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FY25 AR Analysis – Dissecting concerns

Investors’ recent debate on Coforge has revolved around its financials, especially asset-heavy deals and weaker cash flows. We delved deeper into Coforge’s FY25 annual report (AR) to look for numerical evidence, if any. Our analysis suggests that these concerns, though not completely unsubstantiated, are a bit overstated. For example, contract cost – cost associated with obtaining and fulfilling a contract – went up 82% YoY. But when seen in the context of deal wins, incremental contract cost as % of TCV was flat YoY (Exhibit 2). Similarly, growth in contract assets (+35% YoY) should be seen as an addition to receivable days. In that context, Coforge’s total receivable days (Receivables + Unbilled + Contract asset days) are similar to peers (Exhibit 6). Further, Coforge’s FY25 capex was up substantially by 114%. But c.56% of incremental gross block addition was spent toward the AI data centre, which the company has said was deal specific and non-recurring. Adjusted for this, Coforge’s FCF/PAT was 97% vs. 69-108% for peers (Exhibit 9). Subsidiary financials reveal 16% USD revenue CAGR over FY22-25 for SLK, a mortgage BPO company acquired by Coforge in FY22. That bodes well for Coforge-Cigniti cross-sell synergies. 3x increase in Remaining Performance Obligation to be recognised over the next 12 months improves revenue visibility. On the flip side, consistent losses in India unit and 20% employee turnover (versus reported attrition of 11%) are concerning. Overall though, the FY25 AR should assuage the most pressing concerns on the company. At 32x FY27E EPS, the stock trades at sub-1x PEG. BUY.

* Contract costs – only optically high: Coforge’s contract cost, that is, incremental cost to obtain or fulfill contracts, increased 82% YoY. Within this, cost to obtain the contract was up 2.5x to INR 5.4bn while that to fulfil the contract was broadly stable (Exhibit 2). As contract cost is a period-end figure, we estimated the flow during the year after adjusting amortisation of period beginning cost (Exhibit 2). We then compared this incremental contract cost with total contract value (TCV) won during the year. Despite the optical spike, incremental contract cost as % of TCV in FY25 was 1.6%, flat YoY. This should assuage concerns around increase in upfront payment to obtain contracts.

* Contract assets – not ideal but within bound: Contract assets are unbilled revenues where right to consideration is not unconditional. Coforge’s FY25 contract assets grew 31% YoY, in-line with revenues. Still, given the riskier nature, we looked at two factors to assess if Coforge’s revenue recognition practice is prudent or not. One, contract assets as a % of overall revenues is merely 2%, which is not material. Two, impairment as % of period-beginning contract assets – a proxy for aggressive recognition – actually declined sharply YoY to 3% (Exhibit 5). Importantly, Coforge’s total receivable days (billed + unbilled + contract asset days) are similar to its peers (Exhibit 5).

* Contract assets – not ideal but within bound: Contract assets are unbilled revenues where right to consideration is not unconditional. Coforge’s FY25 contract assets grew 31% YoY, in-line with revenues. Still, given the riskier nature, we looked at two factors to assess if Coforge’s revenue recognition practice is prudent or not. One, contract assets as a % of overall revenues is merely 2%, which is not material. Two, impairment as % of period-beginning contract assets – a proxy for aggressive recognition – actually declined sharply YoY to 3% (Exhibit 5). Importantly, Coforge’s total receivable days (billed + unbilled + contract asset days) are similar to its peers (Exhibit 5).

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