Buy Coforge Ltd for Target Rs. 1,900 by Choice Institutional Equities
Key Conference Call Highlights
Segment Performance
* Healthcare and High-tech: Growth was led by this segment at 15.5% QoQ in Q4.
* Travel, Transportation and Hospitality: This segment grew 7.4% QoQ in Q4, benefiting from secular tailwinds such as "One Order" and airport reconstruction. The management noted that potential headwinds from Spirit Airlines are negligible, representing only 10 bps of FY27 budgeted revenue.
* BFSI: Segment remained largely flat at 0.8% QoQ growth in Q4. Performance was tempered by a top-three banking client that did not grow during the year. Insurance grew 5% QoQ during the same time.
* Government (Outside India): Grew 24.3% QoQ in Q4.
Geographical Performance
* UK: The UK public sector is a major growth engine where the firm enjoys a high reputation. It recently secured a USD-150 Mn+ sole-award framework deal over five years.
* India: The management is consciously discontinuing a USD-20 Mn lowmargin portfolio within the India business. This is expected to create a USD 15 Mn to USD 20 Mn pass-through revenue reduction in Q1 FY27 but will structurally improve overall margin.
Margin Trajectory
* Q4 Results: The exit EBIT margin stood at 16.6%, up from 12.3% in the same quarter last year.
* Efficiency Levers: Key margin tailwinds included SG&A leverage (+100 bps), foreign exchange gains (+80 bps), and direct cost reductions in third-party spending (+50 bps).
* Strategic Reset: The improvement is driven by the "quiet work" of automating the backend and the conviction that G&A cost will be held constant in absolute terms through AI-led interventions.
Outlook & Guidance
* Revenue Guidance: The firm expects to continue its revenue growth leadership in the mid-cap segment. While Q1FY27 is expected to be flattish due to the India business discontinuation, a fast growth trajectory is anticipated from Q2 onwards
* Profitability Guidance: - EBITDA: 20.5% to 21% on a consolidated basis (including Encora). - EBIT (Standalone): 16.5% to 17%. - EBIT (Consolidated): 15.5%, with the gap primarily due to USD 40 Mn in annual amortisation costs.
* Order Book: The 12-month forward executable order book stands at a record USD 1.75 Bn (up 16.4% YoY), this does not include material revenue expected from signed framework agreements.
* Cash Flow: Free Cash Flow to PAT is expected to be maintained at 100%+ going forward.
AI Initiatives
* AI Architecture: The firm uses a three-layer reference architecture, comprising Business Architecture, a Decisioning Engine (proprietary Atlas), and a Composable AI Backbone to move pilots into production
* Delivery Models: Hybrid "AI ModSquads" (specialised delivery units of agents and specialists) are driving 40% to 50% faster time-to-market.
* Internal Productivity: AI is being used internally as "customer zero" to drive 25% to 35% productivity uplift in development and up to 10 times faster modernisation timelines. It has also reduced financial analysis efforts by 40% to 60%.
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