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Organic business continues to do well

However, we stay Neutral amid uncertainties around Cigniti integration

* COFORGE reported 1QFY25 revenue growth of 1.6% QoQ in CC terms, in line with our estimate. Reported revenue stood at USD291m (up 1.6% QoQ/7.2% YoY). The company reported order intake of USD314m in 1Q with two large deals, resulting in a robust 12-month executable order book of USD1070m (+19% YoY). EBIT margin, adjusted for transaction-related costs of INR953m, came in at 13.6% (est. 13.3%). PAT stood at INR1.3b (-41% QoQ/-27% YoY) due to high transaction-related costs and lower other income. Adj. PAT came in line with our est. of INR2.3b.

* COFORGE had a robust quarter. Growth was led by the transportation vertical, whereas BFS had a breather after ~10-12 quarters of strong growth. We believe COFORGE’s organic business is in great shape, and its executable order book over the next 12 months (up 19% YoY) provides confidence in FY25 growth. The demand environment, especially in BFS, is improving, which should strengthen COFORGE’s growth trajectory for FY26 too.

* On Cigniti, the management indicates that the company could cross-sell its own services to Cigniti clients, which could help Cigniti grow faster than COFORGE. For the medium to long term, however, we are slightly wary of the Cigniti acquisition largely because functional testing as a service line could be facing threats from GenAI, and while cross-selling may work in the short term, we look for more evidence of this business being future-proof.

* While the management has maintained its guidance of 50bp YoY gain in full-year EBITDA margins, we believe the ask rate from hereon is steep. Though we acknowledge that COFORGE’s second-half margins are markedly better, we build in a slight disappointment (30bp margin expansion). We have reduced our FY25 EPS estimates by 11% (driven by one-off transaction related expenses) and kept FY26 estimates unchanged. This would lead to a ~25% INR PAT CAGR (adjusted for one-offs) over FY24-26.

* We believe the company’s healthy executable order book and a rebound in BFS client spending bode well for its organic business. But we remain cautious about Cigniti’s integration and its medium-term revenue trajectory. As a result, we maintain our Neutral rating on COFORGE with a TP of INR6,100, based on 30x FY26E EPS.

Growth led by transport vertical; BFS outlook strong

* USD revenue grew 1.6% QoQ CC (est. 1.5% CC). Reported USD growth was 1.6% QoQ.

* Growth was led by the transportation segment (+4.5% QoQ). BFS declined 4.1% QoQ. The insurance vertical’s performance was muted (+0.7% QoQ).

* Order intake was USD314m, returning to its normal run rate (-60% QoQ from the all-time high in the previous quarter). The 12-month executable order book rose 19% YoY at USD1070mn. It signed two large deals in 1Q.

* EBITDA (pre RSU) declined 6.0% YoY to INR3.3b and EBITDA margin (pre RSU) came in at 13.9%, down 470bp QoQ owing to transaction-related costs of INR953m. Adjusted for this, EBITDA margin came in at 17.9% (est. 17.5%).

* Utilization declined 10bp QoQ to 81.6%. Net employee addition stood at 1,886, up 7.6% QoQ. Attrition was down by 10bp QoQ at 11.4%

* Adj. PAT came in at INR1.3b (est. INR2.3b), down 40.7% QoQ due to high transaction-related costs and lower other income.

* Declared a dividend of INR19 per share.

Key highlights from the management commentary

* Demand is picking up. The demand outlook for financial services has materially improved. It is also strong for the travel and aviation segment. There is a rebound in the insurance business too. There was weakness in the top five customers in 1Q (largely banking-heavy clients). The BFS business has normalized after 12-13 quarters of strong growth.

* Growth in the executable order book was in line with the growth in deals. Over the next few quarters, the correlation with revenues should remain stable.

* Europe-based banking clients are normalizing between programs, hence a decline; but there is no change in spending patterns and the client spending outlook remains strong.

* The travel vertical is expected to do better than last year. Airlines expect a 10% YoY increase in passenger demand, and they are undergoing a technological overhaul.

Valuation and view:

* Organic business remains strong, medium-term risks persist

* We believe the company’s healthy executable order book and a rebound in BFS client spending bode well for its organic business. But we are cautious about Cigniti’s integration and its medium-term revenue trajectory. As a result, we maintain our Neutral rating on COFORGE with a TP of INR6,100, based on 30x FY26E EPS.

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