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* Coforge’s Q1FY23 revenue performance was slightly above our estimates, while margins missed our expectations. Revenues grew by 2.7% QoQ to USD238.7mn (4.7% CC). EBITM was down by ~300bps QoQ to 12.5% and came in 50bps below our estimates.

* The company has guided for at least 20% CC YoY revenue growth for FY23 (around 20% earlier), considering the solid deal intake, NTM order book, and a strong pipeline. It has retained adj. EBITDAM (ex-ESOP and acquisition costs) guidance of 18.5-19% for FY23.

* Order intake stood at USD315mn in Q1, with two large deals signed in the quarter, including a large deal of USD50mn+ (5-year deal with a BFS client). The order book executable over NTM increased 15.5% YoY to USD745mn. It added 12 new logos in Q1.

* We cut our FY23/FY24/FY25 EPS estimates by 2.6%/1.1%/0.8%, factoring in the Q1 performance. The company has given healthy revenue/margin guidance for FY23 and leaves limited upside risks. We retain Hold with a TP of Rs3,400 (22x Jun’24E EPS), considering limited positive upside risks and the overhang of further stake sale by Baring.

What we liked? Steady revenue performance in Q1; robust deal wins; and healthy FY23 revenue and margin outlook.

What we did not like? Continued weakness in Insurance (-6.3% QoQ CC) and weak cash conversion

Broad-based revenue growth; FY23 revenue growth guidance of at least 20% in CC:

Revenues grew by 2.7% QoQ (4.7% CC) to USD238.7mn, slightly above our estimates. Revenue growth was led by BFS (11.1% QoQ CC) and Others verticals (incl. manufacturing, retail, healthcare, Hi-tech & public sector sub-verticals; grew 11.4% QoQ CC). BFS growth remained robust on the back of large deal ramp-ups. Insurance reported a sequential decline of 6.3% in CC; however, management remained confident about a strong rebound in Q2 aided by deal wins. Order bookings were robust, with a total fresh order intake of USD315mn, with two large deals signed in the quarter (a large deal of USD50mn+ with a BFS client and another large deal with an airline in the US). Management is confident about sustaining the growth momentum in the coming quarters and crossing USD1bn revenue run-rate in FY23, and is on an accelerated path to achieve USD2bn in revenues in the years ahead, based on: 1) broadbased revenue growth momentum; 2) client conversations; 3) strong order intake (NTM executable order book grew 15.5% YoY to USD745mn) and deal pipeline; 4) healthy new logo additions (12 in Q1); and 5) steady expansion in client relationships across buckets. Coforge has guided for FY23 revenue growth of at least 20% YoY CC (around 20% earlier).

Retained 18.5-19% EBITDAM (pre-RSU and acquisition-related costs) in FY23E: Adj. EBITDAM (pre-RSU and acquisition-related costs) declined by 390bps QoQ to 16.5% in Q1 due to wage hikes (-250bps), SG&A investments (-100bps), and cross-currency headwinds (-20bps). Reported EBITM stood at 12.5%, down 300bps QoQ, and came in 60bps below our estimate. The company expects adj. EBITDAM to expand by 150-200bps QoQ in Q2, supported by increased utilization, offshoring, and pyramid rationalization, and remains fairly confident about delivering adj. EBITDAM within the guided range of 18.5-19% for FY23.

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