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Strong quarterly performance, robust guidance…

Coforge Ltd (Coforge) reported healthy revenue growth, up 5.1% QoQ in constant currency (CC) terms, above our estimate of 3.0% QoQ growth. The revenue growth was led by insurance (up 3.9% QoQ), others (up 17.9% QoQ) and BFS (up 1.3% QoQ). The company declared a dividend of | 13 per share. Coforge has guided for organic revenue growth of 17% in CC terms (highest in our coverage universe) in FY22E and EBITDA margin (excluding Esop and acquisition related costs) expansion of 1% to 19% in FY22E.

Inorganic growth, healthy deal pipeline to drive growth

The company has reported ~6% YoY growth in FY21 dollar revenue growth despite travel segment impact and Covid challenges. We believe this was mainly due to its ability to win large deals and traction in healthcare, insurance and banking. Going forward, with the acquisition of SLK, we expect Coforge to further penetrate into the banking vertical and participate in large deals. The company is seeing an increase in deal size and is currently pursuing three greater than US$50 million deals (of which one is US$100 million deal).

The materialisation of these deals coupled with healthy order book bottoming out of travel vertical and preferred partnership with Fortune 500 insurance & Tier 1 banking companies bodes well for revenue growth in coming quarters. In addition, traction in cloud, data, cybersecurity and artificial intelligence (AI) (via partnerships with large players in cloud and partnering with product start-ups) will drive long term revenues for the company. Further, on synergies with recent acquisition and aggressive hiring, we expect Coforge to register a dollar CAGR of 22.5% in FY21-23E.

Margins to remain healthy, going forward

EBITDA margins were flat on a QoQ basis despite higher revenue growth due to one-time bonus to employees. The company plans to give wage hikes in FY22E. However, we believe Coforge would be able to offset this and other cost headwinds due to higher offshoring, higher margins in acquired company, reversal of travel discount and revenue growth. We expect margins to improve 253 bps to 19.4% in FY21-23E.

Valuation & Outlook

The company is witnessing a healthy deal pipeline and growing deal sizes, which will help improve revenue growth, going forward. In addition, ramp up in BFS & Insurance, revival in travel segment, traction in healthcare and strategic acquisition of SLK global will help drive long term revenues. This, coupled with improving margins, prompt us to have a positive view on the stock from a long term perspective. Hence, we upgrade the stock from HOLD to BUY with a revised target price of | 3985 (30x PE on FY23E EPS) (earlier target price | 3300).

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