650% jump in 40 months! Multibagger stock Birlasoft is the next Persistent Systems, says HDFC Institutional Equities

Shares of multibagger stock Birlasoft have potential to deliver up to 20 per cent returns over prevailing share price, despite it delivering solid returns from March 2020 lows. The stock, which has delivered 650 per cent return in the last 40 months, got a target price of Rs 530 from HDFC Institutional Equities, as the brokerage believes the recent leadership changes can propel growth as well as improve the quality of revenue. The target hints at a 19 per cent upside potential ahead.

Calling it the next large mid-tier in its initiation report, HDFC Institutional Equities expects Birlasoft to attain the current scale of Persistent Systems in five years. So far, Persistent Systems is 1.7 times Birlasoft's revenue, 2 times its profit and 3.1 times its market capitalisation. Based on its mid-tier IT assessment framework, client cohort analysis and industry checks, HDFC Institutional Equities is positive about Birlasoft’s growth prospects.

The stock traded at Rs 447.20 apiece on Monday afternoon against Rs 57-odd level in March 2020. HDFC's target price suggests 18.51 per cent upside over this price.

"Based on our mid-tier IT assessment framework, Birlasoft 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)," it said.

Birlasoft's lower annuity mix gets offset by a high deal velocity, HDFC Institutional Equities said, adding that the It firm also has a strong track record of large client mining, supported by its proactive (non-RFP) wins and account rationalisation. It said Birlasoft's growth is expected to accelerate ahead with uptick

in the BFSI vertical (under-indexed currently); recent leadership refresh (hires from tier-1 IT), which can improve the quality of revenue and new logo addition; pipeline build-up indication from uptick in job posting; and reduction in growth skew of manufacturing and life-sciences.

Birlasoft'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.

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