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Organic revenue guidance revised further upwards…

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

* Coforge’s revenues and PAT have grown at a CAGR of ~12% each over the past five years

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

Q2FY22 Results: Coforge reported robust Q2FY22 results on the revenue front.

* Dollar revenues increased 6.5% QoQ of which organic was 2.9% QoQ

* EBITDA margin improved 304 bps QoQ due to cost control

* Revised organic guidance upwards to 22.0% YoY (in CC terms) in FY22E

What should investors do? Coforge’s share price has grown by ~13x over the past five years (from ~| 397 in October 2016 to ~| 5069 levels in October 2021).

* We upgrade the stock to BUY (from HOLD earlier)

Target Price and Valuation: We value Coforge at | 5870 i.e. 40x P/E on FY23E 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 27.5%CAGR over FY21-23E

* A 220 bps improvement in margins over FY21-23E due to offshoring, higher margins in acquired company, reversal of travel discount and growth

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

* Larsen & Toubro Infotech’s (LTI) ability to deliver end-to-end solutions is expected to help in registering industry leading growth

* BUY with a target price of | 7,650

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