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Quietly strong

Coforge met elevated expectations. Revenues grew 5.9% cc QoQ (4.5% QoQ in USD terms), inline with consensus expectation of 5.8%. Importantly, after “noisy” print (read one-offs) over past few quarters, Coforge delivered clean results. These were not only devoid of any one-offs, but also had no GAAP to non-GAAP EBITDA adjustments. This should help quieten a key investor concern, in our view. In this context, margin performance was better than what the headline suggests. The underlying like-for-like improvement was 100 bps QoQ, ahead of JMFe: 60bps. Similarly, improvement in OCF (8% QoQ) was impressive given one-time client’s upfront payment in the base quarter. Capex, another of investors’ grudge, normalised too, driving 86% FCF/PAT (Q1: -56%). Though these are positive signs, management’s outlook appeared measured. Coforge’s quarterly bookings, barring Sabre deal, have stagnated around USD 500mn zipcode over the past four quarters, even though its quarterly revenue run-rate is up c.USD 100mn (+25%). This, along with steady-state in Sabre and furloughs in 3Q, could weigh on near-term growth, in our view. Management’s stance to maintain margins at 14% while reinvesting for growth could possibly be to lift plateauing deal TCV. That stance however limits flow through of 2Q beat on EPS estimates. Our FY26-28E EPS has changed by -2% to +1%. We however raise our target PER to 35x, as absence of noise improves confidence on earnings. BUY.

* 2QFY26- uncluttered: Revenue grew 5.9% cc QoQ (25.7% YoY cc growth) vs JMFe: 5.2%. Growth was led by Travel (+6.3% QoQ USD) and Americas (6.6%) likely due to Sabre deal ramp up. EBIT margin expanded 83bps to 14%, in-line with JMFe: 13.8%. Margins were aided by a reduction in SG&A expenses. Interestingly, there were no adjustments or one-offs to margins reported in the quarter. GAAP and reported margins were the same. PAT grew 68% YoY and reached INR 3,758mn (excl. minority interest) vs JMFe : INR 3,639mn. Cash conversion improved this quarter with Data Centre related capex ending, FCF/PAT stood at 86% vs -56% in 1Q. Utilization and attrition were stable while headcount increased by 709 (697 billable; 2.2%QoQ), Additionally, COFORGE reported that revenue per billable IT personnel (per annum) grew 3% QoQ to reach c.USD 70k.

* Deal wins, order book and outlook: Coforge won USD 514mn of TCV, taking LTM TCV to USD 3.6bn (book-to-bill: 2.1x). They signed five large deals, two in North America (two net new insurance deals and one in travel) and APAC, taking 1HFY26 large-deal tally to 10 vs 14 deals in FY25. 12-M EOB increased 6% QoQ (27% YoY) to USD 1.63bn (0.96x LTM revenues). Management is seeing demand improve on the margin. They reiterated their view that 2H will be a growth half, though did qualify it with seasonal softness. Strong traction is expected in Banking, Insurance, public sector and travel verticals. Within the others vertical, they expect Healthcare to reach a book of business of USD 100mn by end of FY26, and expect Public sector outside India to reach USD 200mn in the coming quarters. Q4 is expected to be a seasonally strong quarter while Q3 is expected to see furloughs similar to last year. Management indicated a clear pathway to achieve 14% EBIT margin in FY26, which they expect to hold as they prioritise growth. However, Q3 will see 100-150bps of impact from wage hikes, offset by ESOP costs, D&A expenses and other levers. On cash conversion, management is intent on maintaining FCF/PAT in the 75-80% range, a positive.

* EPS largely unchanged- Retain BUY: There were no adjustments/one-offs reported to margins in the quarter, this increases confidence on margins/earnings driving higher multiples. We have raised our target multiple to 35x from 32x earlier. Maintain BUY.

Key Highlights from the call

* Demand: Coforge reported 5.9% cc QoQ growth in Q2 FY26, with broad-based performance across key verticals. Growth was led by the Travel vertical, driven by driven by ramp-ups in existing programs and steady execution of large transformation engagements. Management noted that the Sabre deal has now reached steady state, with no further ramp-up expected from Q3. Beyond travel, they mentioned that BFSI and insurance verticals also exhibited positive trends, aided by structural tailwinds such as real-time payments, regulatory shifts, and rising demand for specialized products. Leadership underlined healthy traction in strategic and top accounts, with the top-5 and top-10 clients growing 6.2% and 9.8% QoQ, respectively. They noted that the demand outlook is improving, supported by an expanding pipeline and client additions across core and emerging verticals.

* AI-driven service portfolio: Leadership underscored that they are fundamentally transforming their delivery model through an AI-driven service portfolio, embedding intelligence across every stage of the value chain. Management highlighted that the next 18–24 months will be marked by technological confusion and competing standards, as the AI ecosystem remains nascent with immature protocols and evolving tools. In this environment, they highlighted that enterprises increasingly seek partners who can bridge deep industry knowledge with practical AI implementation expertise. They highlighted that their platforms – Code Insight AI, BlueSwan, and ForgeX, are central to this strategy, enabling code intelligence, integrated automation, and rapid transformation. They noted that AI has mutated demand, with enterprises now seeking holistic adoption rather than isolated pilots.

* Outlook: Management remains confident of delivering another strong year in FY26. Leadership emphasized continued focus on robust organic growth, complemented by selective acquisitions. They expect growth to be broad-based, with BFSI and travel continuing to see strong demand. The firm aims an FCF to PAT ratio in the range of 75-80% going forward. They expect H2 FY26 to deliver robust growth, with leadership highlighting that Q4 has traditionally been one of the strongest quarters.

* Margins: Q2 FY26 EBIT margin stood at 14%, a 251bps expansion QoQ, driven by operational efficiencies and lower ESOP costs. The quarter’s reported EBIT was adversely impacted by ~78bps due to hedge losses amounting to INR 307mn, while a 20bps upside came from lower ESOP expenses. Management highlighted that the Q1 base included one-time employee bonus provision, exceptional legal expense, and acquisition-related expenses, normalizing in Q2 and aiding the overall margin expansion. Leadership reiterated that once the firm achieves its targeted 14% EBIT margin for FY26, it will serve as a minimum threshold, with the focus towards growth rather than further margin expansion. The company announced an organization-wide wage hike effective 1st October, which is expected to have a 100–150bps adverse impact in Q3, partly offset by reductions in ESOP costs, lower D&A as a percentage of revenue, and ongoing efficiency levers.

* Bookings: Leadership reported that Q2FY26 was a strong quarter for Coforge in terms of order intake and deal closures. The company highlighted total order intake of USD 514mn, including 5 large deal wins spread across North America (two in Insurance and one in Travel) and APAC. The company mentioned that the executable order book rose to a record USD 1.63bn, up 26.7% YoY, underscoring continued strength in proactive deal pursuits. Management highlighted increasing velocity and median size of large deals, with the firm already closing 10 large deals in H1 FY26 compared to 14 large deals across FY25.

* Segments: Growth in Q2FY26 was led by the Travel vertical, which posted a 6.4% QoQ in USD terms increase as the large Sabre engagement entered steady state with strong delivery. Emerging verticals – including healthcare, retail, and hi-tech also saw healthy traction, growing 5.9% QoQ. The Government (outside India) vertical grew 0.4% QoQ, but management expects acceleration in the coming quarters. The Insurance vertical grew 1.8% QoQ, supported by higher deal flow in P&C and Life segments and increased adoption of AI-led platforms for underwriting and risk management. The BFS vertical saw a 4% QoQ growth, aided by demand in real-time payments, regulatory-driven modernization, and data transformation programs. Leadership also highlighted strong contributions from newer verticals like Healthcare (approaching USD 100mn book of business) and Public Sector (crossing USD 150mn, moving towards USD 200mn),

* Hedge losses: Coforge reported a higher hedge loss of INR 307mn in Q2FY26, compared to INR 158mn in the previous quarter. Management attributed the sequential increase to currency movements and elevated exposure to the pound and euro, which acted as a headwind relative to the US dollar. The company also cited a growing India business mix this quarter, further influencing currency realization. They also mentioned that the rise in hedge volumes was driven by the inclusion of Cigniti, which previously did not hedge as a standalone entity, thereby expanding Coforge’s overall hedge book.

* Cigniti acquisition: Management highlighted that the Cigniti acquisition has been one of the most successful integrations undertaken by them, both strategically and operationally. They noted that the merger process has received NCLT approval, with creditor and shareholder meetings scheduled shortly, and completion expected by Dec 2025/Jan 2026. Management highlighted that this deal brought not just marquee clients but also deep technical expertise and leadership talent to the firm.

* Supply: Coforge ended the quarter with a total headcount of 34,896, adding 709 employees sequentially. Utilization stood at 82.3%, broadly stable QoQ, and LTM attrition was 11.4%. The company noted that their attrition levels are among the lowest in the industry. Management highlighted the emergence of non-linearity in the delivery model, with revenue per employee rising from USD 67,000 to USD 69,000, supported by AI-driven productivity initiatives.

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