Buy Coforge Ltd for the Target Rs 1,550 by Emkay Global Financial Services Ltd
We attended Coforge’s analyst day, where the management reaffirmed its growth strategy and medium-term growth aspiration. KTAs:
1) The company’s growth strategy is centered on four pillars, with an emphasis on execution:
i) Big bets focused on strengthening core capabilities in AI-led engineering, data and integration, and cloud, while deepening its presence in industries (healthcare in the US and public sector in the UK)
ii) Partner-led growth (partnerships with frontier models, hyperscalers, etc)
iii) Accelerating scale through key account expansion (top 20 accounts contributed ~38% of revenue in FY26); and iv) pursuing strategic M&As where the mgmt is confident in driving turnaround.
2) The mgmt views AI as a growth driver, deal accelerator, and margin enhancer simultaneously, rather than merely a cost-saving lever.
3) Large deals (TCV >USD20mn) continue to fuel topline growth, rising 38% YoY (ex-Sabre) in FY26. The sustained acceleration in large deal wins and orderbook is driven by its onshore solutioning engine.
4) It expects continued momentum in the Government (outside India) business owing to deal wins.
5) Travel remains a key differentiated vertical, with AI-driven transformation, agentic AI, dynamic pricing, and AI-led customer engagement expected to drive a new modernization cycle.
6) The mgmt aspires to scale revenue to USD5bn by FY30, with ~USD4.3bn expected to be driven organically (~15% CAGR) while the remaining ~USD700mn from future M&As. We maintain BUY, increasing FY27/28E EPS by ~3%/2% on updated currency assumptions, and rolling forward TP to June, with a revised TP of Rs1,550 from 1,400 at 22x Jun-28E EPS.
Q1 is expected to be flattish organically with FY27 momentum steady
The company is exiting low-margin, higher working capital-intensive India Government business (~USD50mn in FY26; USD15-20mn quarterly run rate in Q4), which will result in a flattish sequential organic growth in Q1, and expects growth to accelerate from Q2. Encora acquisition will be consolidated for 2M in Q1. It expects to sustain EBITDAM/EBITM (incl Encora) at 20.5%/15.5% in FY27. EBITM may have further upside in subsequent years with growth and flattening amortization costs. It expects organic revenue growth over the past nine years to sustain over next four years considering differentiated offerings in data, cloud, AI engineering, execution rigor, and transformation solutioning.
Key actions that act as the fulcrum for growth and profitability over L2Y
1) Divested AdvantageGo, a loss-making, cash-negative business (~60bps improvement in EBITM, USD10mn FCF).
2) Exited low-margin, high working capital-intensive India Government business (~USD50mn revenue in FY26) to improve revenue quality.
3) Embedded AI across delivery and G&A functions, enabling the company to sustain gross margins despite pricing pressure, while driving productivity gains and reducing overhead costs.
4) Completed Cigniti merger, scaled its top-3 accounts ~3x on a cumulative basis over the past 2Y, driving EBITDAM expansion from 12% to 21% within five quarters through integration synergies and operating leverage.
5) Acquired Encora, which is expected to strengthen Coforge’s digital engineering capabilities, with consolidation expected to start from Q1FY27.
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