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Robust financial performance; Definite signs of improvement in outlook

Coforge reported inline performance for the quarter. It reported revenue of Rs 24.1bn ( up 1.8% QoQ in INR terms, up 1.6% QoQ in USD terms). The cc growth was 1.6% QoQ. The sequential growth was led by Travel , Tourism and Hospitality( up 4.6% QoQ). Adjusted EBITDA margin was at 17.9% vs 19.0% in Q4FY24. Order intake of $314 mn for the quarter( 10th consecutive quarter of $300mn+). The 12 month executable order book was at $ 1070 mn( up 19.3% YoY). Added 10 clients in the quarter, almost similar run rate in previous quarters. Employee attrition was at 11.4%( among the lowest in industry) from 11.5% in Q4FY24. Added 1,886 employees in the quater. ( up 7.6% QoQ) to 26,612 employees. Utilization was down 10 bps QoQ to 81.6%. DSO was up 2 days QoQ to 59 days. The robust growth in 12 month executable order book and green shoots in the BFSI segment along with higher headcount addition provide strong growth visibility. The focus on margin levers such improving pyramid, higher offshoring and utilization will drive margin improvement. We expect Revenue/EBITDA/PAT to grow at 17.0%/22.2%/33.1% over FY24-FY26E. We have revised up our FY25E/FY26E EPS by 2.9%/4.4%. We change rating from ADD to BUY on the stock with revised target price of Rs 7,140 (vs Rs 5,551 earlier) at PE of 30x on FY26E EPS plus the value of stake in Cigniti (at Rs 560/share). We have increased target PE multiple from 24x to 30x to account for improving demand scenario led by green shoots in BFSI segment(~50% of revenue). Tier 2 IT companies had undergone higher multiple compression vs tier 1 companies in recent downcycle and we expect that for Coforge, with higher and improving growth profile, the valuation multiple should expand with 25-30% premium over top tier 1 IT companies; to ~1.75x-2.0x PEG ratio.

Revenue growth was as per expectation

Revenue grew by 1.8% QoQ in INR terms, up 1.6% QoQ in USD terms (& up 1.6% QoQ in CC terms) led by 4.3% QoQ growth in Travel, transportation and Hospitality vertical. The robust growth in 12 month executable order book and 6% QoQ increase in headcount provides strong revenue visibility going ahead. We expect ~17% revenue CAGR over FY24E-26E led by broadbased growth across verticals.

EBIT margin declined sequentially

Reported EBIT margin was down by 76bps to 13.7%, led by higher visa and headcount addition related cost. It expects that the merger with Cigniti would help to drive around 150-250 bps of operating margin improvement by FY27. We expect EBIT margin to improve to 14.5%-15.0% by FY26 led by positive operating leverage, higher offshore mix and improving employee pyramid.

Change Rating from ADD to BUY with revised target price of Rs 7,140/ share

We expect Revenue/EBITDA/PAT to grow at 17.0%/22.2%/33.1% over FY24-FY26E. We have revised up our FY25E/FY26E EPS by 2.9%/4.4%. We change rating from ADD to BUY Rating on the stock with revised target price of Rs 7,140 (vs Rs 5551 earlier) at PE of 30x on FY26E plus the value of stake in Cigniti (at Rs 560/share). We have increased target PE multiple from 24x to 30x to account for improving demand scenario led by green shoots in in BFSI segment (~50% of revenue).

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