Birlasoft: Hidden IT business| Poised for Growth
Hi investors! Welcome to SOIC! We’ll talk about Birlasoft in today’s analysis. Before we discuss Birlasoft, we’ll talk about something very interesting Why is it important to select the right sector? We often talk about Megatrends, these are trends that are there for a long time. Looking at the exports of Indian IT sectors, & what Megatrends are, this is it. What is a megatrend? This is a typical example. In 2006, $24 billion IT services were exported from India, which in 2015 grew to $88 billion, today $15 billion IT services are exported from India.
You gotten a 6-7 bagger at Industry level. If the industry itself becomes a 6-7 bagger, its constituents also obviously grow. Similarly, observing the Indian CDMO & CRAMS industry, Pi Industries, Divis, & Syngene are the key beneficiaries The Indian CDMO exports industry is growing at ~10-11% The FMCG Industry shows double digit volume growth in FMCG sector for several yrs. 100 Baggers a book by Chris Mayer, you should look for megatrends, there are some who are able to surf the wave for a long time.
here’s quote: “There’s a tide in the affairs of men, which taken at the flood, leads on to fortune…’ William Shakespeare He means that there is a rising tide in the affairs of men Similarly, there’s a rising tide in terms of industry growth, if we find a good player, it leads to a fortune. Similarly, in industries such as IT, pharma, FMCG, private banks, CDMO, if we’re able to find a good player, it leads to a fortune. You must have noticed this about our channel, we try to analyse those companies that are undergoing megatrends.
This is why we’ve decided to analyse Birlasoft, let’s see what’s interesting about it. Birlasoft was etsb. in 2019 due to the merger of KPIT & Birlasoft. It’s C. K. Birla Group’s company. It’s worth $2.4 billion Birlasoft was a traditional IT company in 1995 They had legacy & digital businesses The problem was, for the legacy business until 2015, 50% sales were generated from 1 client: General Electric GE was the no.1 conglomerate in the world for a long time Due to many diversifications & being in many traditional industries, gradually the business began to suffer.
This decline in business affected Birlasoft’s business, they experienced challenges in growth. 50% of growth was coming from a customer who itself was struggling. From 2015-18, Birlasoft tried to reduce their exposure towards GE In 2018, through Slump Sale, they sold their business to Genpact. From 2018, Birlasoft became a Digital IT Service Business. In 2019, KPIT & Birlasoft merged KPIT had 2 businesses: 1. ERP: Implement Oracle & SAP They had more than 400 clients Their focus was horizontal A good thing about this business was that they had many clients 2. ER&D: like we’d discussed about Tata Elxsi
which then separated later Looking at KPIT’s Technologies (which is listed) ER&D business which focuses on Electric Vehicles. KPIT Services, meanwhile is a part of Birlasoft So Birlasoft includes Digital IT Services & KPIT’s ERP business Let’s understand the Rationale Behind the Merger 1. When you’re setting up an IT company, or if its a small IT company to reach the clients you have to often cut your pricing. This is known as the Foot-In-The-Door Technique. When you cut the price & win a project, you’ll then build a good relationship with your client.
Subsequently, you’ll gradually increase your pricing. Birlasoft was experiencing problems during that time, they decided to merge their business with KPIT, which already had ~400+ clients After the meter, in 2019 they experienced Integration Challenges: Integration Challenges: of different work cultures, KPIT’s ERP business de-grew by 10-15%, The clients also experience uncertainty The business wasn’t an Annuity Business We must look for Annuity Businesses in IT companies. Annuity Business: Recurring Projects During that time, their business wasn’t recurring In 2019, their previous C.E.O, Anjan Lahiri by Dharmender Kapoor. His background is very interesting, he’s previously worked for HCL for 11 yrs. His total industry experience was of ~30 yrs.
Another interesting thing to note about Mid-Cap or Small-Cap IT business, the key managerial personnel’s qualifications. Dharmender Kapoor hired other industry veterans like himself. For e.g. the company’s Chief Delivery Officer, Shreeranganath, has worked at Infosys & Mastek & has ~30 yrs of experience in the industry. Roop Singh, the Chief Business Officer, has >25 yrs of experience, & worked for 9 yrs at WIPRO & 3 yrs in IBM in the banking division. Arun Dinakar Rao, the Chief People Officer has previously worked at DXC for 3 yrs in as Head of HR & has also worked at CSC & Deloitte.
. He has >28 yrs of experience in HR. Chandrasekhar Thygarajan, the Chief Financial Officer, has worked at Karvy Consultants, & has >32 yrs of experience. On LinkedIn, Birlasofts’s KMPs or those who hold key positions, have a lot of industry experience. IT business is a business of Human Resources. How is the Human Resource of the company? If we’re considering a Mid-Cap or Small-Cap IT business, the management matters a lot —how aspirational is the management? In terms of Aspirational Management, Birlasoft checks all the boxes.
Coforge, in 2015-16, for 9 months when their older management was being replaced by new management, uncertainty had seeped into the business. Similarly, when John Owen had left Mastek —he’s won a lot of their business in England. Although there was some uncertainty in the business, Mastek handled it well because their acquisition of Evosys is going extremely well. These were some things that ticked the boxes.
Let's look at the 2nd aspect: We must remember that IT businesses are businesses of humans. The biggest resource are humans. Humans have the ability to focus or concentrate The problem with Birlasoft’s merger with KPIT, there were many Tail Accounts: those customers who aren’t beneficial for the company, the contract size is small i.e. $200k-$300k Dharmendra Kapoor’s strategy, from the 1st con-call, was to cut Tail Accounts & focus on their top 20 customers.
Let’s see how their strategy was implemented. In Q4FY20, they had 378 Active Clients & removed 3 clients. In Q4FY21, they have 291 Active Clients. They’ve removed almost 82-83 clients. By removing 82-83 clients the Revenue Contribution from Top 5 Clients: 33% revenue from these top 5 clients Revenue Contribution from Top 10 Clients is 45% Revenue Contribution from Top 20 Clients is ~61% They have very good clients: Xerox Crop., Synchroy, PACCAR, Cummins, SAP, Swiss Re, Tokyo Marine, etc.
What’s interesting in Mid-Cap businesses, if you’re able to mine your clients —this is a very crucial Mental Model for Mid-Cap IT businesses, if you want to remember: Client Mining. Ability to mine the existing clients, how much you’re able to cross sell your services to them. We can observe this Client Mining strategy playing out beautifully for them.
Let’s talk about the Business Verticals. ~32% of Revenue is generated from Integrated Enterprise Solutions, from their legacy business. Their SAP business is 12% at present.
43% of business is legacy business If we’d looked before, when the business merger occurred ~63-64% of business came from SAP & Integrated Enterprise Solutions. This was about their Legacy Business. From ~63-65% it has reduced to 45-47% Their new business of Emerging Horizontals & Digital Transformation Services, like we’d discussed in Happiest Minds Interestingly, this business’s proportion has grown from 27% to 35% Emerging Horizontals & Digital Transformation Emerging Horizontals is about 22% This business is preforming at 55-57% Where does Birlasoft operate within Digital Transformation? They work in different verticals: providing CRM, Supply Chain Management (SCM), —we’ll take up some case studies— Business Intelligence & Data Analytics, Other Digital Solutions: Cloud Migration & Adoption, Transformation, etc.
An interesting that’s happened here is, Microsoft Azure These are called Hyperscalers, if you want to understand the Value Chain, you must understand what Hyperscalers are There are 3-4 Hyperscalers in the industry: 1. Google Cloud. 2. Microsoft Azure. 3. Amazon Webservices. These 3 are the Hyperscalers 4. Salesforce also comes within this. These companies basically provide Cloud services. The role of IT companies is, instead of going directly to the customers, the IT services companies in the middle saves them a lot of time.
It’s the same for the customer Seeking Cloud services through IT businesses makes it easier for them to gauge which one is more suitable for them. Birlasoft recently collaborated with Microsoft Azure, 1 of the reasons was the SAP services are also being delivered via Azure These are hyperscalers & they’re growing at 30-32% CAGR IT Services are like picks & shovel, The hyperscalers are growing because the world is adapting towards Cloud services as we’ve discussed in the Happiest Minds video. Similarly, IT service businesses are getting a lot of benefit from this. Birlasoft in their con-calls have guided that their business with Microsoft Azur is $30-40 million they plan to increase it to $100 million This is the Mid-Cap IT businesses Value Proposition.
Let’s discuss some of Brilasoft’s case studies that seem interesting to note. Birlasoft operates within 4 Verticals: A small IT company will try to operate in micro-niche. If I’m already providing a full stacked services & competing with Infosys or TCS, I’ve mentioned full stack is because they’re working in different verticals & providing different services A Mid-Cap IT company will have to specialise in some verticals. Similarly, Brilasoft specialises in 1. Manufacturing 2. BFSI services 3. Energy & Utilities
4. Life Sciences We'll discuss a case study within Banking & Financial services it is ~17% of their sales Case Study: UK based financier had a $700 million loan book, they were losing money because of inability to track fraud due to complexity of data which makes it difficult to detect fraud. Birlasoft created a solution for them to detect the fraudulent activities & this solution gave detailed analysis to investigate. From this solution, the UK based financier I think its Barklays because that's what news reports mentioned. 900 fraudulent transactions were identified in 2 yrs & the customer saved 300% savings In terms of cost they saved 300% This how IT services have the Value Proposition.
India is doing well in the IT sector because, we have many English speaking population, & we have a comparative advantage at the country level. 2nd Case Study: Manufacturing Business Fortune 10 an aviation major their problem was they had 60k suppliers it was difficult to coordinate with all of them Birlasoft implemented the ERP & smoothened the Supply Chain Management The benefit was, ~$40 million reduction in accounts payable $1.2 million savings due to better governance & productivity & shorter procurement cycle This is the Value Proposition of IT businesses in SCM. Manufacturing includes Birlasoft's high-tech business & automotive business In Life Sciences business includes CRO, CRAMS & CDMO businesses Drug Discovery for Biopharmaceutical companies are also provided services.
Let's consider 2 more case studies. 3rd Case Study: Energy & Utility company The problem: an Oil & Gas major asset maintenance levels were low due to absence of field service solutions which directly affected the assets' performance. Oil & Gas companies their pipelines are transported, & have different assets They were unable to survey their assets, to identify the problem Similarly, Birlasoft create a solution for them, they created a Filed Service Solution that provided real time updates, to the Field Technicians to maintain the asset's reliability.
On time maintenance increased due to reliability of assets. Longer lifetime of assets lead to lower Initial Investment Cost. Operational Revenue increased because of increased efficiency. These were some things done by Birlasoft.
If you want to learn about how to analyse different industries, to understand the key variables in each industry, link to the SOIC Membership is in the description below. We're also conducting SOIC Deep Dives our first session of this series on 25th of July, 1 p.m. onwards we're going to conduct this along with the SOIC Members/students We'll be diving deep into 2 companies, 1. Oriental Aromatics, 2. Neogen Chemicals
We'll also deep dive into another company, we won't be naming it. However, this company manufactures electric vehicle chemicals. This is an interesting company at present, and remains under-discussed Not many people know of this company. Even though its Market Cap is >Rs. 10 cr.
the company operates in High Entry Barrier space We're extremely excited to discuss this company! If anyone wants to attend the SOIC Continuous Classes every month, We have conducted a webinar about SOIC Excel Sheet 2.0 today for our members. We've done a discussed Profitability Ratios of the Income statement in detail with real life case studies from the Indian context Link to the SOIC Membership is given in the description below. 4th Case Study: Biopharmaceutical In their Life Science division, they provide services to Biopharmaceuticals & Manufacturers of Medical Devices We'll discuss talk about the Medical Devices because they've made a huge deal here. In Biopharma, the CDMOs, CROs basically the virtual labs