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Strong performance on all parameters; near term visibility remains strong

Result Synopsis

Coforge (COFORGE) reported strong financial performance for the quarter. Both revenue growth and EBIT margin for the quarter was inline with estimates It reported constant currency growth of 6.2% QoQ, led by BFS vertical( up 11.1% QoQ). The INR reported growth of 7.1% QoQ was supported by depreciation of INR by 3.4% QoQ vs USD. There was sequential improvement in EBIT margin(up 194 bps QoQ) led by improving employee pyramid, higher offshoring and increasing utilization There was slight decrease in reported employee attrition as LTM attrition increased by 160 bps QoQ to 16.4%. Its employee attrition remains one of the lowest in the IT Industry. Offshore revenue mix now contributes 50% to total revenue, having grown from 44% as of Q2FY22.

The demand environment remains robust led by strong deal wins and robust deal pipeline and provides strong near term revenue growth visibility. However, the clients especially in select sectors have become cautious regarding the evolving macroeconomic situation and it poses near term risks. It is well placed to achieve adjusted EBITDA margin of 18.5%- 19% for FY23. Employee attrition is expected to further come down in H2FY23 and should support operating margin going ahead. We estimate revenue CAGR of 21.7% over FY22? 24E with average EBIT margin of 15.3%. We maintain our BUY rating on the stock with revised target price of Rs 4,639/share at 26x (unchanged valuation multiple) on FY24E EPS. The stock trades at PER of 29.4x/21.6x on FY23E/FY24E EPS.

Result Highlights

* Reported revenue of Rs 19,594mn ( up 7.1% QoQ in INR terms, up 3.4% QoQ in USD terms). The cc growth was 6.2% QoQ. The growth was broadbased across verticals

* EBIT margin increased by 194 bps QoQ to 14.4%, led by higher offshoring, improved employee pyramid, and increased utilization.

* Reported order intake of $304mn, with 2 large deals ($30mn plus) vs $315mn in Q1FY23.

* Signed 11 new logos during the quarter. Offshore revenue mix grew by 2 percentage points QoQ to 50%

* Added 249 employees during the quarter to close at 22,991 employees. LTM attrition declined by 160 bps QoQ to 16.4%( one of the lowest in Industry)

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