Buy Coforge Ltd For Target Rs. 10,000 By JM Financial Services
Rinse and repeat
Coforge reported 3.4% cc QoQ growth (for continuing business), meeting expectations (JMFe: 3.2% on reported). An in-line print however understates the fact that it came atop of a strong 3Q (8.4% cc QoQ). A better gauge of underlying momentum, in our view, therefore is pro-forma YoY growth, which was strong at 20%+. Unabated large deal momentum (Sabre and otherwise) suggests growth can accelerate further. Coforge reported a record USD 2.1bn TCV. Even excluding the USD 1.56bn Sabre deal, TCV was healthy at USD 566mn (book-to-bill: 1.4x). 12-M Executable order book (EOB)-to-LTM revenue ratio has improved from 0.91x at FY24-end to 1.03x currently, reflecting improved visibility. Management’s remark of a better organic growth in FY26 underscores the point. Besides, on track Sabre ramp suggests conversion could be faster. We therefore believe our FY26E USD revenue growth assumption of 30% cc (Organic: 25% vs 15% in FY25; JMFe) is achievable. Management’s view that FY26 exit EBIT margins can expand to 14% (from 13.2% currently) means growth is not coming at the expense of profitability, especially from the Sabre deal. We however suspect it could come at a higher finance cost, as factoring/credit insurance of receivables of a B-/B3 rated Sabre could be higher. Our FY26-27E EPS is therefore little changed (-1% to +2%). It however still leaves a 25% EPS CAGR over FY25-28E. Such strong growth merits premium valuation. We continue to value the stock at 38x (15% discount to our target PER for PSYS). We reiterate BUY with a revised TP of INR 10,000 (from INR 9,610).
* 4QFY25 – meets expectations: Revenues (ex-AdvantageGO) grew 3.4% cc QoQ vs JMFe: 3.2%. Similar contribution of AdvantageGo in 3Q/4Q means even reported growth was similar. Growth was broad-based led by BFS (+13% QoQ), Govt. outside India (+9%) and Travel (+7% QoQ). Others segment (incl. Retail, Hi-tech, Mfg) however dragged (-8%) after a strong 3Q (+19% QoQ). Large deal ramps and GCC deals are likely infusing some lumpiness across verticals, in our view. Reported EBITDA margin (non-GAAP) expanded 135bps to 16.9%, above JMFe: 16.6%. Lower ETR helped offset higher minority share (likely due to higher profitability of Cigniti). OCF/non-GAAP EBITDA was 109%.
* Deal wins, order book and outlook: Coforge won USD 2.1bn of TCV, including USD 1.56bn Sabre Deal. Coforge recorded five large deals, including a USD 62mn TCV deal from Cigniti’s top-3 client, indicating early success of cross-sell. 12-M EOB increased 10% QoQ (YoY not like-for-like) to USD 1.5bn (1.03x LTM revenues). In fact, NTM Revenues (our FY26E est.) to 12-M EOB ratio works out to be 1.26x, in-line with historical conversion rates. Besides, management indicated large deal momentum to sustain. Management therefore belives they can achieve its FY27E revenue target of USD 2bn ahead of schedule. Management also indicated that EBIT margins could improve from FY25-exit rate of 13.2% to 14% by FY26-end, aided also by 80bps ESOP cost reduction.
* EPS broadly unchanged; Retain BUY: We had already built Sabre-led strong growth for FY26 (29%). Our FY26E USD revenue is therefore largely unchanged. We now build 50bps higher EBIT margin. Higher finance charges/lower USD-INR assumption however offset that, resulting in (1)-2% changes to FY26-27E EPS. Valuation is reasonable. BUY.
Please refer disclaimer at https://www.jmfl.com/disclaimer
SEBI Registration Number is INM000010361
