Coforge Ltd: On an accelerated path to USD2bn

4 Sep 2023 , 12:29 PM

Recommendation: Buy; Target Price: Rs 5700

 

Analysts of IIFL Capital Services recently hosted CEO & ED Sudhir Singh and Deputy CFO Saurabh Goel for investor meetings across the US, UK and Asia. Management reiterated that Coforge (COFO) is set to deliver on its guidance of 13-16% cc revenue growth for the current fiscal, with adjusted Ebitda around the same level of 18.3% as last year. This will clearly be a top-quartile growth performance in FY24, led by strong deal wins and execution. Analysts of IIFL Capital Services believe the risk to FY24 guidance is minimal; even if they do not grow during Q2-Q4, they will report ~10% CC growth for FY24 vs the guidance of 13-16%. Over the medium-term, COFO targets to double revenues before FY28 with a potential to expand adj. Ebitda margins by 150-300bps. Analysts of IIFL Capital Services forecast 15%/25% USD revenue/EPS Cagr over FY23-25. Given the strong guidance, robust order book, differentiated positioning and top quartile growth, analysts of IIFL Capital Services believe the stock will revert to a premium vs mid-cap peers, as liquidity overhang is behind. Hence, they raise their 12-month TP to Rs5,700, based on 27x 2YF P/E, (from 24x) — now in line with PSYS and at 15% premium to mid-caps. Maintain BUY. 

Employee, client retention and execution key differentiators: 

In the past six years, COFO has delivered industry-leading growth driven by its best-in-class employee retention (lowest attrition levels globally), client retention (92% of revenues from existing clients, top-10 clients with them for avg. of 10 years) and superior execution. COFO intends to achieve the next USD1bn revenues before FY28, from existing clients (45%), alliances (25%), new verticals of Public sector, Retail & Healthcare (15%) and M&A. 

Deal pipeline strong, gaining market share: 

Despite the uncertain macro, COFO continues to win deals through market share (MS) gains. In Q1, the company announced two large deals in BFS with a TCV of USD365mn; they have continued the momentum in Q2, including a USD30mn deal from a new logo. Their 12-month executable order book is a reflection of the statement of work already signed, which is a more reliable, forward-looking metric and is growing at 20% YoY in Q1, providing visibility for near-term growth. 

Healthy guidance in a weak year: 

COFO has given FY24 revenue growth guidance of 13-16% cc YoY, despite the cautious spending environment. They will also maintain adj. EBITDA margins in FY24, show 100bps rise in FY25 and see 150-300bps margin improvement as it hits USD2bn revenues.