Q1FY24 Review: Coforge Ltd: Growth leadership intact, margin levers in hand

21 Jul 2023 , 11:23 AM

Coforge (COFO) reported 1QFY24 revenue growth of 2.7% cc QoQ (18.4% YoY), in line with IIFLe, driven by broad based growth across verticals. Ebit margin at 11.5% (-400bps QoQ) were below IIFLe of 14%, explained by the impact of wage hikes, hedging losses, higher ESOP costs and D&A. COFO announced record deals of USD531m (+29% TTM YoY) including a USD300mn deal, and USD897m of order book executable in the next 12 months (+20% YoY). On the back of a strong order book, COFO has reiterated its FY24 revenue growth guidance to be 13-16% cc YoY. Management is confident of improving Ebit margins through the year, similar to FY22/23 and maintained guidance of 50bps gross margins expansion as well as flat adjusted Ebitda margins. Hence, Analysts of IIFL Capital Services maintain EPS and forecast 15%/25% USD revenue/EPS Cagr over FY23-25, led by superior execution. Analysts of IIFL Capital Services 12-month TP of Rs5,100 is pegged at 24X 2YF P/E. Maintain BUY.

Growth momentum continues: 

COFO’s growth in Q1 was broad based across verticals led by Insurance (+4.5% cc QoQ), followed by BFS (+3%), Others (+2%) and Transportation (+1.1%). COFO signed 2 large 5-year deals of TCV of USD300mn and USD65mn in the BFS vertical. Executable orders in the next 12 months accelerated to USD897m (+20% YoY), which equals 76% of Analysts of IIFL Capital Services next 12 months estimate of 15% revenue growth. COFO reiterated FY24 revenue growth guidance of 13-16% cc YoY and continues to invest in building blocks towards USD2bn revenue aspiration.

Margins contract but should recoup through FY24: 

Ebit margin compresses to 11.5% (-400bps QoQ), due to full impact of wage hikes, higher ESOP costs, hedging losses, higher D&A and S&M expenses due to one off events in the quarter, most of which will be recouped through FY24, as witnessed in FY22 and FY23 as well. Hence, COFO maintained that FY24 would see 50bps gross margin expansion and flat adj. Ebitda margins, even as it continues to invest for growth. Sequential headcount increase of ~1,000 employees was the highest in the last six quarters.

Maintain BUY: 

COFO is trading at 24x FY25 P/E, in line with high growth midcaps peers. Analysts of IIFL Capital Services 12-month TP of Rs5,100 is pegged at 24x 2YF EPS. They maintain BUY and believe valuations may sustain given a strong track record of top quartile growth and healthy outlook. Key risks: Supply-side.