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Strong revenue growth; one-off items led to profit miss

Coforge reported strong revenue performance in Q2, whereas margin was a slight miss. Revenue grew 26.8% QoQ to USD369.4mn (26.3% CC; organic CC 5.5%). Adj. EBITDAM fell by 140bps to 16.5%, a slight miss. Revenue growth was broad-based, led by Insurance (8.9% QoQ), Travel (6.2%), Government vertical outside India (6.7%), and BFS (5.2%). Management highlighted that Cigniti’s revenue growth, margins, and synergy benefits progress were ahead of expectations; it upped EBITDAM guidance for Cigniti to ~18% by Q4 from 16.5% earlier. Management is confident of sustaining growth momentum on the back of broad-based growth, healthy NTM executable order book (up 40% YoY), and strong headcount addition (organic 5.4% QoQ); it also retained 50bps expansion in adj. EBITDAM in FY25. Management remain confident of achieving USD2bn revenue target by FY27 with better profitability. We tweak FY25-27E adj. EPS -1.7% to 6.4%, factoring in Q2 performance and higher growth assumptions. Retain REDUCE with TP of Rs6,750 at 30x Sept-26E EPS.

Results Summary

Revenue grew 26.8% QoQ to USD369.4mn (26.3% CC), well above our expectations. Organic revenue growth was 6.3% (CC 5.5%) and Cigniti revenue grew 6.1%. Adj. EBITDAM (excluding ESOP costs and one-off costs) declined by ~140bps QoQ to 16.5%, a tad below our estimates. Margins were impacted by wage hike. Adj. net profit (adj. for one-off expenses) grew 1.2% QoQ to Rs2.3bn. Revenue growth was broad-based, led by Insurance (8.9% QoQ), Travel (6.2%), Government vertical outside India (6.7%), and BFS (5.2%). Total TCV of fresh-order intake was USD516mn (organic USD448mn). Executable order book over NTM is USD1,305mn (up 40% YoY; organic 18%). The quarter saw 13 new client additions. Headcount grew ~22% QoQ (5.4% organic) to 32,483. The company declared an interim dividend of Rs19 per share. What we liked: Broad-based growth, deal intake and NTL order book growth, headcount addition. What we did not like: Margin miss, reported profit miss.

Earnings Call KTAs

i) Q2 performance exceeded the management’s expectations and reflects on 3 key assertions it made at the start of FY24 – a) potential of Cigniti acquisition, b) strong organic growth, c) first to call definite signs of turnaround in demand environment. ii) Management is confident of clocking robust and sustained broad-based growth. They mentioned that cross-selling traction is above their expectations and its benefit will be visible from Q3. iii) BFS is on track to deliver double-digit growth in FY25. iv) Large deal pipeline for travel vertical remains strong with deals in IT modernization, GCC ramp ups, e-Commerce, and hospitality. Spends have considerably increased in travel tech domain. v) The acquisition and integration-related expense impacted profitability by 230bps in H1, which will get normalized going ahead. vi) Management expects incremental ~120bps impact in H2 from higher ESOP costs accruing from new ESOPs granted to the leadership team; it is expected to taper off by 60-70bps in FY26 as old ESOP expenses lapse. vii) Furlough impact in Q3 is likely to be in line with past trend. viii) Company does not expect past liabilities of Cigniti to be recurring in coming quarters (USD1.1mn in Q2). Merger-related expenses to taper down to below USD1mn (USD2.4mn in Q2) in next 1- 2 quarters before getting lapsed. ix) Coforge received SEBI approval for the open offer which is likely to conclude by mid-November. x) OCF/EBITDA is likely to be 65%-70% for FY25. xi) It signed 3 large deals in Q2 – one each in Continental Europe (area with low presence currently), America, and UK. 2 of them are NN and 1 EN.

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