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Well positioned

Coforge reported revenue of US$232.4mn, growing 4.9% QoQ (above our estimates of +4%). In CC terms, revenue grew 5% QoQ. For FY22, it grew 38% YoY US$ (37.6% YoY CC). On an organic basis, growth was 24.9% YoY US$ for FY22. Fresh order intake stood at US$301mn, +22% QoQ US$, which includes a US$50mn+ deal won in the US. For the full year, order intake was US$1.15bn, +48% YoY. Coforge signed 11 large deals in FY22. Strong bounce back in travel industry and sustained momentum in insurance should continue driving growth in FY23. Further, the company’s client mining efforts have increased US$10mn+ clients to 18 from 11 in FY21.

The company has reported its highest-ever EBITDA margin (pre-RSU) of 20.4% in Q4FY22. EBIT margin for the quarter was 15.8%, +70ps QoQ (Isec: 16.3%). Significant expansion of margins in FY22 (+70bps YoY) was led by 1) progressive enhancement in offshore revenue on the back of large deals signed, 2) expansion in gross margins, 3) operating leverage from strong growth, 4) induction of 6.7x freshers over FY21, flattening delivery and 5) phased return of gross margins in the travel business. Management has created an aggressive time bound plan to achieve US$2bn in revenues. Given the order book, order intake and client conversations, management guided for organic revenue growth of 20% YoY (CC) for FY23. We believe this guidance is conservative and build in revenue growth of 22.3%/17.5% for FY23E/24E. Adjusted EBITDA margins are guided to be in the range of 18.5-19%. Given the supply-side constraints and return of travel/facility costs, we believe margins should be under pressure, and accordingly build in adjusted EBITDA margins of 18.8%/19.0% for FY23E/24E, respectively.

We like Coforge led by its 1) differentiated competitive positioning in certain niche areas (e.g. insurance, wealth management, TTH); 2) sector-leading growth profile; 3) ability to win large deals amidst demand environment filled with shorter cycle deals; 4) robust client mining across buckets reflected in highest revenue per client among peers; 5) lowest client concentration; and 6) highest revenue productivity among peers. Its focus on client mining and sub-verticals such as insurance, asset management and transportation is a competitive advantage. Coforge is currently trading at 27x/22x on FY23E/24E EPS of Rs137/167. We maintain our BUY rating on the stock, valuing it at 27x multiple on FY24E EPS vs 30x earlier due to slower macro growth. We arrive at a target price of Rs4,514.

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