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Revenue beat; earnings quality under lens

Coforge reported a mixed operating performance in Q1 with strong revenue growth, while margin missed our estimate. Revenue grew 9.6% QoQ to USD442mn (8% in CC; organic 5.9% in CC), better than our expectations. Revenue growth was led by TTH (31.2% QoQ; contributed over 60% of incremental revenue in Q1, owing to Sabre deal ramp-up), Others (12.8%), and Government outside India (6.8%). Adj EBITM was flat QoQ at 13.2%; however, reported EBITM declined by 50bps to 11.3%, lower than expected. In Q1, Coforge signed 5 large deals totaling USD507mn, lifting the next 12M executable orderbook to USD1.55bn, up ~47% YoY. The management remains confident about the revenue growth momentum continuing in FY26, on deal wins and the pipeline. It guided for adj EBITM of 14% in FY26. Quality of earnings is reflected in the gap between reported EBITM and adj EBITM; higher capex (USD65mn in Q1; USD85mn in the last two quarters) on AI-powered data centers and poor cash conversion remain areas of concern. We revised adj EPS estimates by -5.8% to 1.1% over FY26-28E, factoring in Q1 performance and the outlook. Considering the strong execution track record, expectations of a similar improvement in the reported EBITM trajectory as implied for the adjusted EBITM guidance, and better FCF conversion likely with moderation in capex intensity, we retain ADD with TP of Rs1,850, at 36x Jun-27E EPS.

Results summary

Revenue grew 9.6% QoQ (8% in CC, organic 5.9% in CC) to USD442.4mn, better than our expectations of 7% in CC. Revenue growth was driven by TTH (31.2% QoQ), Others– primarily Healthcare, Retail, Hi-Tech, Manufacturing (12.8%), Government outside India (6.8%), and Insurance (1%), while BFS declined 1.1% QoQ. Adj EBITM was flat QoQ at 13.2%; however, reported EBITM declined by 50bps to 11.3%. Reported net profit grew ~21.4% QoQ to Rs3.2bn due to a one-off gain from disposal of stake in AdvantageGo to the tune of Rs702mn. Adj net profit (adj for one-off transaction-related expenses, legal costs, and one-time bonus of Rs749mn) grew 36.5% QoQ to Rs3.9bn, above our estimate. Deal intake TCV stood at USD507mn vs USD2,126mn in Q4. Headcount grew ~2.1% QoQ to 34,187. LTM attrition increased to 11.3%, from 10.9% in Q4. The company declared interim dividend of Rs4/sh. What we liked: Revenue growth momentum, strong deal intake. What we did not like: Margin miss, weak FCF.

Earnings call KTAs

1) The company remains confident about sustaining the growth momentum on execution intensity, hyper-specialization in a few select industries, deep engineering capabilities, and assets. It expects H2 to be stronger than H1. 2) The mgmt remains confident about delivering 14% adjusted EBITM in FY26 on likely lower ESOP costs, continued revenue growth momentum, SG&A leverage, and the offshore shift 3) It invested USD85mn in an AI-powered data center over the last two quarters, with USD62mn received as advance from clients and recorded as deferred revenue, while USD23mn was funded through a term loan. The assets have a useful life of 5 years, resulting in an increase in D&A. Coforge expects capex intensity to normalize at 2-3% of revenue ahead. 4) Q1 was strong in terms of order intake and large deal closures. The company added 6 clients in Q1. 5) It expects OCF/EBITDA to be at 65-70%. 6) It signed 5 large deals in Q1 and targets 20 large deals in FY26. The mgmt indicated that the velocity and the median size of large deals signed has been increasing over the years. The 5 large deals include – a) a deal with one of the top three clients of Cigniti – an AI-infused app modernization deal (USD30mn TCV) with a US-based client, b) a deal with a North American client – digital transformation to scale-up various customer and enterprise processes on Pega Cloud, c) a deal with a North America-based client – transformation of the workplace platform, and integration with AIenabled Microsoft services, d) a deal to build GCC for a Middle-East-based client to help transform its exchange operations, and e) a deal to transform tech infrastructure to enable scaling up of tax services for a client in Asia. 7) The Sabre deal is expected to continue to ramp up in Q2, with resource-loading and total headcount anticipated to stabilize from Q3. 8) The company has successfully leveraged Cigniti’s acquisition for cross-selling, securing large deals with two of Cigniti’s top three clients, and is actively pursuing opportunities with the third. 9) BFSI is seeing healthy demand across commercial banking, lending, wealth management, and risk/compliance, driven by margin pressures and regulatory changes. 10) The company provided a one-time broad-based bonus (USD5.5mn) to employees. 11) The unwinding of the discount is an accounting entry where the amount rises over time as interest accrues, then drops at maturity, with the corresponding value recorded as receivable. 12) Coforge plans to hike wages in Q3 and expects its impact to be partly negated by an anticipated reduction in ESOP costs. 13) It added 1,164 employees in Q1 to support large deal ramp-ups. 14) The merger process with respect to Cigniti is underway, with exchange approvals received and NCLT filing in progress; the effective date of merger was 1-Apr-25.

Update on AI/Gen AI

1) The company sees strong potential in AI integration, with AI budgets expanding at doubledigit rates and becoming the primary engine for innovation and competitive advantage. 2) It launched the Coforge AgentSphere Platform with over 100 foundational agents that can address industry pain points across travel, financial services, and healthcare clients. 3) It now has over 20 core AI assets that accelerate the execution of services, such as reverse engineering of legacy code, intelligent test automation, and resilient cloud and infrastructure operations. 4) Quasar AI marketplace has more than 100 case examples of industry-specific solutions.

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