Coforge Ltd Management Discussions

FY2024

(Note: Data and commentary refer to the consolidated performance unless otherwise stated)

Coforge delivered a robust 13.3% CC organic revenue growth.

Company Overview

Coforge is a company with over 40 years of history. It has been one of the fastest-growing IT services companies in recent years

FY24 has been a year of continued strong organic growth for Coforge. The Company registered a consolidated revenue of USD 1,118.7 million (INR 91,790 million) and has clocked organic revenue growth of 13.3% in CC terms, 11.7% in USD terms and 14.5% in INR terms.

The adjusted EBITDA margin was 17.6%, and consolidated net profits after tax for the year were INR 8,080 million, growing 16.5% during FY24.

Coforge is a global digital services and solutions provider that leverages emerging technologies and deep domain expertise to deliver real-world business impact to its clients. Focusing on select industries, Coforge provides a distinct perspective by providing a detailed understanding of their underlying processes and partnerships with leading platforms. Coforge leads with its product engineering approach and leverages Cloud, Data, Integration and Automation technologies to transform client businesses into intelligent, high-growth enterprises. Coforges proprietary platforms power critical business processes across its core verticals. The firm has presence in 21 countries with 26 delivery centres across nine countries.

FY24 was a year of strong organic growth for Coforge. The company managed to sail through one of the most challenging demand environments in recent years and continued to emerge as one of the fastest-growing IT service Companies (organically). The Indian IT industry is poised to grow ~4% in FY24, while Coforge has delivered a 13.3% CC revenue growth. Coforge will remain focused on its execution and committed to driving robust, sustained, and profitable growth despite ambient challenges.

FY24 is also a milestone year in terms of large deal wins. The company signed a TCV USD 300 million deal in Q1 FY24, securing five years of revenue visibility in one of its top BFS clients. Further, the Company signed its largest ever deal totalling TCV of USD 400 million over ten-year in the Q4 FY24 quarter in another top BFS customer, thus assuring revenue visibility in an environment of revenue slippages seen for the sector.

The executable order book, which reflects the total value of locked orders over the next 12 months, stands at a record USD 1,019 million. This number was USD 869 million a year ago, thus registering a growth of 17.3% in FY24.

FY24 order intake was at USD 1.97 Bn, up 56% YoY

Global Economic Outlook and Industry Overview

International Monetary Fund (IMF), in its April 2024 World Economic Outlook report, mentions that the global economy has remained remarkably resilient despite significant central bank interest rate hikes to restore price stability. The global economy grew steadily, defying warnings of stagflation and global recession, with growth holding steady as inflation returns to the target. The baseline forecast is for the world economy to continue growing at 3.2% during CY24 and CY25, at the same pace as in CY23. Global inflation is forecast to decline steadily, from 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025, with advanced economies returning to their inflation targets sooner than emerging markets and developing economies. Core inflation is generally projected to decline more gradually.

The pace of expansion is low by historical standards, owing to near-term factors, such as still-high borrowing costs and withdrawal of fiscal support, and longer-term effects from the COVID-19 pandemic; Russias invasion of Ukraine; weak productivity growth;and increasing geoeconomic fragmentation.

According to the IMF, the risks to the global outlook are now broadly balanced. On the downside, new price spikes stemming from geopolitical tensions, including those from the war in Ukraine and the conflict in Gaza and Israel, could, along with persistent core inflation where labour markets are still tight, raise interest rate expectations and reduce asset prices. Amid high government debt in many economies, a disruptive turn to tax hikes and spending cuts could weaken activity, erode confidence, and sap support for reform and spending to reduce risks from climate change. As the global economy approaches a soft landing, the near-term priority for central banks is to ensure that inflation touches down smoothly by neither easing policies prematurely nor delaying too long and causing target undershoots. Multilateral cooperation is needed to limit the costs and risks of geoeconomic fragmentation and climate change, speed the transition to green energy, and facilitate debt restructuring.

According to Indias premier information and technology sector body, the National Association of Software and Services Companies (NASSCOM), the global economic slowdown and volatility continue to cast a shadow. The year 2023 emerged as the year of reinforced business fundamentals and a heightened focus on efficiency for the technology industry in India.

The world will continue to consider India the frontrunner in shaping global transformation, given that the tech industrys value proposition hinges upon Indias diverse ecosystem, young and high-quality talent pool, excellent physical and digital infrastructure, vibrant domestic market, and strong Government support.

As per NASSCOM, global geo political tension leads to a more cautious investment approach and delayed decision-making. Indias technology industry revenue (including hardware) is estimated to reach USD 254 Bn (~3.8% y-o-y growth) in FY24, an addition of over USD 9 Bn over last year. Exports are poised to touch the USD 200 Bn mark, growing at 3.3% y-o-y, and the domestic technology sector is expected to cross USD 54 Bn, growing at 5.9% y-o-y. The Indian tech services export revenue (excluding hardware) is expected to touch USD 199 billion in reported currency, a growth of 3.3% compared to FY23.

The resilience outlook in tech spending is also corroborated by Gartner, which, in its April 2024 forecast for worldwide IT spending, has indicated GenAI initiatives to help drive IT Spending in 2024 and beyond. According to Gartner Inc.s April 24 forecast, worldwide IT spending is expected to total USD 5.06 trillion in 2024, an increase of 8% from 2023. This is an increase from the previous quarters forecast of 6.8% growth, putting worldwide IT spending on track to surpass USD 8 trillion well before the decades end. It expects the spending on IT services to grow by 9.7% to USD 1.52 trillion.

Sub-sectors such as GCC and ER&D emerged as growth hotspots as the addressable market expanded with digital capabilities and global ER&D sourcing. Global Capability Centre, or GCC, continues investing in India, expanding its service portfolios while new GCCs set up operations. The industry saw an addition of 53 new GCCs in 2023.

Despite the challenging market conditions, the Indian IT industry continues to be a net hirer, adding around 60,000 employees, taking the total employee base to 5.43 Mn (1.1% y-o-y growth). The focus on digital skills remained strong, with AI, Cloud, Data and Cybersecurity emerging as top in-demand skills for the industry in 2023. The industry is committing 60-100 hours per year per employee on upskilling. Europe, APAC, Manufacturing, Retail and Healthcare emerge as the key growth markets for the industry. With the advent of Generative AI, companies are expanding their portfolios. They are redefining their service offerings to include AI-driven analytics, intelligent automation, and personalised customer interactions, creating more value for their clients and setting new industry standards.

Revenue - USD 2 billion and beyond...

At the core of Coforges strategy to drive consistent and profitable growth is its intent to "transform at the intersect", which entails actively engaging with emerging technologies to drive customer transformation in specific industry verticals where the firm already has deep domain expertise. The firm actively engages with and invests in emerging technologies as part of this strategy. This is done to drive fundamental business transformation for clients across its three verticals by using these digital, AI and post-digital technologies.

Coforge stands for working together to create lasting value. In the coming years, Coforge looks forward to unlocking actual value working with and for its customers. Managements single-minded focus on execution over the last several years has helped the company deliver top-quartile revenue growth and achieve USD 1 bn in annual revenue in FY23. The Management has set its eye on reaching USD 2 billion revenue milestone over the next few years and has laid a broad framework towards achieving this. It expects four key areas which would help drive the growth towards it.

1) Scaling up existing key accounts:- Currently, Coforge has 24 accounts, each of which is over USD 10 M versus eight about 5 years back. Management has identified its Must Grow Accounts (MHAs), which have significant scope for scaling up through cross-sale, upsell, and wallet share gain. Coforge works with 61+ Forbes Global 1000 clients and sees enough headroom for these accounts to drive medium-term growth. The underlying factors which will go into scaling up these accounts are:

a. Increased mining of targeted key accounts

b. Client services investments.

c. 3-in-box consulting-led delivery to drive trusted partner status and

d. Generate extensive multi-tower/partnership- driven deals.

2) Scaling up new and emerging verticals: In FY24, the contribution from other/emerging verticals was 27.6%. - The Company is looking to carve out new verticals for its portfolio. Public services (outside India), which have gained scale, could be the first addition to verticals in FY25. Retail, Hi-Tech Technology, and Healthcare are the other verticals that the company could add going forward .

3) Partner ecosystem- led growth:- The Company has successfully scaled its partnerships like Salesforce/Mule soft, Duck Creek and Pega practices. It is focused on further building, these partnerships and will invest in and strengthen its partnerships with Microsoft, AWS, and ServiceNow. Further, it is also nurturing new partnerships to accelerate time-to-market for its customers like Mendix, Unquork, OutSystems in the automation space, and Insurity, Guidewire, Surify, and FAST in the insurance space.

4) Acquisitions: The company has a successful track record of acquiring and scaling entities. It is looking to fill whitespaces in its portfolio through the inorganic route. Company also has got approval from its shareholders in form of an enabling resolution to launch Qualified Institutional Placement up to INR 3,200 Crores specifically for acquisitions. Such acquisitions, if undertaken, are aimed at strengthening

(A) horizontal capability such as Cyber Security, Data services and Cloud Operations;

(B) alliance partnership such as Service Now, Microsoft etc. and

(C) existing verticals such as Banking, Travel and build new verticals such as Retail, Healthcare, and Hi-Tech.

Awards and Recognitions

- Won the 2023 Duck Creek Technologies International Value Creation Partner of the Year award.

- Coforge was recognis ed with the "Market Maker Partner of the Year" award at the Pega ANZ Partner Summit 2024

- Coforge was recognis ed among Indias Best Workplaces in IT & IT-BPM 2023-the top 100 for the second time in a row.

- Coforge secured the esteemed Great Place to Work 2023-2024 award for the third consecutive year,

- For the second consecutive year, Marksmen Daily, in collaboration with India Today, selected Coforge as one of the Most Preferred Workplaces of 2023-2024 .

- Coforge won the 6^th CHRO Vision & Innovation Awards 2023 in three categories: Employee Engagement, Learning & Development, and Corporate Social Responsibility

Analysts Accolades

- Coforge was honoured with the ServiceNow 2024 Emerging Industry Partner of the Year - Worldwide award

- Forrester recogni sed Coforge in the Automation Fabric Services Landscape, Q1 FY24

- Everest recognis ed Coforge as a Major Contender in the Financial Crime and Compliance (FCC) Operations Services PEAK Matrix? Assessment 2024.

- HFS recognised Coforge as an Enterprise Innovator in the 2024 Horizon assessment of the best asset and wealth management service providers.

- Avasant positioned Coforge as a Disruptor in the Intelligent Automation Services 2024 RadarView.

- Recognis ed as a Market Leader in Travel, Hospitality, and Logistics by HFS Research

- Ranked as a Major Contender in Everests cloud services in Insurance PEAK Matrix assessment 2023.

- Positioned as a Major Player in the IDCs Worldwide Managed Public Cloud Services MarketScape 2023

Alliances, partnerships, and solutions offerings

- Coforge launched Orion: A Gen AI-based autonomous self-service solution to enhance customer experience across multiple industries.

- Coforge launched Quasar Responsible AI, a comprehensive solution to ensure AI is ethical, fair, transparent, and regulatory compliant.

- Launched Coforge Quasar which enables enterprises to develop and build their own Gen AI-powered applications at scale.

- P&O Cruises and Cunard partnered with Coforge for precision quality engineering & testing.

- Coforge and Newgen elevated their partnership to deliver transformative Insurance Lifecycle Management Solutions.

Financial Performance

Consolidated revenue for the full year FY24 grew 14.5% over last year to INR 91,790 million. In constant currency (cc) terms, growth for the year was 13.3%.

The BFS vertical led 17.1% growth in USD terms in FY24 and contributed 32.2% of the total revenues. The travel vertical grew by 4.9% and contributed 18% of the total revenues. The Insurance vertical grew by 9.6% and contributed 22.2% of the total revenues. Other businesses, including primarily Healthcare, Hi-tech, Retail and Overseas Public Sector, collectively grew 12% year-on-year in USD terms, and they represented 27.6% of the overall revenues.

The geo-based growth cuts also showed sustained growth. Americas, contributing to 48.3% of global revenues, grew by 10.8% y-o-y. EMEA revenues grew by 16% y-o-y, representing 39.4% of the revenue mix. RoW grew 26% during the year and contributed 12.3% to total revenues.

The significant revenue growth was accompanied by a marginal uptick in gross margins during the year. For FY24, the gross margins increased by 4 bps to 32.6%. The company rolled out wage hikes to its employees from 1^st April despite the tough environment and continued its investment in front-end leadership and capability enhancements throughout the year. EBITDA (before ESOP costs) increased by 10.5% during the year and stood at INR 16,185 million, translating into margin of 17.6% for the year. Selling, General & Administrative (SG&A) expenses as a percentage of the total revenue increased from 14.3% in FY23 to 15% in FY24.

The effective tax rate for the year stood at 20.0% as against 21.7% in the previous year.

Verticals: contribution to consolidated revenues (in %)	FY2024	FY2023
Banking and Financial Services	32%	31%
Insurance	22%	23%
Travel, Transportation & Hospitality	18%	19%
Others	28%	28%
Total	100%	100%

 

Geographies:contribution consolidated revenues (in %)	FY2024	FY2023
Americas	48%	50%
Europe, Middle East and Africa	39%	39%
Asia Pacific	7%	7%
India	5%	4%
Total	100%	100%

Robust Balance Sheet

As on March 31, 2024, cash and cash equivalents were INR 3,548 million (compared to INR 6,025 million a year ago on March 31, 2023). This decrease in cash is primarily attributed to repayment of borrowings, investments and dividend payouts. The Companys total liabilities as on March 31, 2024, were INR 5,835 million, including Non-Convertible Bonds of INR 3,399 million. The Companys net worth (excluding minority interest) as on March 31, 2024, stood at INR 36,266 million.

Days Sales Outstanding (DSO) decreased to 56 days as on March 31, 2024, compared to 61 days a year ago.

Segment Results

(in INR Mn)

Segment information at Consolidated level	Year Ended March 31, 2023	% to Income	Year Ended March 31, 2024	% to Income
	(Audited)		(Audited)
Revenue from Operations
Americas	40,020	49.9%	44,350	48.3%
Europe, Middle East and Africa	31,175	38.9%	36,160	39.4%
Asia Pacific	5,817	7.3%	6,360	6.9%
India	3,134	3.9%	4,920	5.4%
Total Income	80,146	100.0%	91,790	100%
Adjusted EBITDA
Americas	6,176		8,085
Europe, Middle East and Africa	6,611		7,053
Asia Pacific	749		481
India	-286		-828
Total	13,250		14,791
Depreciation and Amortization	2585		3,186
Other Income (net)	-630		-1,156
Profit Before Exceptional items	10,035		10,449
Exceptional items	523		-
Profit Before Tax	9,512		10,449
Provision for Tax	2,061		2,093
Profit after Tax	7,451		8,356

 

Key Financial Ratios	FY2023-24	FY2022-23
EBITDA Margin* (%)	16.5%	17.5%
Net Profit Margin (%) *	9.2%	10.1%
Days sales outstanding - Billed	56	61
Return on Equity (RoE)	24.2%	24.8%
Debt-Equity Ratio	0.12	0.11
Interest Service Coverage Ratio	15.19	20.19
Current Ratio	1.70	1.50

* FY23 - Adjusted for one-offs - USD 1 bn milestone cost & ADR expenses.

* FY24 - Adjusted for USD 1bn celebration and transaction related expenses

Human Resources

Coforges total headcount at the end of Q4 FY24 stood at 24,726, and it saw a net addition of 1,502 people y-o-y. Coforges 24,700+ employees continue to be the architects of its growth journey. Their commitment is reflected over the years in one of the highest employee retention and lowest employee attrition rates, which Coforge prides itself on.

Utilisation, including trainees, stood at 80.6% during the year, compared to 78.9% in the previous year. With supply-side challenges receding in FY24, attrition (excluding BPS) stood at 11.5%, compared to 14.1% in FY23. Coforges attrition is one of the lowest across the industry and a testament to Coforges culture.

Risks and Concerns

Risks and uncertainties related to our business and industry include, but are not limited to, the following:

•A resurgence of a pandemic like COVID-19, which we witnessed about a year back, either at a regional or global level, could impact our sales and results of operations. During fiscal 2023, the impact on our revenue due to supply and demand risks we experienced from the COVID-19 pandemic was insignificant.

•Our customers and prospective customers technology spending on products and services depends on many factors, including the economic, geopolitical, monetary and fiscal policies and regulatory environment in the markets in which they operate.

•Demand disruption due to AI and GenAI? One of the most significant ways AI has affected the IT industry is through automation. Companies can automate many more complicated processes using AI-powered tools and software. This saves time and resources and decreases the possibility of human error.

•Economic slowdowns, including recessions, could impact the economic health of a nation and industries that operate in those nations, like the US, UK, Germany, etc., from which we derive our major revenue.

•Resourcing risk ? Our business is dependent on our ability to attract and retain highly skilled professionals, as well as on succession, employee development and training.

•Cybersecurity risk?Technological changes and customers adaptation to new technologies pose a substantial risk to the successful operation of our business.

• The risk of a COVID-19-type pandemic in the future and the resultant changing immigration regulations, which have affected our ability to deploy our personnel around the world for successful operations, remains a risk.

•If we were to lose the services of members of our senior leadership team or other key employees, our business, financial condition and results of operations, including our competitive position and client relationships, may be adversely affected.

•Reducing the outsourcing budgets of our existing and prospective clients and making strategic decisions to reduce their use of third parties could affect our pricing and volume of work.

•Our ability to continue to develop and expand our service offerings to address emerging business demands and technological trends, including our ability to sell differentiated services, may impact our future growth. If we do not meet these business challenges, our business, financial condition and results of operations may be materially and adversely affected.

•Foreign exchange-related risk could adversely affect our business.

Outlook

As per NASSCOMs insights from the CEO survey, the global macroeconomic headwinds would remain constant, and CEOs expect technology spending to increase in 2024. Industries such as Hi-Tech, BFSI and TMT that underperformed in 2023 will likely improve in 2024. Gen AI will remain a key priority for over 95% of organisations over the next 6-12 months. It expects FY25 to be the year of Capability Building as the new normal, and navigating the current challenges would require the industry to focus on the 4Rs - Reshape - Accelerate transition to AI first companies; Reskill - Make talent the most significant competitive advantage; Rewire growth and Raise IP creation and R&D investments.

Coforges ability to claw out 13.3% CC organic revenue growth despite a very tough macro environment, an enhanced and proven enterprise sales engine that it has continued to invest in, continued scale-up of USD 10 M+ relationships, the increasing velocity and median size of large deals signed and also in the pipeline gives the company confidence that it shall strive to deliver industry-leading growth in FY25 and expand its gross margins.