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A blazing quarter Growth across the board and a strong start to Cigniti integration

* COFORGE reported 2QFY25 organic revenue growth of 6.3% QoQ in USD terms, above our estimate of 4.3%. It reported an organic CC QoQ growth of 5.5% (consol. CC QoQ growth of 26.3%). Consol. revenue stood at USD369.4m (up 26.8% QoQ/32.8% YoY). Organic order intake of USD448m in 2Q with three large deals, resulting in a robust organic 12-month executable order book of USD1,105m (+18% YoY). Organic EBIT margin, adjusted for transaction-related costs of INR201m, came in at 12.2% (est. 12.5%). Organic adj. PAT stood at INR1.8b (+39.5% QoQ/2.7% YoY) due to lower SG&A costs and higher other income. The company’s revenue grew 10.4% in 1HFY25, while EBIT/PAT declined 0.7%/12.4% vs. 1HFY24 in organic terms. We expect revenue/EBIT/PAT to grow organically by 19.0%/20.6%/17.0% YoY in 2HFY25. We reiterate our BUY rating on COFORGE with a TP of INR10,000, implying a 32% potential upside.

Our view: Coforge in pole position to participate in recovery

* COFORGE had a robust quarter, to lead the industry on the growth front: COFORGE’s organic growth was broad-based across BFS, Insurance, and Travel. Order intake was quite healthy too, up 43% QoQ. We believe COFORGE’s organic business is in great shape, and its executable order book over the next 12 months (up 18% YoY) provides confidence in FY25 growth. Further, its presence in high growth verticals in a recovering demand environment positions it as a growth leader alongside Persistent.

* Not just margins, but Cigniti growth could surprise on the upside too:. While the EBITDA margin expansion from 12.6% in Q1 to 16.2% in Q2 was the key highlight, Cigniti’s growth numbers were an even bigger surprise. Cigniti reported revenue growth of 6.1% sequentially.

* COFORGE believes it can extract further synergies and expand margin to over 18% by 4QFY25. Further, early cross-selling initiatives between COFORGE and Cigniti indicate that COFORGE could engineer a growth turnaround at Cigniti earlier than expected.

* Demand turnaround now certain, COFORGE a key beneficiary: The 2Q earnings season corroborates our thesis that demand is recovering, and COFORGE’s offerings and vertical exposures put it in pole position to lead growth. It continues to be our top pick, as detailed in our IMPACT framework analysis (Exhibit 3).

Valuation and changes to our estimates

* We integrate Cigniti numbers in our financial model, and we now assume 80% ownership of Cigniti by FY25E and 100% ownership beyond FY26E. We value COFORGE organically at 40x Sep’26E EPS (vs. 38x earlier) and value the Cigniti business at 25x Sep’26E EPS. This SOTP-based approach yields a rounded TP of INR10,000 (INR8,700 for COFORGE and INR1,300 for Cigniti). We reiterate our BUY rating on the stock with a TP of INR10,000, implying a 32% potential upside.

* Our FY25E adj. PAT has reduced on account of higher-than-expected RSU costs and one-offs; otherwise we have raised our organic estimates by 3% to 7% for FY25/FY26/FY27, driven by the company’s higher-than-expected organic growth. We believe the company’s healthy executable order book and a rebound in BFS client spending bode well for its organic business. Cigniti could prove to be an effective long-term asset. Significant beat on revenue (both organic and Cigniti included), margins miss; organic deal-win TCV up 43% QoQ

* COFORGE’s organic USD revenue grew 6.3% QoQ (est. 4.3% QoQ). Organically, growth was led by the insurance vertical (+8.4% QoQ), followed by transportation, which was up 5.8% QoQ. BFS grew 4.7% QoQ during the quarter.

* Organic order intake was USD448m (consol. order intake at USD516m), returning to its normal run rate (43% QoQ). Organic 12-month executable order book rose 18% YoY at USD1,105m (consol. Order book stood at USD1,305m). It added nine (13 clients on a consol. basis) new clients organically in 2Q.

* Cigniti’s EBITDA margin stood at 16%, above consensus estimates.

* Organic EBIT margin for COFORGE was 12.2% (barring transaction-related expenses), below our estimates of 12.5%

* Organic adj. EBITDA (pre-RSU) rose 21.6% QoQ/1.4% YoY to INR4.0b and EBITDA margin (pre-RSU) came in at 15.8%, up 190bp QoQ.

* Utilization grew 60bp QoQ to 82.2%. Net employee addition stood at 5,871, up 5.4% QoQ. Attrition inched up 30bp QoQ at 11.7% ? Organic Adj. PAT came in at INR1.8b (est. INR2.3b), up 39.5% QoQ/2.7% YoY

* The Board declared a dividend of INR19 per share.

Key highlights from the management commentary

* Headcount additions and a strong large-deal pipeline give confidence in robust and sustained growth in the coming quarters.

* The Cigniti acquisition is now fully operationally integrated.

* The management is confident of a strong growth story for the next seven years, which is built upon: 1) a much more diversified organization compared to the last 7 years (reduced airline exposure); 2) growth vectors primarily driven by industry build in product engineering, in cloud services, in data services, and experience-based technologies; and 3) an expanded geographical mix.

* This was an exceptionally strong quarter for COFORGE. The quarter validates three key assertions made at the beginning of the year: 1) the credibility of Cigniti's business is strong, and synergies will be realized, 2) despite stopping annual guidance, organic COFORGE growth remains strong, and 3) the first management team to announce a positive turnaround in demand.

* The go-to-market (GTM) engine is already in place, headed by a COFORGE leader.

* In the GCC space, the company has seen strong activity. GCCs are led by leaders of Indian origin who have risen through the ranks. The company has built GCC capabilities and is in the process of creating virtual GCCs. The sales plan includes both micro and mega GCCs.

* Large deal velocity remains strong, with three large deals signed during the quarter. The vertical mix has evolved, with notable traction in newer verticals such as healthcare and increased activity in product engineering. COFORGE is also widening the funnel and expanding geographical presence.

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