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Inline quarter, Encora complements core business

Coforge reported an in-line Q1FY27 performance, whereas outlook seems to be even more encouraging. The management commentary was incrementally constructive with an anticipation of closing highest ever large strategic deals in Q2 vs Q1 which saw 4 large deal wins. Organic revenue grew 5.2% QoQ CC excluding planned portfolio exits (1.1% QoQ CC reported), broadly in line with our expectations, while consolidated EBIT margin expanded to 16.0%, exceeding full year FY27E guided band. A record executable order book of US$2.23bn (+44% YoY) and robust order intake (USD 691m, up6.5% QoQ) provide healthy visibility for H2FY27 growth. Including Encora deal TCV, the combined opportunity is even more bigger. With successful integration of Encora, Coforge gets to participate in a broader client portfolio and scale the potential strategic accounts to a higher revenue band. The combination of Neuron platform and ModSquad practice further compliments to generate new leads within these accounts. The company also sharpened its AI strategy around the Neuron platform with outcome-based revenues now account for 6-7% of revenue and AI-led (Engineering + Data + Cloud) revenues now contribute 86% of revenues. Encora integration has progressed ahead of plan, with early synergy realization reflected in Q1 profitability. A ~40% reduction in G&A expenses was the primary contributor to the stronger-than-expected margin performance. While we maintain our FY27E/FY28E CC revenue growth estimates at 43%/15% YoY, respectively, the record deal pipeline and incremental cross-sell opportunities from Encora provide confidence in sustaining double-digit organic growth. We marginally raise our EBIT margin estimates to 15.5%/15.6% (from 15.3%/15.5%) to reflect early Encora synergies, operating leverage and wage hike deferral. We assign 28x to FY28E EPS that translates a TP of INR 2,120. Maintain our BUY rating.

Revenue:

Coforge reported revenue of USD 592.2 mn in Q1, up 22.3% QoQ in CC terms and 21.1% in USD terms, broadly in line of our estimates of 22% QoQ CC growth. Growth was led by Healthcare, Insurance, BFSI & TTH segment which grew by 11.6%, 4.6%, 2.9% and 1.7% QoQ CC organically respectively. Government segment reported QoQ CC decline of 8% due to discontinuation of low margin portfolio. Geographic growth was driven by Americas & EMEA regions. Organic growth for the quarter was 1.1% QoQ CC & excluding exited business, organic growth at 5.2% QoQ CC

Operating Margin:

EBIT margin came in at 16.0%, a contraction of 60 bps QoQ, slightly below our estimate & above consensus estimate of 16.2% & 15.6% respectively. Margins are guided to likely sustain or improve further driven by integration synergies continuing to accrue, additional G&A savings from Encora from Q2 onwards, and unlikely wage hikes expected in FY27.

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