Coforge Ltd: At the intersection of tech and domain expertise

26 Jul 2023 , 11:27 AM

Recommendation: Buy; Target Price: Rs 5100

Coforge (COFO) is set to deliver top quartile growth in FY24, on the back of strong deal wins and execution. COFO’s specialization in emerging tech, including digital integration, in verticals such as Insurance, BFS and Transportation has ensured that it remains one of the fastest growing mid-caps in the sector. It has a track record of diversified but strong client-mining and delivering industry leading growth — having delivered 16%/20% USD revenue/EPS Cagr over FY17-23. Analysts of IIFL Capital Services see COFO continuing on this trajectory by delivering 15%/25% USD revenue/EPS Cagr over FY23-25, driven by execution of strong deal wins and improving margins. The stock is trading at 23x on FY25 P/E, in line with mid-cap peers. However, given the strong guidance, robust order-book visibility, differentiated positioning in specific verticals and sector-leading growth profile, analysts of IIFL Capital Services believe the stock will command premium valuations. They maintain BUY with a 12-month TP of Rs5,100, based on 24X 2YF P/E. COFO is one of their top mid-cap picks.

Micro-specialisation drives the differentiation: 

COFO drives its differentiation from its focus on niche sub-verticals/service lines, backed by solid execution. Key tenets of its strategy include: a) The ability to operate at the intersection of domain and technology, driven by investments in the focused sub-verticals. b) Scaling of key partnerships with specialized horizontal and vertical SaaS players like Pega, Duck Creek, ServiceNow, Snowflake, Adobe and Appian. c) The ability to mine clients that is reflected in the high repeat business (92%) and scaling of USD10mn+ clients. d) Culture, as reflected in one of the lowest attrition levels in the sector.

Solid execution to pave road to USD2bn revenues: 

COFO intends to achieve the next USD1bn revenues before FY28, led by 45% from existing clients, 25% from alliances, 15% from new verticals (Public sector, Retail and Healthcare) and 15% from acquisitions. If COFO can deliver on these targets, they would end up growing revenue/EPS at 4yr 19%/25% Cagr.

Healthy guidance in a weak year: 

COFO has given FY24 revenue growth guidance of 13-16% cc YoY, despite the cautious spending environment, particularly in BFS. They are also confident of maintaining margins in FY24, delivering 100bps improvement in FY25 and see room for 150-300bps Ebit margin improvement as it hits USD2bn in revenues. BUY. Key risk: M&A.