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Confident to meet lower end of 13% to 16% cc revenue growth guidance for FY24

Result Synopsis

Coforge (COFORGE) reported mixed financial performance for the quarter. Both,the sequential revenue growth and EBIT margin were slightly below expectation. It reported constant currency growth of 1.8% QoQ (up 1.4% QoQ in USD terms), led by Banking Vertical (up 3.3% QoQ) and Others Vertical (up 4.4% QoQ). There was sequential improvementin EBIT margin (up 191 bps QoQ) led by focus on operational efficiency. Employee attrition continues to decline as LTM attrition decreased by 90 bps QoQ to 12.1%. Its employee attrition remains one of the lowest in the IT Industry. Offshore revenue mix now contributes 52.2% to total revenue, having grown from 50.5% as of Q3FY23.

The near term demand environment remains challenging as the clients especially in select sectors remain cautious regarding the evolving macroeconomic situation and it has led to moderation in revenue growth performance. However, the order booking remains strong and provides strong revenue growth visibility. Revenue guidance of 13%-16% in cc terms for FY24 remains strong. Falling employee attrition is expected to support operating margin going ahead. We estimate revenue CAGR of 19.6% over FY23?26E with average EBIT margin of 14.9%. We maintain our BUY rating on the stock with revised target price of Rs 7,700/share at PER of 27x on FY26E EPS. The stock trades at PER of 26.9x/22.1x on FY25E/FY26E EPS.

Result Highlights

? Reported revenue of Rs 23,233mn (up 2.1% QoQ in INR terms, up 1.4% QoQ in USD terms). The cc growth was 1.8% QoQ. The growth was led by Banking Vertical (up 3.3% QoQ) and Manufacturing and Other Vertical (up 4.4% QoQ).

? EBIT margin increased by 191 bps QoQ to 13.8%, led by control on personnel cost.

? Reported order intake of $354 mn in Q3FY24 against $313 mn in Q2FY24. Total order book executable over the next 12 months is at US$ 974 million (v/s $935 mn in Q2FY24).

? Offshore revenue mix grew by 20 bps QoQ to 52.2%. 7 new clients were added during the quarter.

? Net employee addition stood at (31) employees during the quarter to close at 24,607 employees. LTM attrition declined by 90 bps QoQ to 12.1%.

? Declared interim dividend of Rs 19/- per share; record date 5th February, 2024.

KEY CON-CALL HIGHLIGHTS

? 8th consecutive quarter to clock in $300 Mn+ TCV with 1 large deal in BFS vertical, 1 in Insurance vertical and 1 in Travel vertical.

? 7 new logos were signed during the quarter. 8 Large deals were signed during 9MFY24.

? CY24 does not have significant increase in client budget when compared to CY23. BFS client budget has marginally increased by ~5% when compared to CY23.

? Travel vertical was bottomed out and is expected to rebound strongly in Q4FY24.

? Margins grew due to lower cost of ESOP, lower effective tax rate and improvement in operational efficiency.

? Furloughs during the quarter were higher than anticipated and had a negative impact of 50bps on overall margin.

? Repeat Business stood at 94% for Q3FY24 (vs 95% for Q2FY24).

? ~1,400 net employees added during 9MFY24. ESOP cost reached the normalized levels.

? CAPEX for the quarter stood at $6.7 Mn. Investments in SG&A has increased to attract more customers and scaling Australia geography.

? Guided OCF / EBITDA in the range of 65% to 70% by end of FY24.

? Guided FY25 Margins expected to improve by ~100 bps on account of lower finance cost and improved employee pyramid.

? Company affirms to meet its lower end of revenue guidance of 13% to 16% organic growth in cc terms.

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