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Topline growth; margin expansion

Coforge reported Q3FY22 numbers: revenue grew 4.2% QoQ to USD221.6mn, missing our and Street’s estimates of USD224mn and USD225.3mn, respectively. EBITDA margin expanded 90bps QoQ to 19.5%, lower than our estimate of 20.2% but higher than Street’s estimates 18.8%. Net profit rose 25.2% QoQ to INR1.8bn. Organic revenue increased 5.7% QoQ in CC.

Management highlighted that it is trying to deliver stronger growth and equally committed to expanding EBITDA margins. It recorded highest quarterly EBITDA margins in ten years. Management is confident of growth reversal in AdvantageGo in Q4FY22. Retain ‘BUY’ with an unchanged TP of INR7,357.

BFS driving growth around digital and transformation solutions

Organic revenue grew by 5.7% in CC, led by 18.5% QoQ growth in the BFS vertical (28.4% of revenue), followed by 2.4% QoQ growth in Transport (18.3% of revenue), while Insurance remained flat QoQ (27.8% of revenue). Management expects the Insurance vertical to be strong as they added senior leadership in this vertical and AdvantageGo is likely to bounce back in Q4. Order intake at USD247mn, up 28.6% YoY, and executable order book over next 12 months stands at USD701mn (ex-SLK at USD616mn) of firm business. Geographical breakdown of order intake: US (USD91mn), EMEA (USD110mn) and ROW (USD47mn).

Revenue growth guidance further revised

Management has again raised organic revenue growth guidance from 22% to 24% CC in FY22 and revenue growth (including SLK acquisition) of 37%, adj. EBITDA margin guidance remains at 18.9%-19% which implies increasing EBITDA margin in Q4FY22 by 130bps QoQ to 20.8%. SLK is delivering growth better than what was initially expected and with appointment of a sales head for BFS and SLK, there would be opportunity to cross sell further. Headcount stood at 22,130, with net addition of 1,344 employees. Attrition rose from 15.3% in Q2FY22 to 16.3% in Q3FY22 which continues to be amongst the lowest in the industry.

Outlook and valuation: Strong demand; retain ‘BUY’

We continue to believe Coforge would be one of the key beneficiaries of cloud and digital-led demand. The stock is trading at 27.8x FY23E. Retain ‘BUY/SO’ with an unchanged TP of INR7,357 (40x Q1FY24E) based on strong growth and rollover to Q1FY24E.

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