Coforge: The execution powerhouse

20 Jun 2023 , 10:18 AM

Recommendation: Buy

Target Price: Rs. 4,580

While the demand environment remains muted in near term and competitive intensity has increased, COFO is confident of delivering its guided 13-16% cc YoY revenue growth in FY24. Over the medium term, it aspires to achieve USD 2 billion in revenue well before FY28. Management is also confident of improving margins by 150-300 basis points through operating leverage, average cost per resource optimization and pricing. Analysts at IIFL Capital Services are forecasting 15%/23% USD revenue/EPS CAGR over FY23-25, led by robust order book and superior execution.

Solid execution to drive accelerated growth towards USD 2 billion revenues

COFO highlighted that the key ingredients of its strategy – focus on niche sub-verticals/service lines, backed by solid execution – are likely to remain unchanged, to achieve the next billion in revenues. Split of the next billion of revenues is expected to be 45% from existing clients, 25% from alliances, 15% from new verticals (Public sector outside India and potentially Retail and Healthcare) and 15% from acquisitions. COFO believes it has invested in the building blocks to achieve the USD 2 billion revenue well before FY28.

FY24 revenue growth guidance reiterated

COFO reiterated confidence in achieving its FY24 revenue growth guidance of 13-16% cc YoY, despite the cautious spending environment, particularly in BFS. They are not seeing improvement in demand environment and expect H1 to be stronger than H2. Competitive intensity has increased with some larger peers using extreme discounting to drive growth.

Multiple levers to improve margins

COFO reiterated confidence in improving gross margins by 50 basis points YoY in FY24, driven by an internal program to optimize average cost per resource. However, these benefits are likely to be invested back into SG&A to drive growth. Management is confident of delivering 100 basis points operating margin improvement in FY25 and sees room for 150-300 basis points operating margin improvement by the time it hits USD 2 billion in revenues. Other key margin levers are increased fresher billability, operating leverage and improved price realization.