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Performance exceeding expectations

Coforge’s (COFORGE IN) Q3 results were ahead of our and Street estimates. Revenue growth was broad-based across verticals, while margins improved on cost efficiencies. Deal wins continued to be robust, which should aid strong revenue growth in the coming quarters. Margin performance might have had quarterly variation (frontloaded annual costs in Q1 of every year, followed by margin expansion in Q2-Q4), but key tenets of margin expansion remain continued higher offshoring and further rationalization in costs. COFORGE maintained its guidance of reaching USD 2bn revenues by FY27 and 200-300bps margin expansion by that time – Expect continued impressive performance. Recommend Accumulate.

Broad-based growth across verticals and geographies: COFORGE reported USD revenue growth of 7.5% QoQ and CC growth of 8.4%. In INR terms, growth was 8.4% QoQ. Verticalwise, growth was led by Insurance, Others and Travel (up 5.8%, 14.2% and 7.5% QoQ). Growth in Banking was relatively muted at 0.6%. Geography-wise, both North America and Europe markets reported strong sequential growth of 9.3% and 8.8%, while RoW market reported a decline. Fresh order intake was at USD 501mn versus USD 516mn in Q2. LTM attrition rose to 11.9% and COFORGE added 600+ employees in Q3, with headcount now 33K.

Margins helped by cost optimization: Adjusted EBITDA margin (adjusted for ESOP) in Q3 was up by 122bps QoQ to 17.8%. Margin performance was strong despite furloughrelated headwind of 50bps in Q3. The furlough impact was in BFS – Typically, in Q3, there are mandatory furloughs in the industry, which should reverse in Q4. Margins at the company level were also helped by continued margin expansion at Cigniti (wherein margins are now at 17.3%). Margins were helped by lower cost of revenues (66.8% in Q3 from 67.6% in Q2). Utilization pared in Q3 due to fresher intake. Per COFORGE, it is comfortable with 83- 84% utilization and hence, this may improve going forward. The cost of ESOP was 2.1% of sales – Per COFORGE, this cost will go down, going forward and will be one of the tailwinds for margin expansion. It continues to maintain margin expansion guidance of 200-300bps in the medium term, led by continued focus on offshoring, strong revenue growth (on sustained strong orderbook) and rationalization of costs

Recommend Accumulate; TP raised to INR 9,950 from INR 8,110: COFOGE is steadily progressing as regards revenue to reach USD 2bn guidance. Now, we build in revenues closer to the guidance (implied revenue CAGR now 22%). This should be driven by strong orderbook, broad-based growth and enhancing AI capabilities (helping deal wins). Opportunities exist in terms of rationalization of costs, which should aid margin expansion. We build in 30% earnings CAGR in FY24-27E. We raise our TP to INR 9,950 (from INR 8,110) as we raise multiple to 37x (from 35x earlier) on impressive performance. Key downside risk is deceleration in revenue and margin.

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