Birlasoft Says Dealmaking Robust After Client Bankruptcy Causes Loss

The December quarter was one of Birlasoft Ltd.'s best in history in terms of dealmaking even as bankruptcy of one of its US clients pushed it into loss, Chief Executive Officer Angan Guha said on Friday.

The total contract value—or net new deal wins—stood at $231 million in the October-December period, Guha told BQ Prime during a post-earnings interaction. 

"This has by far been one of the best quarters (in terms of deal activity) in our history," Guha said. He hopes to convert some good deals in the fourth quarter as well.

Guha took over as the CEO of the Pune-based IT services firm on Dec. 1, a day after Dharmender Kapoor resigned from the post. The chief financial officer, Chandrasekar Thyagarajan, has also put in his papers.

Guha has taken the helm of Birlasoft at a crucial time—the company slipped into loss in the December quarter after one of its US clients, medical-devices maker Invacare Corp., filed for bankruptcy protection in that country.

Birlasoft then created a provision of Rs 151 crore against any outstanding receivables and contract assets. That wiped out its operational profitability.

The EBIT loss stood at Rs 136 crore in the December quarter, compared to an EBIT profit of Rs 155.7 crore in the previous three months, according to an exchange filing on Thursday. Analysts tracked by Bloomberg had estimated an EBIT profit of Rs 158.3 crore.

But Guha seems unperturbed. "If you take Invacare out, we delivered 13.4% EBIT margin and that was during a seasonally-weak quarter that has furloughs," he said. 

Guha feels that going into the March quarter from a 13.4% situation, the company will be able to do better from an EBIT standpoint.

“Now, how much provision we take against Invacare, that's very hard for me to say. But as of today, we are fully provided for it...unless the courts come back and give us a different scenario."

Birlasoft had signed a $240-million deal with Invacare in October 2019 to provide IT services over 10 years. At that rate, Birlasoft would have earned $25 million annually from the client. 

"Overall, Invacare is about 3% of our revenues... so there's of course an impact, I’ll not deny that. But it's not an impact that we cannot surmount," Guha said. "What we did however, in true corporate governance, we decided to provide for everything we knew today."

"It's important to tell our investors and provide upfront... That's what we have done."

WATCH | Birlasoft CEO Angan Guha After Q3 Results

Dealmaking Amid Macro Headwinds

Is Invacare's bankruptcy, then, a symptom of a slowdown in dealmaking? Guha was non-committal in his answer.

"It's hard for me to comment on individual clients, but I can tell you that our pipeline is really growing," he said.

"Now the question whether the client is there to close the deal or push out their decisions is hard to answer. But at this point in time, I'm getting the confidence that the deal pipeline is on track. And we will have another good quarter in terms of signings."

“It's hard to predict the future… We are trying to take one quarter at a time, but for now at least, I'm cautiously optimistic," he said.

Hirings & Firings

Birlasoft's attrition rate fell to 23.5% in the October-December quarter on a trailing 12-month basis from 27.4% in the previous three months.

"We estimate that it'll continue to go down, which is a positive on our EBIT margin," Guha said. "Headcount fell in the quarter and that is not because our business was weak, but because we are driving more productivity because we want to increase the margins." 

He underscored that the demand environment was stable overall and the firm continued to hire.

The churn is visible in the senior management as well: Birlasoft has lost a CFO, but gained an independent director in Ananth Narayanan, the founder of Thrasio-style venture Mensa Brands and a former Myntra CEO. He was previously in a 15-year stint with McKinsey & Co., where he rose to the rank of managing partner.

"Ananth is a great leader... He'll be a great addition to our board when it comes to strategy, execution and, quite frankly, even acquisitions," Guha said. "So, to me, he will be a great addition to the board and I look forward to working with him as we build Birlasoft into a growth engine."

Guha’s appointment as Birlasoft CEO itself is subject to government approval as he is a non-resident Indian.

"I mean, it [approval of appointment] has to take its own course... I mean, it comes when it comes," the New York native said.

On Friday, shares of Birlasoft Ltd. fell 1.43% to Rs 268.05 apiece on the BSE even as the benchmark Sensex ended the day 1.52% higher at 60,841.88 points.