Coforge Ltd: Strong exit paving way for a healthy FY24

12 Apr 2023 , 09:14 AM

Recommendation: Buy

Target Price: Rs 4900

 

Analysts of IIFL Capital Services recently met with Sudhir Singh, CEO and ED, Coforge (COFO), before they entered silent period, to understand the overall outlook for the company, going into FY24. He reiterated FY23 revenue guidance of 22% growth YoY and remained confident of meeting the margin guidance. While the macro environment may result in some moderation in FY24 growth vs FY23, the underlying drivers stay intact and they remain fairly confident to deliver strong growth in FY24 as well. Exposure to regional banks in the US is limited and BFSI continues to be a key growth driver for the company despite investor concerns. All key verticals are expected to grow at similar pace next year, with Insurance too rebounding. Deal velocity is intact, even if decision-making may have become a bit erratic. While margins have room to expand, we may see focus on investments and margins remaining range-bound.

Broad-based growth in FY24:

While COFO may end up growing its revenues at 22% cc in FY23, it was largely driven by 40%+ growth in BFS vertical; even as Insurance declined and Others grew in line with company average. FY24 growth should be broad-based, with Insurance seeing a rebound owing to pick-up in revenues from the largest client in the vertical and the new leadership now settled. While the impact of US regional bank crisis is expected to be minimal, BFS growth should also normalise.

Supply side easing, gross margins have potential to expand:

Supply side dynamics have started to ease off, which should result in margin tailwinds in FY24, especially at the gross margin levels. Analysts of IIFL Capital Services believe COFO would witness reduction in the average cost per employee, on the back of pyramid rationalisation and limited wage hikes in FY24. However, margins may be range-bound as tailwinds may be invested in higher S&M costs.

Price correction overdone, valuations attractive:

Analysts of IIFL Capital Services believe the recent price correction in the stock on potential concerns around exposure to US regional banks, is overdone; while the outlook remains intact. At 20x FY25 P/E, the stock is trading at 10% discount to peers with similar growth profile (LTIM/PSYS), and offers 20% potential upside.