Buy Coforge Ltd for the Target Rs. 2,240 by Motilal Oswal Financial Services Ltd
Journey to USD5bn: Key takeaways from mgmt meeting
We recently met with Coforge’s management to discuss the company’s outlook on growth, margins, and cash flow conversion. The team highlighted that while industry-wide demand remains mixed, budgets are opening up for vendors that can deliver outcome-driven solutions. Clients are fatigued by plain-vanilla RFPbased procurement, though they are willing to fund transformation initiatives by vendors that bring true solutioning capabilities. The healthy momentum in large deals continues, with Coforge aiming to sign at least 20 deals above USD20m in FY26 (five done so far). Coforge CEO, Mr. Sudhir Singh, highlighted that the company enjoys a win rate of ~40-45% in proactive proposals, notably higher than RFP-led deals. On the difficult questions of margins and cash flow conversion, the company’s FY26 EBIT margin guidance stands at ~14% (reported), which management believes is adequate to fuel growth. Management also expects cash flow conversion to improve meaningfully going forward.
Our View: We believe Coforge’s strong executable order book and resilient client spending across verticals bode well for its organic business. Cross-selling opportunities in Cigniti remain highly synergistic for the company. We value Coforge at 38x FY27E EPS with a TP of INR2,240, implying a 29% potential upside. We reiterate our BUY rating on the stock.
Demand Environment: Uneven but rewarding for the right vendors
* Demand recovery is uneven. While discretionary spending is still constrained in some areas, there is enough demand for the right vendors, as per management. Clients with well-defined budgets are prioritizing transformational programs, but fatigue has set in for generic solutioning and traditional T&M-led pitches.
* GCC build-outs are seeing some delays, partly due to anti-offshoring sentiment, though overall IT budgets are being finalized with greater confidence compared to last year.
* Importantly, clients are not cutting budgets for proposals that demonstrate strong RoI, which plays well into Coforge’s proactive solutioning approach.
Deal momentum: Eye on large deal closures
* Coforge continues to scale up large deals as a core growth lever. Management has set a target of signing at least 20 deals above USD20m in FY26 (five closed so far), with proactive proposals enjoying a ~40-45% win rate. Further, the Sabre deal was a milestone not just by itself, but in the number of avenues it has opened up for Coforge in travel.
* Beyond this, Coforge is already leveraging the relationship to expand into new airline logos globally. The travel vertical’s contribution has now scaled up to ~23% of revenue and remains a differentiated growth engine.
* Management has reaffirmed its confidence in sustaining the company’s longterm growth CAGR achieved over the past eight years, supported by large deal momentum, sectoral diversification, and inorganic opportunities.
Margins and cash flows: Improvement expected
The company guided EBIT margin(reported) to reach ~14% for full year FY26. Management has reiterated that this level is sustainable for Coforge and should not be viewed as a constraint on growth. Margins in recent quarters were impacted by one-off items, but these are now behind, implying a normalized margin run-rate from here.
* Utilization has further room for improvement. While subcontracting will remain a lever for flexibility, its share is expected to trend lower.
* On growth investments, Coforge continues to hire aggressively with a net addition run rate of ~1,000 per quarter.
On Cigniti, and further acquisitions
* Cross-selling from Cigniti is progressing well. This is not new: SLK’s business has scaled up significantly after the acquisition despite weakness in SLK’s core mortgage business.
* Inorganic growth remains a near-term priority, with management “open to acquisitions in the right areas” to add capability depth and diversify further.
* We believe Coforge’s ability to integrate and scale up acquisitions remains solid.
Our view on the cash flow conundrum
* Coforge remains one of the fastest-growing companies in the sector and is likely to sustain this trajectory in the medium term (Exhibit 2). That said, aggressive investments in capacity and acquisitions have meant that free cash flow (FCF) growth has lagged both mid-cap and large-cap peers (Exhibit 4).
* We analyzed rolling three-year cash conversion metrics across peers and benchmarked them against other high-growth sectors like EMS. Our findings reaffirm that IT services remain the gold standard in cash flow conversion, with most companies consistently delivering strong FCF/PAT ratios. Coforge, admittedly, lags peers.
* There are reparations to be made in FCF conversion as the company absorbs past investments and optimizes working capital. However, we believe the foremost driver for re-rating remains earnings growth, and Coforge’s sustained growth trajectory and deal pipeline leave it well positioned.
Valuation and view: Retain BUY and re-iterate top pick
* We believe Coforge’s strong executable order book and resilient client spending across verticals bode well for its organic business. Cross-selling opportunities in Cigniti remain highly synergistic for the company. We value COFORGE at 38x FY27E EPS with a TP of INR2,240, implying a 29% potential upside. We reiterate our BUY rating on the stock
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