Buy Coforge Ltd for the Target Rs 2,200 by Motilal Oswal Financial Services Ltd
Ticks all the boxes Delivers on growth, margin, and cashflow
* COFORGE reported 1Q revenue growth of 1.1% QoQ in CC terms, above our estimate of flat QoQ CC. The company reported an order intake of USD691m (up 36.3% YoY) in 1Q with four large deals. Consolidated EBIT margin stood at 16%, above the consensus estimate of 15.6%. Consolidated adjusted PAT stood at INR5.6b (down 14.4% QoQ and up 83.2% YoY) vs. the consensus estimate of INR5.4b. Our PAT estimate of INR5.1b reflects only the organic business and is, therefore, not directly comparable, as the reported results include Encora's contribution and the higher post-acquisition share count.
* 1QFY27 revenue/EBIT/adj. PAT grew 49.2%/80.8%/83.2% YoY. In 2QFY27, we expect revenue/EBIT/adj. PAT growth of 57%/82.2%/70.4% YoY in INR terms. We value COFORGE at 29x FY28E EPS with a TP of INR2,200, implying a 31% potential upside. We reiterate our BUY rating on the stock.
Our view: Strong deal pipeline and structurally better cash flow profile keep us positive
* Large deal momentum remains strong; executable order book provides better growth visibility: COFORGE reported another strong quarter of deal wins with order intake of USD691m, taking the next 12-month executable order book to an all-time high of USD2.23b (+44% YoY). More importantly, large-deal momentum has continued into 2Q, with the recently announced USD230m European transformation deal already ramping up.
* While most of these wins should start contributing meaningfully from 3QFY27, management expects 2Q itself to be a strong growth quarter. We believe the current order book, along with healthy deal momentum, provides strong revenue visibility over the next 14-16 months.
* Cash flow profile appears structurally better: Free cash flow-to-PAT conversion improved to 95% in 1QFY27. We believe this is not just a strong quarter but reflects structural changes made over the last few years (refer to Exhibit 1), with the historically weak 1H cash flow pattern largely behind the company. Management has reiterated its target of 100%+ FCF-to-PAT conversion for FY27. We would still like to see this sustained over the next few quarters; but if it does, it would be a meaningful improvement in COFORGE's cash generation profile and one of the key positives from this quarter.
* Underlying organic growth remains healthy: Reported revenue grew 22.3% QoQ CC, while organic revenue (excluding Encora) grew 1.1% QoQ CC. However, this number is impacted by the planned exit from the India government and data center businesses. Adjusting for these exits, underlying organic growth stood at 5.2% QoQ CC, which, in our view, points to the continued strength of the core business.
* Growth becoming more broad-based across verticals: Healthcare & Hi-tech (+11.6% QoQ CC) remained the strongest vertical, while Insurance (+4.6% QoQ CC) and BFSI (+2.9% QoQ CC) also delivered healthy growth. We believe this is encouraging as growth is no longer dependent on one or two verticals. Management also highlighted healthy demand across key markets, and we expect most major verticals to contribute to growth over the next few quarters.
* Margins already ahead of guidance; further upside possible: Consolidated EBIT margin came in at 16.0%, already ahead of the company's FY27 guidance of 15.5%, while standalone margin stood at 16.7%.
* Management indicated that Encora integration is progressing faster than planned, with nearly 40% of G&A costs already removed, and expects further synergy benefits from 2Q onwards. In our view, if execution remains on track, there could be room for further margin expansion. Hence, we build in a 16.1% EBIT margin for FY27/FY28.
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 further margin upside from the Encora integration provide confidence in the medium-term growth outlook.
* We value COFORGE at 29x FY28E (earlier 26x) EPS with a TP of INR2,200, implying a 31% potential upside. We reiterate our BUY rating on the stock.
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