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CG2025 takeaways: A slow recovery

We hosted 21 Indian technology companies for our flagship Chasing Growth 2025 conference. The key takeaways from the conversations with companies are (1) cost optimization continues to be the primary demand driver, (2) the outlook on discretionary spending recovery is mixed, (3) AI will generate significant productivity benefits in services and provide new opportunities and (4) GCC expansion is temporary and a later-stage opportunity. The slower spending recovery and near-term risk from AI adoption lead to downside risks to our revenue growth and margin estimates and stock multiples. We like Infosys and TechM among Tier 1; Coforge, Indegene and LTIM in mid-tier.  The weak business momentum leads us to maintain a cautious view on ERD companies despite the ~18-36% decline in stock prices in the past year.

Cost optimization continues to be the primary driver of demand

Companies continue to focus on cost take-outs, leading to vendor consolidation opportunities. Technology transformation, with investments in cloud, data, AI and legacy modernization, continues at a steady pace. Commentary on tech budgets varied from similar to CY2024 to a modest increase.

Mixed outlook on discretionary spending recovery

Commentary on the magnitude and pace of discretionary spending was mixed across companies. The spending recovery is uneven across verticals. A reasonable level of recovery is visible in BFSI, aided by higher regulatory and compliance work. Green shoots are visible in retail. A broad-based recovery is still elusive in other key sectors, such as healthcare, manufacturing, telecom and hi-tech, due to a mix of (1) focus on cost optimization, (2) pressure on revenue growth and (3) macro environment and industry-specific uncertainties.

AI will generate significant productivity benefits and provide new opportunities

Generative AI provides significant productivity benefits across several service lines of IT services companies, such as software development, testing and horizontal BPO. Companies view the revenue deflation risk as manageable and similar to past technology cycles. Companies intend to be ahead of the game and generate sufficient efficiency savings through AI adoption in order to retain some benefit after passing on the savings to clients. New revenue opportunities in technology from the adoption of generative AI are available and include data infrastructure modernization and legacy code modernization. New opportunities from using AI at scale to transform business operations can be a large future opportunity. The reduction in model costs is good for AI adoption.  

GCC expansion is temporary and a later-stage opportunity

The momentum in setting up new GCCs and expanding the existing ones will continue in the next 1-2 years. However, GCCs can provide outsourcing and carve out opportunities in the medium- to long-term. Many GCCs will not be able to sustain cost-efficient India operations over a period of time, leading to the shifting of operations to IT services firms. Functions considered to be ‘too core’ to be outsourced can be considered for outsourcing later.

We believe headwinds will offset tailwinds from generative AI adoption, leading to a 2-3% negative impact on revenue growth over a period of 2-3 years

Plenty of other use cases are in the PoC stage but do not appear to be promising enough for them to be implemented at scale in the medium term. The increase in AI capabilities and a reduction in costs over time will boost AI adoption, driving new opportunities for Indian IT services providers. However, increased efficiency in software development, BPO and other service lines can lead to revenue deflation. We expect the net impact to be a headwind for Indian IT to the tune of 2-3% growth over 2-3 years, perhaps beginning in CY2025. As AI adoption picks up in other use cases, the net impact on demand could turn neutral or positive. We believe that the focus of enterprises on improving data infrastructure will drive demand for Indian IT. Gen AI adoption can accelerate digitalization and the core modernization journey of enterprises as well.

We expect a higher revenue deflation impact on application development in IT services and customer service BPOs. Several mid-tier firms have a higher exposure to application development than tier 1. However, quality mid-tier names are looked at as challenger vendors by clients. Companies can use this challenger status as an advantage and gain share to offset the negative impact with more volumes.

The focus of AI labs on selective development of capabilities, such as reasoning, can lead to models becoming better at math, reasoning and coding. This can lead to sharper increases in capabilities in these areas versus others, for instance, image creation or creative writing. A higher increase in capabilities in coding, fixing software issues and debugging, among others, versus other areas can lead to higher net headwinds for IT services in the near term.

Downside risks to KIE revenue growth estimates and multiples

A slower recovery in discretionary spending in non-BFSI verticals and downside risk to revenue growth from generative AI adoption lead to downside risks to our industry revenue growth to the extent of 1-2%, in our view. We currently forecast ~6-7% industry growth in FY2026E and 8-9% normalized growth in FY2027E. A combination of lower discretionary spending, cost-conscious clients and pressure to generate savings from generative AI may not be ideal to support significant margin expansion unless the rupee depreciates significantly. Finally, multiples have sustained despite subpar revenue growth in the last couple of years. Another year of below-normalized growth and downside risks from AI in subsequent years carry downside risks to multiples as well.

Quality challengers can continue to ace by gaining market share from incumbents

Quality mid-tier challengers such as Coforge and Persistent remain unperturbed by the pace of discretionary spending recovery. While a healthy recovery will definitely aid in better revenue growth for these companies as well, strong execution on hunting, mining and large deals will help sustain healthy double-digit growth, even if the demand environment does not improve significantly. A loss in revenue due to the passing on of generative AI efficiencies to clients can be offset by market share gains from incumbents. A strong play in promising AI use cases such as legacy modernization and data infrastructure modernization, strong technical and domain expertise, willingness to cannibalize existing revenue and smart identification of opportunities will help quality challengers gain share from incumbents and continue to grow at an elevated pace despite broader market challenges.

Challenging environment for large incumbents unless market recovers significantly

Large incumbents are dependent on market recovery to get back to normalized growth rates. In the past cycles, incumbents benefited from share gains from legacy vendors, strong rise in outsourcing and spending shift from hardware to services. These avenues have shrunk relative to the past. Incumbents face the risk of revenue deflation from generative AI, which will be difficult to offset by gains from other providers. We believe Tier 1 companies may need to provide end-to-end services to ensure additional scope offsets revenue deflation or look to expand in new areas such as the Chief Marketing Officer (CMO) stack. Large incumbents do have an advantage in mega deals. However, mega-deal opportunities in the market are not sufficient to cater to all players. The deal pipeline commentary by companies indicates that the outlook for mega deals may not improve significantly in FY2026.

Too early to assess the impact of policy changes under the new US administration

After the US presidential election, uncertainty related to elections reduced, a positive. However, policy changes under the Trump administration risk increasing uncertainty. Client conversations till now do not indicate a material shift in tech spending priorities due to the perception of higher uncertainty under the Trump administration.

ERD services?near-term uncertainties dampen optimism

A slowdown in manufacturing-focused industries has impacted R&D spends by enterprises. This, coupled with delays in decision-making, has led to some moderation in the near-term outlook. Automotive OEMs are recalibrating their investments with evolving consumer preferences and regulations. Spends related to new platform development related to SDVs could continue. European OEMs have been impacted by increased competitive intensity from Chinese OEMs and are under pressure to lower their costs. This could manifest in large outsourcing opportunities for offshore-based vendors, resulting in pipeline swell, but the conversion has been constrained. Companies with stronger order bookings appear more optimistic to tide over near-term challenges.

Aerospace growth could moderate in CY2025. In the past 2-3 years, the growth was primarily led by increased MRO spending by clients, which has now plateaued. However, new product development spends remain muted due to a significant order backlog and issues at one of the large aircraft OEMs. Clients in the telecom vertical remain cautious before undertaking new investments. The capex spends have stabilized, but cost pressures led to subdued opex spending by clients, impacting outlook.

Moderated revenue growth amid demand challenges would lead to gradual improvement in margins. Headcount has declined across pure-play ERD services companies in the past 2-3 quarters. Most companies have limited room to improve utilization and would need to flex operating efficiencies to maintain profitability.

We hosted 21 Indian technology companies—15 IT services/BPO companies, 5 ERD companies and 1 product company—in our flagship Chasing Growth 2025 conference. They are Birlasoft, Cyient, Coforge, Firstsource, Happiest Minds, HCLT, IKS Health, Indegene, Infosys, KPIT, LTIM, LTTS, Mphasis, Persistent, RateGain, Tata Elxsi, Tata Technologies, TCS, TechM, Wipro and Zensar. The key takeaways from the conference are presented below:

TCS: February 19, 2025

Key takeaways

* New US administration impact. Current client conversations do not indicate considerable headwinds.

*  H-1B visas. The US localization rate in US is over 2/3^rd. TCS has ~50k people in the US, including subcontractors.

* North American vertical commentary. (1) BFS. Since June, demand has been recovering. (2) Retail and manufacturing. Directionally, trends are better in retail and manufacturing. In retail, the holiday season was better than expected. Based on client conversations, TCS expects recovery in retail in 2-3 quarters. In manufacturing, labor issues have settled down. Supply-chain issues are getting sorted out.

* Europe. No change in demand outlook for the geography as a whole.

* BFSI. Both the US and European banks have significant tech debt. US banks are taking steps to modernize, leading to opportunities for TCS.

* Discretionary spending. The pipeline is healthy. Delay in decision-making to close deals is not a concern. Tenure of deals has not significantly changed. Mega transformation programs are being split up into phases. Clients are executing one phase at a time with focus on RoI rather than contracting all the phases upfront.

* Healthcare. Client-specific issues have stabilized in 3QFY25 and will not lead to an incremental drag on revenue growth. Most clients are still awaiting clarity on what the measures to be taken by the new administration under Trump. Most payers and providers will be in a wait-and-watch mode. No new transformation programs are happening so far. Discretionary spending can be impacted in the vertical, but cost optimization deals can provide opportunities.

* Cost optimization deals. The focus on cost optimization is high, especially vendor consolidation. TCS gets to participate since it is a strategic supplier across many accounts. Win rates have not changed significantly.

* Generative AI. The technology is gaining maturity at a very fast pace. AI is being infused across the entire value chain rather than in point solutions. Gen AI’s role in software development lifecycle is also evolving. Use cases that can drive business value are also being focused on now. With DeepSeek, the interest in AI has increased. Legal and security functions of organizations are also being more accommodative of generative AI.

* Legacy modernization. Has engagements to modernize mainframe with generative AI. Earlier, it was a 2-5-year journey. The compression in timelines can lead to an interest in modernization among enterprises, resulting in new opportunities for TCS.

* Differentiation w.r.t mid-tier providers. Contextual knowledge from the client from multi-decade relationships will be an advantage to TCS. The ability to invest and stay ahead in new technologies can also be a differentiator.

* Margin outlook. TCS aspires for 26-28% EBIT margin. The company has almost returned 100% of FCF to shareholders in the last five years.

* Hi-tech. Cost optimization and vendor consolidation have driven some market share gains for TCS.

* GCCs. Not feeling threatened by GCCs. The proliferation of GCCs is due to good talent availability in India. Captives will be burdened with increasing cost structure over time.

*  Deal tenure. Average deal tenure is around 3-5 years.

Infosys: February 18, 2025

Key takeaways

* Demand outlook. Demand environment is showing green shoots, with gradual recovery in discretionary spending. However, the recovery in discretionary spending is still not broad-based. Cost take-outs continue to be the primary focus of clients. Budgets are still not finalized by clients. Finalization of discretionary budgets is important for Infosys to get a sense of demand that the company can capture. The deal pipeline for small- and medium-sized deals is significantly better. Large deal pipeline has improved compared with the past six months. However, decision-making cycles still continue to be protracted.

* 4QFY25 growth outlook. Third-party software costs increased sharply in 3QFY25 and will normalize to an extent in 4QFY25. Lower uptake of discretionary projects in 4QFY25 impacts Infosys due to higher exposure to discretionary spending, usually leading to weaker sequential revenue growth performance in the fourth quarter.

* Vertical-wise outlook. Financial services’ discretionary spending has recovered. Recovery has become fairly broad-based in financial services. Demand is across multiple areas such as cloud, customer experience, cyber, data, analytics and AI. The demand is better in the US compared with Europe, where the recovery is in early stages. Retail and CPG, is the next vertical where discretionary spending is recovering, mainly in the US. Discretionary spending is yet to recover meaningfully for other verticals.

* Generative AI. Focus is on positioning Infosys as a relevant partner to clients.

* Captives. Infosys can capture opportunity when captives are hived off to service providers. The Danske deal is a good example. Danske had already realized cost savings from offshoring. Infosys was able to provide further cost savings for Danske, while at the same time making sufficient margins from the deal.

* Deal win TCV. FY2024 was an aberration in terms of large deals. Despite lower large deals Infosys is already witnessing growth acceleration, courtesy the improvement in discretionary spending. 9MFY25 deal TCV is better than 9MFY22 and 9MFY23. Growth improvement in FY2026 would be a function of the magnitude of improvement in discretionary spending.

* Large deals. Large deals are typically a combination of multiple services. For clients, the key objective is to save costs. Large deal pipeline is still skewed toward cost take-out projects. Discretionary deals are usually smaller deals and convert in the same quarter or the next. Large deals can have a discretionary component, but usually the cost take-out component is larger. The Daimler deal involved rationalization of data centers, which could be considered as cost take-outs, while the cloud migration component could be considered as discretionary.

* Cloud adoption. On average, enterprises have still not crossed the halfway mark on cloud adoption. Cloud opportunity itself still can provide a massive runway to growth.

* H-1B risk. More offshore, more nearshore and higher US localization have lowered the H-1B disruption risk for Infosys.

*  Generative AI. Savings will be passed on to clients. Focus is to stay ahead and get higher benefits than peers so that Infosys can retain some and get sticky client engagements. Clients are still not ready with the data readiness that is required for the application of AI to achieve the benefits. Automation benefits from generative AI is a key pillar of Project Maximus—Infosys’s cost-saving program.

* Rupee depreciation. Can provide a short-term benefit to margins. For every 1% movement in the Indian Rupee versus the US Dollar, there can be a 25-30 bps margin improvement ex-cross currency impact. 3QFY25 had a 30-40 bps margin benefit from a ~2% Rupee depreciation.

* Margin outlook. The aspiration is to get to a higher margin band than the current 20-22% EBIT margin guidance. Infosys has enough levers to improve margins.

*  Wage hikes. Infosys has not made a decision on wage hikes for FY2026.

* Subcontracting costs. Infosys is trying to reduce tenured subcontractors in generic services.

* Unbilled revenue. The decline in recent quarters is due to conscious efforts such as more frequent billing milestones and lower unbilled from earlier mega deals.

HCLT: February 19, 2025

Key takeaways

* Xerox deal. Renewed contract. Revenue-neutral renewal. The productivity benefits in existing work from gen AI will be used to modernize their own products, a new area of outsourcing.

* Generative AI. Productivity benefit can be as high as 40-50% in testing. In development, there are 15-25% savings. In IMS, 10-15% savings because it is already highly AI-led. In BPO, the savings can be as high as 40-50%. AI will create new opportunities such as legacy migration. Has signed a few small deals in Europe. Savings from generative AI will be redeployed for other tech spends.

* Generative AI case study. For a US healthcare provider, working on increasing patient throughput per doctor. The solution is to use generative AI for clinical diagnosis. AI will give recommendations for clinical diagnosis based on data from research papers and historical data from prior patients.

*  Deals. The duration of deals is shortening. ACV has increased despite TCV being similar. The deal pipeline is at an all-time high and has a good mix of large and small deals.

* Areas of investments. (1) Gen AI solutions and (2) sales in newer markets such as government vertical and promising G-2000 clients. HCLT targets EBIT margin of 19-20%, including these investments.

* Demand outlook. Life sciences is picking up in 4QFY25. Except for public services, demand is broad-based. Excluding the anniversary impact of Verizon and the absence of one-off from the retail vertical, underlying growth is reasonable.

* ERD. Tailwinds in semiconductors. HCL does not have a high exposure to the automotive vertical. 

* Margin levers. Pyramid, internal implementations of gen AI in delivery and G&A functions, induction of freshers and expansion of the New Vistas program.

* US. Client conversations do not indicate uncertainty due to the high interest rate situation or the new administration’s policy measures in the US.

Wipro: February 17, 2025

Key takeaways

* Demand. Client budgets for CY2025 should be marginally higher than last year. The primary difference change from CY2024 is that AI initiatives are not being funded from existing technology budgets; they are rather incremental to tech budgets. In CY2024, some of these PoCs were funded from existing budgets, which impacted overall spends. US macro indicators such as manufacturing are improving. The US election uncertainty is behind now. The outlook of the Americas is strong, with some increase in discretionary spends. The company indicated an increase in US$1-5 mn and US$5-10 mn deals in the region. Europe and the APMEA remain weak. The predominant theme in Europe (the UK, Germany and the rest of the Eurozone) remains vendor consolidation and cost takeout initiatives. Among verticals, financial services’ client budgets are likely to increase. Healthcare tech budget growth would moderate yoy. In tech, retail and E&R, the budgets are likely to remain muted, while in the manufacturing vertical, the budgets would decline.

* Pipeline. The pipeline remains healthy and is flat yoy. There has been healthy build-up of early-stage deal pipeline, which needs to progress to qualified pipeline and convert into deal bookings.

* Deregulation of US banks. Do not see much risk if banks get deregulated and stop spending on discretionary spends.

* Consulting. Capco business is the tip of the spear to benefit from the increase in discretionary spends. The appointment of a new leader is to double down on the business. Capco has grown well in APMEA markets in the past and performance can be better in the US and Europe. Capco has synergy targets for every year and the KPIs for all leaders at Wipro are linked to revenue growth, order book and profitability. Senior executives also have cash flow targets for their businesses.

* Client mining. The CEO has adopted a high-touch strategy regarding the appointment of GAEs of the top-80 accounts. An additional set of 30 must-have accounts has been identified and GBLs (direct reports to the CEO) are responsible for scaling these accounts.

* Margin. The company expects to remain in the narrow band around 17.5% for the EBIT margin, with the current nature of the revenue mix. Normalized margins will be 19.5%, excluding the 200 bps impact from amortization of intangibles. The growth will enable the ability to maintain margins, but it would not sacrifice margins for the sake of growth.

* Capital allocation. The company believes in returning excess cash to shareholders. Cybersecurity and AI are areas of interest for inorganic investments, but unlikely to go for large acquisitions. Wipro has benchmarked with peers on capital allocation. The company had minimal dividends earlier and preferred buybacks. In years of buybacks on a trailing three-year basis, the payout used to be as high as 80%.

*  Healthcare. Includes payers, pharma and providers. The mix is higher on payer and provider as compared with pharma. Good presence in enrollment processes, pharmacovigilance and data-keeping services, among others.

* BFSI. 60% of revenues are from Americas. Have been platform agnostic generally. Had acquired Aggne a few months ago. Capco is US-heavy. Have been able to grow Capco well in APMEA.

* Guidance. The 4QFY25E outlook of (-)1% to +1% qoq is due to the impact of lower working days (two days qoq).

* AI. Clients are now more serious about investments in AI, given the success of PoCs. Content moderation, contact center, and sales and marketing are a few areas of interest. Data services will be the largest driver of growth from AI. Legacy code modernization is another area of interest among clients. The company does not expect the cannibalization of existing businesses from AI. It rather expects additional opportunities in the medium term. Currently, clients are not looking for service providers with strong AI practice. AI is being embedded as one of the offerings in some parts of deals.

LTIMindtree: February 18, 2025

Key takeaways

* Top account. The top client rescoped the number of people required to do the same work. LTIM has not lost market share. The top client’s mandate impacts the top line and the bottom line, as employees need to be allocated to other projects. Its top client is pushing for productivity gains since the company has a better understanding of its own AI technology and is under pressure to show results of investments.

*  Skills. Demand for Java and Python coders can go down due to the impact of generative AI. There is a clear productivity gain in coding, leading to a lesser number of people required to do the same amount of work.

* Generative AI. LTIM does not expect generative AI to be a risk to revenue growth. Opportunities outweigh risks over time. AI will open up new revenue channels, which are yet to materialize currently. In the tech industry, clients are ahead of the curve in taking the benefits of AI. In other verticals, LTIM can be ahead in delivering AI-driven productivity benefits, leading to market share gains. AI drives efficiency in software development, which is playing out initially. Clients are still figuring out how to use AI in their own businesses. AI adoption in clients’ businesses will open up opportunities for LTIM. Internally, LTIM is adopting use cases since the company has a good understanding of the technology. Clients will take longer to adopt AI.

* Hi-tech. The hi-tech vertical, excluding the top account, is growing at a company average or above.

* Vertical-wise outlook. The insurance and healthcare verticals have not done well for LTIM. Manufacturing and retail continue to grow. The demand environment is not significantly different to last year. There is uncertainty on when double-digit growth can return. While sequential growth in the past few quarters has been reasonable, visibility is low for an acceleration in revenue growth.

* Productivity benefits. Productivity benefits are usually passed on during deal renewals. Generative AI is another productivity lever. AI-driven efficiency gains pass-through to clients is already happening in the industry.

* Discretionary spending. Regulatory pressure driven spending are short tenured projects, but not really discretionary. Actual discretionary spending is still subdued. Clients are still not sure about measures that the Trump administration will take. Election uncertainty has been replaced with policy uncertainty to an extent.

* Market share gains. Deal wins have been against competitors, including Tier 1.

*  GCCs. In India, GCCs are expanding at a very fast pace, leading to increased demand for talent. LTIM is helping clients set up captives. It is not easy for clients to make the decision to operate out of India.

* Margins. Margins reduced because of insufficient revenue growth. LTIM has been taking initiatives to reduce costs, some of which have already been reflected in the base. Pyramid rationalization will aid margins in the next few months.

TechM: February 19, 2025

Key takeaways

* Vertical-specific commentary. (1) BFSI. Healthy overall. (2) Telecom. US demand is muted, but better than last year. Telecom in the Americas is reasonable, excluding the top client. Positive momentum in Canada and some fiber players in both IT and BPO. Reasonable demand in APAC and Europe. (3) Manufacturing. Demand is healthy except for auto where the discretionary demand is impacted.

* Deals. Vertical-specific sales teams, focus on deals from must-have accounts and more stringent qualification criteria are enabling better deal wins. The pipeline of deals is healthy. TechM is avoiding dilutive deals with hardware and software passthroughs and deals that have aggressive efficiency assumptions baked in.

* Hunting. Net new business is 3% for TechM. The industry average is 5-7%. TechM is fixing the gap, which will reflect in a better growth rate in FY2027E. BFSI and manufacturing have a large number of must-have accounts.

* Progress in client penetration in BFSI. Challenging to qualify as a new vendor. TechM has managed to enter a few accounts. Scaling up will be a steady long-term process. Australia BFSI is a huge focus for TechM.

* Geo-verticals. Europe and APAC telecom geo-vertical has a demand uptick in FY2026E. Europe and APAC contribute to 40% of telecom vertical revenues. The weakest performing geo-verticals are Americas telecom and India, the Middle East and Africa.

* Top client. Insourcing and a cut in discretionary spending have led to an impact on revenue. The pressure on insourcing and discretionary spending reduction will continue. The focus is on not losing net revenue. The account will bottom out in 4QFY25 with revenues stabilizing thereafter in the near term.

* Revenue growth and margin outlook. Revenue growth in FY2026 will be in the average between FY2025 growth and FY2027 guidance. The focus is still on profitability over growth in FY2026. The focus is on accomplishing a large part of the margin target by 2HFY26.

* Employee pyramid. Pyramid will provide benefits in FY2027 and beyond. For now, TechM is investing in the people supply chain. The focus is on increasing internal fulfillment and building the right hiring engine to optimize hiring costs.

* Deal contracting. In fixed-price deals, TechM is fixing issues related to right costs estimation, right contractual agreements with customers and right pricing through a centralized approach. This entails a project-by-project effort.

* Wage hike. The plan is to move to a Jan-Dec cycle for wage revision.

* Margin outlook. EBIT margin in 4QFY25 will be similar or better compared to margins in 3QFY25.

* Acquisition portfolio. (1) Target. Working with the BPO head to optimize costs by offshoring all the support functions. 5-10% EBITDA margin target. (2) Pininfarina. Is in the 5% EBITDA margin zone. TechM plans to leverage the Pininfarina brand better.

Persistent Systems: February 17, 2025

Key takeaways

* Demand outlook. There has not been much change in clients’ wallet spends for CY2025. The macro uncertainties are behind it and the environment is likely to become more positive through the year.

* AI Services. The initial focus of enterprises is to bring in efficiency and productivity benefits. Large players will have to cannibalize their revenues, while mid-tiers do not have much to lose and can be disruptors; there might be a rejig in hierarchy over time. Furthermore, large companies have a certain way of operating, which is quite different from mid-tiers that are more agile and nimble in adapting to tech evolution. Incumbents have an ability to cannibalize some part of the revenues to capture a share of AI spending. Data services would gain more prominence as enterprises look to infuse AI. Management indicated that the data practice has grown at a multiple to the overall growth rate and is the material contributor to revenues. However, according to the company, clients are not willing to lock into long-term engagements related to AI initiatives. Over a period of time, the company believes there is a need to move from an effort-based model to an outcome-based model, which would be a differentiator to gain share.

* Aspiration. Aspiration remains to become a US$2 bn company by FY2027 and further to US$5 bn by FY2031. The visibility to achieve US$2 bn revenues is based on (1) a healthy orderbook (US$1.4 bn ACV and US$2 bn TCV over ttm), (2) strong capabilities and it being positioned as a challenger in most rankings by industry analysts and (3) it being among major players in AI services that can leverage the trend. Currently, AI is mostly about efficiency. SASVA—AI platform can provide a complete history of the various versions of the product and allied modules. SASVA can increase the efficiency of the software development lifecycle for clients. Mathematically, the top-100 clients contribute 80% of revenues and are growing at a 20% rate and continued momentum in these clients would enable them to achieve scale aspirations. The company had very high exposure to a large hi-tech clients, which has significantly moderated to more comfortable levels as other clients have ramped up.

* Deal wins. Average deal sizes have increased from the US$5-10 mn range earlier to US$20-25 mn range. However, clients are dividing larger engagements into smaller ones but there is good visibility that these initiatives will be taken up in due course.

* Vertical scale-up. The company believes that each sub-vertical within verticals could scale up to US$100 mn+ revenues as part of its aspiration to achieve US$5 bn revenue aspiration. For instance, it believes it has the ability to scale each of the four sub-verticals within healthcare–(1) payers & providers, (2) scientific instruments & medical devices, (3) pharma and (4) clinical research organizations (CROs). In scientific instruments & medical devices, the company is working on the customization of products for various markets. The company sees the opportunity to offer predictive analytics services to CRO clients.

* Acquisitions. In the US, the acquisition would be for capabilities, while in Europe it would be to gain scale and market access. AI services, cybersecurity and data privacy are areas of interest for prospective M&A. Cybersecurity is the biggest area of interest. There are a few uncertainties in Europe, but these would subside over time. The company would look to acquire in case interesting opportunities come up at reasonable valuations.

*  Pricing. The deal wins are not won by competing on price with larger peers. Larger peers have a better ability to absorb lower pressures. Rather, the company believes stronger capabilities in new technologies would enable it to better maintain optimal pricing.

* PE channel. There is significant room to further grow the business with portfolio companies of PEs and will continue to mine these companies. The company believes that as the relationship grows, it becomes captive revenues, given PE ownership and Persistent being a preferred vendor

* Margins. The improvement is a combination of pricing firming up and the shift toward FPP. Utilization would likely moderate to more comfortable levels of ~83-85%. Pricing levers and enforcing COLA clauses would aid profitability. The biggest lever to expand margins beyond US$2 bn revenues would be the success of AI-based pricing models. The company indicated that the current levels of margins are healthy and growth would take precedence over the medium term, while managing margins.

Coforge: February 17, 2025

Key takeaways

* Revenue outlook. High visibility to get to annual revenue of US$2 bn in FY2027. Coforge can get to the landmark earlier as well.

* Cigniti acquisition. Has worked phenomenally well. Coforge has cross-sold its services in the key accounts of Cigniti. Under the promoters, Cigniti was a loosely run company. Coforge tightened cost management and improved go-to-market. For example, as part of the non-binding agreement, Coforge limited Cigniti from opening new offices, spending on discretionary sales and marketing events and paying out dividends. After Coforge gained control of Cigniti, checks were kept on spending. For example—expenses above a certain limit required approval from Coforge’s procurement team. Marketing of Cigniti brand was

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