Buy Coforge Ltd for the Target Rs. 2,400 by Motilal Oswal Financial Services Ltd
A clean win
Healthy cash conversion and margin gains stand out
* COFORGE reported strong 2QFY26 revenue growth of 5.9% QoQ in CC terms, in line with our estimate of 6.0% QoQ CC. The company reported an order intake of USD514m (up 1% YoY) in 2Q with five large deals, resulting in a robust 12-month executable order book of USD1.6b. EBIT margin stood at 14%, in line with our estimate. PAT stood at INR3.7b (up 18% QoQ/86% YoY) vs. our estimates of INR3.8b. FCF to NI stood at 86%.
* The company’s revenue/EBIT/adj. PAT grew 41%/44%/68% YoY in 1HFY26. We expect revenue/EBIT/adj. PAT to grow 32%/48%/59% YoY in 2HFY26.
* COFORGE’s strong executable order book and resilient client spending across verticals bode well for its organic business. We now value COFORGE at 38x Jun’27E EPS, arriving at a TP of INR2,400, implying 36% potential upside.
Our view: Solid execution; may just fall short of full-year margin target
* Notable improvement in FCF conversion as well as EBIT margin reporting key positives: FCF-to-NI improved to 86% in 2QFY26 (vs -56% in 1QFY26). We expect this number to settle around 75-80% going forward. We believe that for a company with 20%+ revenue growth, this is a fair cash conversion ratio. GAAP margin and fact sheet margin are now fully reconciled, and we believe the reporting is now clean. This is a key positive and lends credence to the numbers.
* Sabre deal fully ramped up; strong executable order book provides growth visibility: A strong executable order book of USD1.6b, up 26% YoY/5% QoQ, along with order intake of over USD500m in the last few quarters, provides growth visibility. Further, cross-selling initiatives with Cigniti are beginning to yield results, enabling COFORGE to win large deals. Management aims to close 20 large deals (10 deals won in 1HFY26) in FY26 (vs. 14 in FY25). Taken together, revenue visibility over the next 12 months remains high, and we expect organic growth of 23% YoY CC in FY26.
* Revenue per employee improved meaningfully; efficiency trends encouraging: Revenue per employee has improved by 17% YoY, and this will be a key metric to track for the industry, with COFORGE having taken an early lead. As we argued in our note (dated 19th Sep’25: GenAI and IT Services: The waiting game), to avoid margin pressure, hiring has to be somewhat decoupled from revenue growth - this should increase revenue per employee and defend margins, and COFORGE seems to be executing this fairly well.
* Management has guided for margins to be stable at 14%, though we believe that in the current demand environment, margins could be at risk. It is possible that management may fall short of its margin guidance. That said, we still expect a notable improvement YoY in FY26, with margins likely to land fairly close to the management’s target. We estimate the FY26 EBIT margin at 13.8% (vs. the company’s guidance of 14%).
Valuation and changes to our estimates
* We expect COFORGE to be the growth leader in our coverage universe and reiterate it as our top pick. We have kept our estimates largely unchanged. COFORGE’s strong executable order book and resilient client spending across verticals bode well for its organic business, while cross-selling opportunities with Cigniti remain highly synergistic for the company. We value COFORGE at 38x Jun’27E EPS with a TP of INR2,400, implying a 36% potential upside. We reiterate our BUY rating on the stock.
In-line revenue and margins; TTH led growth, FCF/NI improves to 86%
* Revenue grew 5.9% QoQ CC (est. 6.0% CC). Reported USD growth was 4.5% QoQ.
* Growth was led by the TTH vertical (6.4% QoQ), followed by Others (Healthcare, Retail and Hi-Tech), which was up 5.9% QoQ. BFS also grew 4.0% QoQ.
* Order intake was USD514m (up 1% YoY). Five large deals were signed during the quarter. The 12-month executable order book rose 26.7% YoY to USD1.6b. It added nine new logos during the quarter.
* EBIT margin was 14%, in line with our estimate.
* Utilization grew 20bp QoQ to 82.3%. Net employee addition stood at 709, up 2.1% QoQ. Attrition was stable at 11.4%.
* PAT stood at INR3.7b (up 18% QoQ/86% YoY) vs. our estimates of INR3.8b. FCFto-NI stood at 86% vs. -56% in 1QFY26.
* Coforge announced an interim dividend of INR4 per share.
Key highlights from the management commentary
* Demand remains muted, but the addressable opportunity continues to grow, led by positive trends in BFS, Insurance, and Travel.
* Management highlighted that margin-led demand is emerging, where enterprises prefer vendors with strong engineering and AI capabilities. AI is viewed as a clear structural tailwind, though enterprise implementation complexity remains high, favoring firms like Coforge with deep cloud, data, and engineering expertise.
* The company expects 2H to outperform 1H, driving robust full-year growth.
* It continues to focus on organic growth and expects to sustain robust growth over the next 2-3 years.
* The velocity and median size of large deals have been increasing over the years.
* Large deals: three came from North America (two in Insurance) and two from APAC. One of the NA deals was a legacy modernization engagement.
* Two of Cigniti’s top 10 clients have already signed large deals with COFORGE, indicating early cross-selling traction that is expected to improve further.
* Management iterated potential margin exit of 14% in FY26 while emphasizing that growth remains the primary focus.
* Wage hikes, effective 1st Oct’25, are expected to impact margins by 100-200bp, partially offset by lower ESOP and D&A expenses.
* The Sabre deal has reached the steady-state level; rebadging activities are now complete.
* Revenue per employee continues to improve, driven by AI-based delivery platforms and non-linear growth.
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
