Q4FY23 Review: Coforge Ltd: Robust growth, but investments hurt margins

28 Apr 2023 , 10:24 AM

Coforge (COFO) reported Q4FY23 revenue growth of 4.7% cc QoQ, above IIFLe of 3.5% cc QoQ, driven by broad-based growth across verticals and geographies. At 15.5% (+90bps QoQ), Ebit margins were below IIFLe of 16.2%. COFO announced USD301mn worth of deals (+10% TTM YoY) and USD869mn of order book executable in the next 12 months (+21% YoY). On the back of a strong exit, order book and pipeline, COFO has guided for healthy FY24 revenue growth to be 13-16% cc YoY, implying ~3% Cqgr over the next 4 quarters. Management expects gross margins to expand by 50bps YoY in FY24 but adjusted Ebitda margins to remain flat, as it invests back in growth.

Growth momentum continues: 

COFO’s growth in Q4 was broad-based across verticals, led by Others (+7.3% QoQ), followed by Insurance (+5.4%), BFS (+4.6%) and Transportation (+2.2%). COFO signed 2 large deals — one each in BFS and Travel — and continues to see a robust, large deal pipeline. Executable orders in the next 12 months accelerated to USD869mn (+21% YoY), which equals 76% of our next 12 months revenue estimates of 15% growth. COFO has guided for FY24 revenue growth of 13-16% cc YoY, driven by broad-based growth across key verticals. COFO continues to invest in building blocks towards USD2bn revenue aspiration.

Margins expand less than expected: 

Normalised Ebit margin increased to 15.5% (+90bps QoQ), below IIFLe of 16.2%, since efficiency gains were partly re-invested to drive growth. One-off costs (expenses incurred on ADR listing and USD1bn milestone celebration costs) led to reported Ebit margins declining to 9.4%. COFO guided for flat adj. Ebitda margins in FY24 as it continues to invest for growth. Sequential headcount increase of ~720 employees was the highest in the last 5 quarters.

Maintain BUY: 

COFO is trading at 20x FY25 P/E, in line with mid-cap peers. Analysts of IIFL Capital Services 12-month TP of Rs4,750 is pegged at 24x 2YF EPS. They maintain BUY and believe valuations may sustain, given strong track record of top quartile growth and healthy outlook. Key risks: Supply side.