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Guidance intact despite a margin miss

Growth outlook factored into valuations

* COFORGE reported an in line revenue growth of 4.7%/2.7% QoQ in constant currency (CC)/USD terms in 1QFY23. Growth was led by BFS (+9.4% QoQ), while Insurance fell by 7.7%. It reported an order intake of USD315m, implying a book-to-bill ratio of 1.3x, including an over USD50m deal. EBITDA margin (pre-RSU) of 16.5% (down 390bp QoQ) missed our estimate of 17.8%. The management reiterated its FY23 EBITDA margin guidance of 18.5-19% as it guided at a 150-200bp margin pickup in 2QFY23.

* We see good revenue performance and continued momentum in deal wins as a positive and expect COFORGE to deliver revenue growth ahead of its FY23 guidance of at least 20% YoY (a slight increase from its earlier guidance of up to 20% YoY growth), despite macroeconomic headwinds in 2HFY23. We expect the company to deliver USD revenue CAGR of ~15% over FY22-24, despite a 350- 400bp cross-currency headwind.

* While its margin performance in 1QFY23 was impacted by higher than usual salary hikes (up 250bp) and SG&A investments (up 100bp), the management remains confident about achieving its guidance of 18.5-19%. Despite the large QoQ improvement expected in 2QFY23, we expect margin to remain near the lower end of its guidance band as attrition remains elevated at 18% (up 30bp QoQ). This, in turn, should help them deliver an FY22-24E PAT CAGR of 21%.

* The stock currently trades at 23x FY24E EPS. Given the additional headwinds due to the share sale from promoter group, we see limited upside at current levels. We largely maintain our earnings estimates. Our TP of INR3,630 per share implies 22x FY24E EPS. We maintain our Neutral rating on fair valuations.

In line revenue, margin miss

* COFORGE posted a USD revenue/adjusted EBITDA/adjusted PAT growth of 19.6%/28%/10% YoY. EBITDA margin fell 390bp QoQ to 16.5% (pre-RSU).

* Adjusted PAT fell 29.3% QoQ to INR1.5b. It missed our expectation of INR1.9b on lower margin and other income.

* Order intake stood at USD315m, implying a 1.3x book-to-bill ratio.

Key highlights from the management commentary

* It saw a strong order intake at USD315m in 1QFY23, with 12 new client additions and two large deals, including one deal of over USD50m.

* The management has guided at a minimum CC growth of 20% in FY23, even after taking into account every possible slowdown in the macro environment.

* It has continued with its 18.5-19% margin guidance for FY23. It expects a strong 150-200bp bounce back in margin in 2QFY23 on account of higher utilization, increased offshoring, and freshers becoming billable.

Good growth, but valuations remain full

* We see COFORGE’s robust growth performance and improvement in deal wins as positives. The company has also been able to expand margin in a tough supply environment.

* While we continue to see a good operational performance from the company, we see reduced scope for further improvement from the current high base and expect better growth elsewhere in our coverage.

* We value COFORGE at 22x FY24E EPS and maintain our Neutral rating on fair valuations.

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