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Attrition lowest among IT services companies…

About the stock: Coforge offers system integration, apps & BPO services to BFSI, travel & healthcare verticals.

* Revenues grew at 18.1% CAGR in the past five years

* Healthy OCF, EBITDA (~75%) and robust return ratios (RoCE > 20%)

Q2FY23 Results: Coforge reported strong Q2FY23 results.

* Revenue grew 6.2% QoQ in CC terms & 3.4% QoQ in dollar terms

* Adjusted EBITDA margin improved ~190 bps QoQ to 18.4%

* Attrition declined 160 bps QoQ to 16.4%

What should investors do? Coforge’s share price has grown by ~6.9x over the past five years (from ~| 612 in October 2017 to ~| 3850 levels in October 2022).

* We maintain our BUY rating on the stock

Target Price and Valuation: We value Coforge at | 4570 i.e. 24x P/E on FY25E EPS

Key triggers for future price performance:

* Increase in deal size; signed a US$105 mn BFS deal (for four years), insurance US$20 million (three years), healthy order book to drive growth

* Bottoming out of travel vertical (in US), preferred partnership with Fortune 500 insurance & Tier 1 banking companies, recent acquisition and aggressive hiring to drive 16.8% revenue CAGR over FY22-25E

* A 170 bps improvement in margins over FY22-25E due to offshoring, higher fresher additions and utilisation improvement

Alternate Stock Idea: Apart from Coforge, in our IT coverage we also like LTI.

* LTI and Mindtree to create a large entity of US$3.5 billion revenue through merger. The combined entity will enjoy scale benefit, large order wins etc

* BUY with a target price of | 5,525

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