quarter. Sequential growth in our manufacturing vertical enabled us to offset the impact of furloughs and softness in some of the other verticals resulting in a stable revenue performance during the quarter. Moving on to our EBITDA performance. This is the second consecutive quarter of healthy margin expansion even after excluding the benefit of exchange rate tailwinds and some one-offs. We've been putting in a serious effort over the past few months around our cost structure and continue to do so. This is clearly delivering results for us. EBITDA for the quarter under review increased by 14.8% quarter-on-quarter and by 49.8% on a year-on-year basis in rupee terms to INR 244.8 crores and up 13.3% quarter-on-quarter, 42.1% year-on-year in dollar terms to $27.4 million. Consequently, EBITDA margin expanded 212 basis points quarter-on-quarter from 16% in Q2 to 18.2% in Q3. The significant margin expansion was led by a combination of factors. We have seen the quality of our revenues improve, which is the outcome of a conscious effort to focus on a more profitable engagement and delivery model. We have also benefited from favorable shift in our revenue mix with a rise in fixed price business and offshore work. In addition, better operational efficiencies and gains from exchange rate tailwinds about 70 to 80 basis points as well as from one-offs, about 110 basis points in Q3 helped us in our EBITDA story. On a steady-state basis and taking into account some accelerated investments we will be making going forward, EBITDA margin will be about 15%. Our EBIT performance for the quarter under review reflects the impact of a onetime provision that we've taken to conform to the changes in the labor code with regard to gratuity and leave encashment. That provision, which we have called out as an exceptional item, amounts to $4.6 million or INR 40.7 crores. As we had mentioned on our earlier calls, during the current financial year, our effective tax rate has increased on account of a provision made for higher tax related to U.S. federal taxes. You will recall that we had said that this transitionary trend will sustain through the course of the current financial year before settling closer to historical ETR levels in the next financial year. The ETR for Q3 FY '26 reflects the same. Without the additional federal tax impact that we have seen Q1 onwards, our year-to-date ETR would have been about 28%. Adjusted for an incremental provision for tax and a onetime provision made on account of changes to the labor cost, normalized PAT for the quarter was $20.2 million, up 20.4% quarter-on-quarter and INR 180.2 crores in rupee terms, up 22.1% quarter-on-quarter. This translates into an adjusted basic non-annualized EPS of INR 6.44 per share. We also maintained our robust track record on collections and cash flow generation during the quarter with the highest quarterly collection so far this financial year. As a result, our DSO has improved quarter-on-quarter and now stands at 54 days, which you will agree is amongst the best in our industry. Cash and cash equivalents at the end of Q3 increased to INR 2,491 crores, up 6% quarter-on-quarter and 21% year-on-year. We will continue with our efforts to enhance our operating efficiencies and improve our quality of revenue while also making the investment and capabilities that are necessary for future growth. Thank you very much. With this, let me open the floor for questions.

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

Congratulations on a great execution in a difficult time in a quarter. Sir, first question is, if I look at the offshore revenue mix, it has jumped materially in this quarter. So is it fair to assume volume growth is materially higher versus the headline growth in constant currency terms? And this shift to offshore is a deliberate attempt where we want to diversify beyond a staff augmentation business to managed services kind of a business?

Yes. So Sandeep, thank you for your question. So your analysis is exactly right. As you would have seen even in the last quarter and this quarter, our endeavor has been to move away from [ staff work ] and do more outcome-based work. Our clients are also challenging us to do more outcome-based work. And some of the deals that we have won last quarter as well as this quarter are really fixed-price work. As a result, moving to offshore is easier for us, and that is reflected in the results that we have delivered. From a volume perspective, mathematically, yes, you're correct. The volume growth is higher. But since the offshore ratios are higher, that obviously suppresses growth, but improves margins.

Okay. Okay. And sir, just a second question in terms of vertical mix, which vertical you believe still carries some demand headwinds and which vertical is giving you confidence in terms of a better growth starting from 4Q and next financial year?

Yes. So Sandeep, though manufacturing has shown growth this quarter, we must not take that as a winning story, quite frankly. In my mind, the manufacturing business will continue to show headwinds even in 4Q, there will be softness. You see the growth in manufacturing and also ERP because both businesses are quite related because of some deals that we had won earlier and we got to ramp them up now. And as a result, the revenue realization has happened. But that's more onetime. Sustainably, I think manufacturing will continue to face headwind at least for one more quarter. And I expect the manufacturing business to turn around sometime Q1 or Q2 onwards for the next financial year. We strongly believe that ENU and Financial Services will be -- will continue the growth momentum. As you know, this was a furlough quarter. So optically, you're seeing a degrowth in Financial Services. But I believe Financial Services will be steady in 4Q. And next year, definitely, we will see growth. Similar goes for ENU. Manufacturing will be a lot of headwind. Similarly, like we've always said that our Life Sciences business is more a med devices business, which is also really manufacturing. So that holds true for Life Sciences as well. Life Sciences, I feel there will be headwind in 4Q. And hopefully, in the next -- Q1 of next financial year, we should see it stabilize and then grow Q2 onwards.

We have the next question from the line of Dipesh Mehta from Emkay Global.

Congrats on strong execution, particularly on margin side. I just want to understand if you can provide some margin work. Last quarter in quarter 2, we have some one-off of roughly around 150 bps. This time, you indicated around 110 bps. So from quarter 1 onwards, whether one should take is almost 250, 260 bps kind of one-off benefit, which is in there in the quarter 3 margin trajectory? That is question one. So broadly margin work and one-off related, some explanation, what is driving this one-off and how long is this to sustain? Second question is about the revenue growth side, whether furloughs were similar to last year or we have seen higher-than-usual furloughs this quarter? If you can provide some color around intensity of furloughs. And last question is about wage hike. Any decision we make on wage hike?

So Dipesh, I'll ask Chandru to take the margin question first, and then I will attempt to answer your other 2 questions. Chandru?

Yes. So Dipesh, in terms of the one-off, right? So you'll recall that both in quarter 1 and quarter 2, we did call out some of the overall one-offs and therefore, the steady-state EBITDA margins, right? So if you look at third quarter, and if I were to do that math from the second quarter onwards, second quarter, we spoke about a steady-state margin of about 13.5%, 14%, if you recall, right? From then to where we are today, I would believe that net of some of the one-offs, there is a ForEx impact of 70 to 80 basis points that we spoke about. We spoke about the one-offs of 110 basis points. If I were to remove those my steady-state EBITDA margin from the 18.2% is down to 16.5%. And then what we believe is that the 14% has gone up to the 16-odd percent. There is a 200 basis point improvement from a steady-state standpoint. And from there, we do expect that we will continue to invest in our business. And our business, I think, requires an investment on a regular basis. And if I were to provide, say, 150 basis points on that, we believe that 15% EBITDA margin should be a sustainable run rate margin as we go forward, Dipesh. I hope this answers your question.

Dipesh, on the wage hike bit, look, we've already taken a decision that we will do a wage hike next financial year. We are doing promotions this year -- this quarter, and we will affect the wage hike between Q1 and Q2, depending upon what level of employees there are in the organization. But that's a decision we have taken and we have already communicated. Dipesh, on the growth question, can you repeat the question because I didn't quite catch the growth question.

So quarter 3, whether we face furlough in line with last year or furloughs were higher than last year. And the second question yes...

No, furloughs were in line, Dipesh.

Okay. So broadly, if I refer to your last quarter earnings commentary, you said if furloughs were in line with last year, you expected some kind of revenue growth to continue in this quarter. Now this 0.3% is what we delivered, whether that was the expectation or it is higher, lower than what you anticipated at the beginning of quarter? And how one should look quarter 4 to play out?

Yes. So Dipesh, it is exactly in line with what we had anticipated because as you know, if you recall, even last year, we had furloughs, which were to the tune of about 0.5% to 1%, and that held even for this financial year. Now it is hard for me to predict Q4 from a revenue standpoint, but our focus will be on generating pipeline and signings. What we are confident of is we will deliver better signings in Q3 and Q4. Now how much out of that will be playing out on the revenue, we'll have to wait and watch. But like I've always said, our problem or rather the focus of the management team has to be on revenue growth. But before that, we have to get the signings done. So as a management team, what I can commit is our order booking for Q4 will be better than Q3.

We have the next question from the line of Abhishek Shindadkar from Incred Capital.

Congrats on a good execution. My question is related to the stand-alone business. If I look at the 2 quarter number for the stand-alone business, the revenue has [Technical Difficulty].

Sorry, to interrupt in between. Abhishek, your voice is breaking. No, still your voice is breaking. I would request you to please rejoin the queue again.

Okay. Fair enough. I'll do that.

We have the next question from the line of Priyank Chheda from Vallum Capital.

Congratulations to the management team for walking the talk about growth in Q3 and Q4. I'll first start with my first question on the verticals. Data and digital has been the story across the sector, across the IT companies with respect to the modernization as well as the digital revenue. So in this segment, we have seen a decline after a growth after growth that was reported in H1. What has been the reading through this? How should we read this decline? Is it one-off or related to furloughs? And the related question on the infra, which is again a 10% of the revenues. And I'm sure we had given up some pass-through revenues and given up some businesses over here in H1. But again, when I see Q3, we have seen a strong growth, and I suppose this is coming from the ROW market. So how should we look across the growth in data and digital, which is segment #1 and the last segment, which is infra over a steady state?

Yes. So Priyank, thank you for that question. So Priyank, look, our data and digital business fundamentally is strong. I don't think there is any structural issue in the business. The reason why you see a little bit of degrowth is because it is in line with Financial Services, which is affected by furloughs. So furloughs have dented the growth a little bit. We are reasonably certain that growth will be back in Q4 as far as data and digital is concerned. Structurally, there is no issue with that business. As far as infrastructure is concerned, as you can see, the major growth of infrastructure is because of the deal that we signed in ROW, which was an infrastructure deal, which we are now executing, and that has contributed to the growth. If I were to look forward, I continue to feel that digital and data will be steady. They will show a growth or -- I mean, structurally, there is no issue. Infrastructure will be a strong growth area. Our ERP business will continue to lag, though it has shown some growth this quarter in line with our manufacturing growth, but we will see softness in the ERP business for another quarter at least before that turns around.

Sure. And just to appreciate the readings between this infrastructure segment, can we get details around what kind of work we do in the infrastructure as a broader vertical?

Yes. So we do all kind of work. We do deskside services. Though deskside services is not a big focus area, but we have won some business on the deskside services. We also do data center management. We also -- within data center, we manage the middleware, we manage storage. So all kinds of infrastructure that runs the business we manage. We've also forayed into the cybersecurity business where we've started to serve our customers on the cybersecurity side. So all in all, it is a growth-oriented business for us, Priyank.

Got it. Coming to the deal wins, and I'm congratulating the team for the $65 million two deals, I suppose that has been reported now from the signings that were pending in Q2. But if I have to carve out that deals which have been flown through from Q2 to Q3, the net new after excluding that, again, has not been that great. How do you read through this? And then I have to take a view on a YTD deal wins, which is there at around $450 million. And still it's far away than our aspirational numbers of $750 million, $850 million for us to get a confidence around the growth for the coming year. How should we think about ending this year in, say, next 3 months at what size and number we are looking out to end? And then given all the background around the sales engine that we are deploying, what would be the growth outlook on the deal wins and the targets for FY '27?

Yes. So Priyank, you've asked 3 questions, and let me try and attempt to answer all 3. First of all, the 2 deals that were supposed to get signed and slipped from Q2 to Q3 finally got signed in Q3, right? So from that perspective, you are correct that those 2 deals had to get pushed out, but now finally got signed. But Priyank, you must also remember, both the deals were net new deals, right? They were not renewals. So that's point number one, which is why among -- out of the total signings of $202 million, $94 million is net new, which is 46% almost of our signings is net new. What we are confident of, Priyank, is our 4Q signings will be better than Q3 signings. Now whether it will be $210 million, $250 million or more, I don't know. But from the looks of it, basis on the funnel, basis on our conversation with our clients, we are pretty confident that our Q4 signings will be better than Q3 signings. Now as far as revenue targets are concerned, it is a little too early for us to think about that. We have to first execute Q4 on all the parameters that Chandru spoke about, operational rigor, signings, revenue management, et cetera. And sometime towards the end of March, we will be able to put our head together in terms of what would be our outlook for Q4 FY '27. But look, we don't give a guidance. Our job will be to execute for the quarter and take one quarter at a time.

Sure. I get that. And when you say Q4 would be better than Q3, is it based on net new number that we should focus on because H2 is generally very heavy on the renewal -- so maybe renewals is something that you would want to call out. And if I have to remember my notes, in last quarter call, you did mention that the new renewals will come at a lower margin, and this is what is making around our guidance of 15% versus what we have been delivering now.

That is correct, Priyank. So you're absolutely correct. So look, renewals are important because as a company, as you know, Priyank, we have discussed it in the past that we have faced a lot of headwinds in terms of leaky bucket. So from that perspective, renewals are important. What we can say is that all the bad news is behind us. I don't think we will lose any existing business, but they will get renewed at a lower margin because we see pricing pressures, which is why Chandru talked about a steady-state margin of about 15%. In terms of the total signings, and the percentage of the new signings within the total signings is something that we cannot guide at this point in time. I can only say that our overall signings in Q4 will be better than Q3.

Yes. And Priyank, if I may add to what Angan just said, one of the big reasons why we believe that a continuous exercise around -- it's a spring cleaning on our cost structure to make sure that we eliminate waste, we improve efficiency is anticipating that we will have margin pressure, and we still need to deliver the strong EBITDA margins for ourselves and our stakeholders. So that is clearly an objective for us and one of the reasons why we are so maniacally focused on our cost takeout exercise, Priyank.

If I can add to a similar follow-on question, despite being a great confidence on the -- despite being one of the good quarter on the new deal signings and also on the confidence that we carry forward. The number of clients that rationalization exercise is yet not ending or it's not bottoming out in terms of the last few clients we have lost a couple of clients over the quarters. So when should we see this bottoming out along with the new signings that we are doing? Is it the existing clients being minted further more in their wallet share? Or the strategy would be to see as the headcount on the sales has been added, this would also get reflected in the coming quarters on the -- in terms of the clients profile on the number of client?

Yes. So Priyank, look, I mean, we have not lost a single client, right? The reason why you see the total clients coming down is we are rationalizing businesses that are not profitable for us or businesses that don't show potential for growth, right? So we are trying to concentrate on lesser number of clients so that we can deliver and serve those clients meaningfully, which is why you will see the client list coming down. Now that doesn't mean that we are cutting a tail any further. I mean we've done a lot of rationalization of clients, and I think we are at an optimum number. Now 3 or 4 clients in a quarter we add or 3 or 4 clients we rationalize is a call that we take based on what kind of margins we can do. However, if you look at our 1 million-plus clients, right, that has expanded from 78 to 85 which also should tell you that our focus on growing clients which have the potential is very, very sharp.

We have the next question from the line of Abhishek Shindadkar from Incred Capital.

Hopefully, this time it is better.

Yes, we can hear you, Abhishek.

Okay. Perfect. Congratulations on a great quarter. Sir, my question is regarding the stand-alone business. The growth rate in that business is phenomenal. The expansion in margin is even more better. So can you give a color in terms of what is driving this efficiency in the stand-alone business? And a part 2 question is, is it that it is being driven by any sales force or any other particular business, which was predominantly the old Birlasoft business? And the cost rationalization or the one-offs that are we reporting are those -- the reduction in the employees predominantly being driven in this part of business?

Yes. So Abhishek, thank you for the question, right? I'm happy that you looked at the stand-alone results as well. See the stand-alone results is where a lot of the ROW revenues are captured, okay? So which is what you're seeing in the consolidated financial is ROW revenues having gone up on a quarter-on-quarter basis, right? Specifically, we had a couple of customers where we achieved milestones and as a result, we were able to book additional revenue in the quarter, okay? And these are customers in the ERP space, and therefore, you will find that the third quarter ERP revenue went up on a quarter-on-quarter basis. So very precisely, that's the reason. Also the impact of ForEx benefit pretty much sits in the stand-alone financials. And that's the other reason why you're seeing the bottom line uptick on a big time in the stand-alone financials, Abhishek.

Perfect, sir. This is helpful. So just the second part of the question, can we relate the reduction in the employees to the stand-alone business? And is this any service line which is driving this business? You mentioned the geography, but any color on the service line would be helpful.

Yes. Service line, I spoke about ERP, Abhishek. I said this geography, specifically the ERP service line is where we saw a growth, right, in the third quarter. I also wanted to add that there were specific milestones that we hit that allowed us to book some revenues in ROW. We still need to steady our ERP business, as Angan earlier mentioned, the manufacturing and ERP businesses. And that is a work in progress as we speak. That's the short answer to your question on the service line part of it. In terms of the headcount reduction, the headcount reduction, as you rightly said, is to a big part in the offshore side of our business. Having said that, not all offshore headcount actually gets accounted for in the stand-alone, right? Because a lot of them work for our global businesses. And therefore, the accounting will be in the respective P&L of the country from which the business accrues. That's point number one. Point number two, we do -- as you know, we've seen business shifting from onsite to offshore. And so there is some rebalancing within this headcount portfolio as well that happened during the quarter, Abhishek.