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In-line operating performance; FY22 revenue guidance raised

* Coforge’s Q3FY22 revenues grew by 4.3% QoQ to USD221.5mn (5.2% CC), a tad higher than our estimates. EBITM expanded by 120bps QoQ to 14.8% on the back of the offshore shift, flattening of the employee pyramid and other operating efficiencies.

* Coforge has raised its organic revenue growth guidance to ~24% YoY CC (earlier at least 22%), based on 9M performance, solid deal intake, NTM order book and strong pipeline. It has retained adj. EBITDAM (ex-ESOP and acquisition costs) guidance of ~19% in FY22.

* Order bookings were robust with a total fresh order intake of USD247mn, including a large deal of USD45mn in Europe (public sector deal with a tenure of 6 years). The order book executable over NTM has increased by 40% YoY to USD701mn.

* We tweaked FY22E/FY23E/FY24E EPS by -1.6% to 2.9%, factoring in Q3 performance. We retain Hold on the stock with a TP of Rs5,300 at 34x Dec’23E EPS, considering the rich valuations on a relative basis despite a ~22% correction in 1M.

What we liked? Steady operating performance in Q3, healthy deal wins and strong pipeline, upward revision of FY22 outlook, progress made in client mining across client buckets

What we did not like? Continued softness in product engineering service line, increase in attrition (16.3% vs. 15.3% in Q2)

Strong operating performance; raises FY22 organic revenue growth guidance to ~24%: Revenues grew by 4.3% QoQ to USD221.5mn, a tad higher than our estimates. Organic revenue grew by 4.6% QoQ to USD199.2mn (5.7% CC). Management remains confident of accelerating growth in the coming quarters and reaching USD1bn in revenues in FY23 on the back of 1) broad-based revenue growth momentum, 2) strong order intake (NTM executable order book up 40% YoY to USD701mn) and deal pipeline, 3) healthy new logo additions (46 in LTM), and 4) steady expansion in client relationships across buckets. The company has raised its FY22 organic revenue growth guidance to ~24% YoY CC (earlier at least 22%) and overall guidance to ~37%. The transport vertical grew by 3.9% QoQ in Q3; Coforge expects the transport vertical to do well in FY23 as normalcy returns. It also expects revenue growth momentum to pick up in the Europe region in FY23. Order bookings were robust with a total fresh order intake of USD247mn, including a large deal of USD45mn in Europe (public sector deal with a tenure of 6 years).

Expect ~19% EBITDAM (pre-RSU and acquisition related costs) in FY22: EBITDAM (preRSU and acquisition related costs) expanded by 90bps QoQ to 19.5% on the back of higher offshore shift, flattening of the employee pyramid, and other operating efficiencies. Coforge expects Q4 adjusted EBITDAM to expand by further ~130bps QoQ to ~20.8%, considering continued revenue momentum, offshore shift, flattening of the employee pyramid and higher revenue from AdvantageGo license deals. It expects a ~100bps expansion in EBITDAM (preRSU and acquisition related costs) to ~19% for FY22, considering revenue growth-led operating leverage, flattening of the employee pyramid and offshore shift, which should more than negate potential headwinds stemming from investments in capability augmentation, onboarding of senior talent, higher attrition and hiring costs.

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