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Carving out growth

Coforge reported 1.8% cc QoQ growth, beating expectations (JMFe: 0.5%). Growth was led by BFS (+3.1%), a vertical most impacted by furloughs. Deal wins were strong (USD 354mn at 1.3x book-to-bill). 12-M executable order book (EOB) outpaced revenue growth again (16% vs 12%). Coforge’s 9MFY24 order inflow has grown marginally ahead of its 12-M EOB (24% vs 18%). This indicates limited divergence between TCV and ACV growth, something that can’t be said for the larger peers confidently. Besides, even at FY24 conversion ratio, FY24E exit EOB translates into mid-teen FY25 USD revenues growth, per our estimate. Coforge’s consistent investment in capacity, capabilities and sales engine is helping the company carve out growth even in a challenging demand environment. That is impacting near-term margins though. 3Q adjusted EBITDA margins missed estimates marginally. But management is confident of better margins in FY25 as SG&A leverage plays out. These lend visibility to earnings trajectory. We lower our FY24-26E EPS marginally by 1-4% on a slightly lower margin assumptions. However, at 24% FY23-26E EPS CAGR, Coforge’s earnings growth remains the highest among our coverage universe. Besides, at 30x FY25E EPS, we find the valuations reasonable. Maintain BUY with revised TP of INR 6,940.

3QFY24 – mixed bag: Coforge reported 1.8% cc QoQ revenue growth, above JMFe: 0.5%. Growth was led by BFSI (+3.1% cc QoQ) while Insurance and Travel were weak. Reported EBITDA margins improved by 200bps (in-line) on lower ESOP cost. However, adjusted EBITDA margin (ex ESOP) missed estimates by 30bps as furloughs eroded 40- 50bps. Lower other income resulted in PAT miss (INR 2.4bn vs JMFe: INR 2.5bn). OCF/EBITDA was 73% (vs 49%), in-line with management guidance of 65-70% in 2H. 

Maintains growth guidance: cuts margin guidance: Coforge won USD 354mn TCV of deals during the quarter at 1.26x book-to-bill. Deal wins include three large deals (USD 20mn+). 12-M EOB grew by 16% YoY, ahead of revenue growth (12% YoY cc), reflecting a healthy inflow as well as a resilient book-of-business. Management reiterated its FY24 cc growth guidance of 13-16%. They maintained that they will likely land towards the lower end of the band. 1.2% cc QoQ ask rate needed to achieve the lower end of the band makes it achievable, in our view. Management indicated Q4FY24’s margins to be at a similar level to Q4 of last year, implying some moderation to its earlier full year margin guidance. However, they expect margins to improve in FY25.

Marginal cut to EPS; maintain BUY: We estimate that at a likely FY24E exit 12-M EOB of USD 1bn and a conversion ratio similar to FY23-exit, Coforge can deliver a mid-teen USD revenue growth in FY25 (JMFe: 15.7%). That offers comfort. Even though we lower our FY24-25E EPS by 3-4% on lower margin assumption, we see 200bps EBITDA margin expansion over FY24-26E driving 32% EPS CAGR over the same period. Even though management commentary around flat IT budgets and pressure on RTB spend is not encouraging, we draw comfort from Coforge’s consistent execution led wallet share gain. These should help sustain the multiples, in our view. We value the stock at 28x forward PER (unchanged). Our TP moves to INR 6,940 (from INR 6,890) on roll-forward. BUY.

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SEBI Registration Number is INM000010361