Buy Coforge Ltd for the Target Rs1,800 by Emkay Global Financial Services Ltd
Coforge posted healthy operating performance in 1Q. Revenue grew 21.1% qoq to $592.2mn (22.3% CC; organic: 1.1% CC), largely in line with our estimate of 22.4% CC. EBITM contracted by 60bps qoq to 16%, higher than our estimate of 15.7%. Coforge signed 4 large deals in 1Q, with total order intake of $691mn (excluding order intake from Encora and UK framework agreement deal), lifting the next 12M executable orderbook to $2.23bn. It sees large deal signing momentum gaining strength in 2Q, expecting the number of deals signed to be close to that in full-year FY23 (11), with most of these translating to revenue from 3Q. Approximately 6-7% of revenue comes from outcome-based contracts, and 30% of active delivery projects are driven by AI assets. The company expects a) industry-leading revenue growth and margin in FY27; b) EBITDAM/EBITM (including Encora) to sustain at 20.5-21%/15.5% in FY27; c) FCF/PAT of >100%; and d) EPS accretion from Encora integration in FY27 (on track). We tweak FY27-29E EPS by -1.0% to 3.3%, factoring in 1Q performance and management outlook on deals and growth. We retain BUY and raise TP by ~6% to Rs1,800 (from Rs1,700), at 24x Jun-28E EPS.
Results summary
Revenue grew 21.1% qoq to $592.2mn (22.3% CC; organic: 1.1% CC). Adjusted for the planned exit from low-margin India government business ($15mn) and divestment of a data center asset ($4mn), organic revenue growth stood at 5.2% qoq in CC terms. EBITM declined by 60bps qoq to 16%, above our estimate of 15.7%. Net profit stood at Rs5.2bn, tad above our estimate. Total headcount rose ~10.5k to 46,228 (including 9,256 from Encora). Coforge declared interim dividend of Rs4/share. What we like: Strong execution, margin beat, strong deal intake. What we do not like: cash conversion.
Encora acquisition on track to be EPS-accretive in FY27
The company consolidated 2 months of Encora’s financials post-acquisition (~$100.7mn revenue contribution) in 1Q. Per the management, the integration is ahead of schedule, with all 45 legal entities migrated to SAP S/4HANA. Early synergies are visible across AIled engineering, Hi-tech and Healthcare expansion, and cross-selling. Client mining remains strong: one former Encora client entered the top-10 accounts and is expected to exceed $50mn in revenue over the next 12–18M; two more clients are expected to scale through cross-selling. AI-led engineering, data, and cloud services contribute ~86% to revenue (vs initial 80% target). Encora delivered EBITDAM/EBITM of ~20.3/19.1%, respectively, in 1Q, while G&A costs declined ~40%, with further synergies expected from 2Q. Acquisition-related expenses stood at $6.5mn in 1Q (vs $5.4mn in 4Q), with total integration costs expected to remain within the $15mn guided budget
Recently won large deals in ramp-up phase
The management indicated that the $158mn transformation deal is fully ramped up and contributing at the planned run rate. The $230mn AI-led digital transformation deal entered the ramp-up phase in 2Q, and is expected to contribute progressively over the coming quarters as delivery scales and implementation advances.
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
