Buy Coforge Ltd For Target Rs.2,370 by Motilal Oswal Financial Services Ltd
A quarter for integration Margin push encouraging as benefits from AI continue
? COFORGE reported 2QFY27 organic revenue growth of 3.8% QoQ in CC terms, above our estimate of 3.5% QoQ CC. The company reported an order intake of USD1,040m (up 102.3% YoY) with eight large deal wins. Consolidated EBIT margin stood at 16%, in line with our estimate.
? Consolidated adjusted PAT stood at INR6.3b (up 12.5% QoQ/67.8% YoY), in line with our estimate.
? 1HFY27 revenue/EBIT/adj. PAT grew 52.1%/78.8%/59.8% YoY. In 2HFY27, we expect revenue/EBIT/adj. PAT growth of 51.5%/58.1%/47.6% YoY in INR terms. We value COFORGE at 32x FY28E EPS with a TP of INR2,370, implying a 25% potential upside. We reiterate our BUY rating on the stock.
Our view: Strong order book supports growth acceleration in 2H
* Deal momentum remains strong, supporting growth visibility: Coforge reported a record quarterly order intake of USD1.04b, up 51% QoQ and 102% YoY, with eight large deal wins. The next 12-month executable order book rose 45% YoY to a record USD2.4b. With eight or more large deal wins targeted in 3QFY27, deal momentum is expected to support growth visibility. Most large deals are proactively sourced and solution-led, limiting direct pricing competition.
* Encora integration nearing completion; growth expected to accelerate in 2HFY27: YoY organic growth has decelerated over the past two quarters, partly reflecting the Encora integration, with Encora's revenue remaining broadly flat QoQ at USD147-148m in 2QFY27. With integration largely complete, Encora's growth is expected to converge with Coforge's from 3QFY27. Encora's margin expansion is also ahead of the acquisition plan, while a strong deal pipeline, including the largest deal currently being pursued with an Encora client and expected to close in 3Q or 4Q, provides further growth opportunities.
* Margin trajectory improving, with further expansion levers: Margin gains have so far been supported by G&A efficiency, with G&A growing only 15.6% YoY against revenue and sales and marketing growth of ~52% YoY. Further improvement is expected from AI-led efficiency and high utilization, currently at 82.4% vs. ~86% for peers. Gross margin expansion is expected to become more visible from 4QFY27. We expect consolidated EBIT margins at 16% in FY27E and build in 40bp improvement in FY28E. The margin upgrade, alongside continued investment in sales and solutioning, supports the view that profitability gains are not being pursued at the expense of growth.
* Organic growth led by BFSI and government; healthcare and high-tech decline: Organic QoQ CC revenue growth was led by government outside India (+20.8% QoQ), BFSI (+8.3%), insurance (+3.6%), emerging verticals (+2.3%), and travel, transportation and hospitality (+1.8%). Healthcare and high-tech declined 6.4%. Organic growth led by BFSI and government; healthcare and high-tech decline: Organic QoQ CC revenue growth was led by government outside India (+20.8% QoQ), BFSI (+8.3%), insurance (+3.6%), emerging verticals (+2.3%), and travel, transportation and hospitality (+1.8%). Healthcare and high-tech declined 6.4%.
* Cash conversion on track despite temporary collection delays: FCF-to-PAT conversion stood at 89% in 2Q, with 100% conversion targeted for FY27. OCFto-EBITDA (~42%) conversion has been affected by the transfer of contracts from US entities to India as part of Encora’s legal entity rationalization and tax structuring, resulting in temporary delays in invoicing and collections.
Valuation and view
* We expect COFORGE to be the growth leader within our coverage universe, and we reiterate it as our top pick. Strong deal wins, continued execution, improving cash conversion, and EBIT margin guidance upgrade, along with further expansion in FY28, provide confidence in the medium-term growth outlook.
* We keep our estimates unchanged and raise our target multiple to 32x FY28E EPS (earlier 29x), arriving at a TP of INR2,370, implying 25% upside. The higher multiple reflects improved visibility from strong deal wins and structurally higher margins. We reiterate our BUY rating on the stock
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