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In-line operating performance

For Q2FY23, Coforge’s operating performance was broadly in line with our estimates; however, lower ETR led to beat on the profit front. BFS grew in double digits sequentially in constant currency (CC) terms for the second quarter in a row, reflecting strong deal momentum and resilient demand. Management remains watchful of evolving macro situations and is cautiously optimistic on the growth outlook. Management expects usual furloughs in Q3FY23. The company has retained at least 20% CC YoY revenue growth guidance for FY23, considering healthy deal intake, NTM order book (USD802mn, 16.6% YoY), and a strong deal pipeline. Management has also retained its adjusted EBITDAM (ex-ESOP and acquisition costs) guidance of 18.5-19% for FY23. Management is confident that it will attain ~USD1bn revenue run-rate in FY23 and has its eyes set on achieving USD2bn revenue run-rate in the next five years. We have raised our EPS estimates by 3.6-4.3% over FY23E-25E, factoring in Q2 performance. We retain Hold with a TP of Rs3,550 (Rs3,400 earlier), at 21x Sep-24E EPS, considering limited upside risks and the overhang of further stake sale by Baring.

Result summary: For Q2FY23, Coforge reported revenue growth of 3.3% QoQ (6.2% CC) to USD247.1mn, in line with our estimate of USD247mn. Adjusted EBITDAM (excl. ESOP costs and acquisition-related expenses) expanded by 190bps QoQ to 18.4% due to currency movement (+10bps), lower SG&A (+20bps), and continued offshoring expansion, utilisation uptick, increased contribution from higher-margin businesses, and employee pyramid optimization (+160bps). EBITM increased by 190bps QoQ to 14.4%, 20bps above our estimate of 14.2%. Net profit was up ~34% QoQ to Rs2.01bn, above our expectations of Rs1.84bn, due to lower ETR and non-controlling interests. Revenue growth was led by BFS, which registered QoQ CC growth of 14%, Insurance (5.5% growth), and Travel (4.9% growth), while Others (incl. manufacturing, retail, healthcare, Hi-tech, and public sector sub-verticals) declined by 0.9%. Among geographies, growth was led by EMEA (12.9% CC QoQ) and Americas (4.5%). RoW reported a 7.3% QoQ drop in CC, largely due to weakness in India. Order bookings were robust, with total fresh order intake of USD304mn (Americas: USD141mn, EMEA: USD134mn, and RoW: USD29mn), having two large deals with over USD30mn TCV signed in Q2FY23. The top-5 clients grew by 4.4% QoQ and the top-10 clients grew by 4.2% in USD terms. What we liked: Steady revenue performance, margin trajectory, healthy deal intake, and executable order book. What we did not like: Weak cash conversion (~17% OCF/EBITDA in H1).

Earnings call KTAs: 1) Despite macro uncertainties, BFS and travel continue to show robust demand. 2) EMEA business is centered around select banking and travel clients. 3) The company added 249 employees in Q2. Headcount addition remains strong in the IT segment (464 in Q2), while headcount decline continued in BPS for the third quarter in a row. 4) Utilization (including trainee) inched up by 110bps QoQ to 77.3%. 5) LTM attrition moderated to 16.4% vs. 18% in Q1. 6) Offshoring mix improved to 49.8% in Q2FY23 from 36% in Q2FY21, which is a structural and sustainable improvement and augurs well for margins. 7) Revenue growth-led operating leverage, continued increase in offshoring mix, utilization uptick, and deployment of freshers remain key margin levers. 8) It added 11 new logos during the quarter. 9) Capex stood at USD5mn for Q2. 10) Weak cash conversion in H1, but management expects it to recover in H2. OCF/EBITDA is expected to remain at 65-70%. 11) The Board recommended an interim dividend of Rs13/share. 12) Given the adverse market conditions, Coforge delayed its ADR listing but remains committed to it.

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