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Assessing Q3 Results in Light of Recent Acquisitions & Deal Wins

Fresh order intake and $1.56Bn Sabre collaboration to propel revenue towards $2Bn milestone: Coforge has secured its largest deal, a 13-year, $1.56Bn partnership with Sabre, potentially boosting its revenue by $100- $120Mn annually along with on-going revenue growth, which is projected to add approximately 8-10% to the current revenue levels. This agreement makes Coforge a key player in Sabre's efforts to enhance product delivery and implement AI-driven solutions. In addition to this, Coforge demonstrated strong momentum in Q3FY25 with a fresh order intake of $501Mn, including four major deals across North America and ASEAN, one within the Cigniti client portfolio. Management remains optimistic about future deal wins, citing a substantial deal pipeline. Considering this, we anticipate that Coforge medium-term revenue guidance of hitting $2Bn mark remains on track and expected to achieve sooner this makes Coforge a serious contender against Tier – I companies to grab mega deals.

Acquisition of Rythmos Inc. and TMLabs Pty Ltd to boost cloud and ServiceNow expertise: Coforge is expanding its portfolio through the acquisition of two IT/ITeS companies: Rythmos Inc. and TMLabs Pty Ltd. Coforge will acquire 100% stakes in both firms. Rythmos, operating in the US and India, will be acquired for $30Mn upfront, with an additional $18.7Mn possible based on specific performance conditions. Rythmos is expected to generate $ 25.3Mn in turnover for the year 2024 and maintain a similar growth trajectory. With a favorable valuation of 1.9x of its revenue, this acquisition will enhance Coforge’s data, cloud, and airline industry expertise. TMLabs, based in Australia, will be acquired for $20Mn to boost Coforge’s ServiceNow capabilities, generating a turnover of $ 11Mn for the FY ending June2024. TMLabs has demonstrated strong growth, with 25% CAGR from FY22 to FY24 and is expected to contribute at similar lines going forward. Both deals are expected to close by Q4FY25.

Q3FY25 Performance: Coforge's Q3FY25 revenue exceeded estimates, while EBIT met expectations, but PAT missed expectations. Revenue was INR 33.1Bn, up 42.8% YoY and 8.4% QoQ, surpassing the INR 31.4Bn consensus estimates. EBIT stood at INR 3.9Bn, up 22.5% YoY and 9.0% QoQ, in line with expectations. However, the EBIT margin declined by 196bps YoY but rose by 7bps QoQ to 11.8%, slightly below the 12.1% consensus estimates. PAT was INR 2.1Bn, down 9.5% YoY but up 6.6% QoQ, missing the INR 2.6Bn consensus estimates

View and valuation: With recent acquisitions and significant deal wins, the company remains focused on driving strong growth across its various business segments, both in the short and long term. We project Revenue/EBIT/PAT to grow at a CAGR of 24.4%/ 35.1%/ 48.6% respectively over FY25E-FY27E. As a result, we upgrade our rating to BUY to arrive at a revised target price of INR11,260 implying a P/E of 40 on FY27E EPS of INR281.5.

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