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Robust Deal booking despite macro concerns

Result Synopsis

Coforge (COFORGE) reported mixed financial performance for the quarter. Both revenue growth and EBIT margin for the quarter were slightly below estimates It reported constant currency growth of 3.7% QoQ, led by Manufacturing vertical( up 8.3% QoQ). The INR reported growth of 4.9% QoQ was supported by depreciation of INR by 2.9% QoQ vs USD. There was sequential improvement in EBIT margin(up 11 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 60 bps QoQ to 15.8%. Its employee attrition remains one of the lowest in the IT Industry. Offshore revenue mix now contributes 50.5% 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 robust 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 20.7% over FY22? 24E with average EBIT margin of 14.7%. We maintain our BUY rating on the stock with revised target price of Rs 4,980/share at 28x on FY24E EPS. The stock trades at PER of 30.4x/23.1x on FY23E/FY24E EPS

Result Highlights

* Reported revenue of Rs 20,558mn (up 4.9% QoQ in INR terms, up 1.9% QoQ in USD terms). The cc growth was 3.7% QoQ. The growth was led by transportation vertical (up 1.9% QoQ) and manufacturing vertical (up 8.3% QoQ).

* EBIT margin increased by 11 bps QoQ to 14.5%, led by higher offshoring, improved employee pyramid, and increased utilization.

* Reported order intake of $345mn, with 2 large deals ($30mn plus) and 1 large deal ($50mn plus) vs $304mn in Q2FY23.

* Offshore revenue mix grew by 70 bps QoQ to 50.5%. Total order book executable over the next 12 months at US$ 841 million. 11 new clients were added during the quarter.

* Net employee addition stood at (486) employees during the quarter to close at 22,505 employees. LTM attrition declined by 60 bps QoQ to 15.8%.

* FY23 annual revenue growth guidance: 22% in cc terms and reaffirmed its Adjusted EBITDA annual margin guidance at 18.5%-19.0%.

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