Q2FY24 Review: Coforge Ltd: Growth on track; one-offs impact margins

20 Oct 2023 , 11:29 AM

Coforge (COFO) reported Q2 revenue growth of 2.3% cc QoQ (14.1% YoY); largely in line with IIFLe, driven by broad-based growth across verticals. At 11.9% (+40bps QoQ), Ebit margins were below IIFLe of 13.5%, due to one-off impact from the higher ESOP costs, annual client event and continued hedging losses. COFO announced healthy deal wins of USD313mn (+28% TTM YoY) including 3 large deals, and USD935mn of order book executable in the next 12 months (+17% YoY). On the back of a strong H1 and healthy order book, the company reiterated FY24 revenue growth guidance of 13-16% cc YoY. Management is confident of improving Ebit margins in H2 and maintained guidance of 50bps gross margins expansion as well as flat adj. Ebitda margins. Hence, while analysts of IIFL Capital Services lower their FY24 EPS on higher ESOP costs, they broadly maintain FY25-26 EPS. Analysts of IIFL Capital Services 12-month TP reduces modestly to Rs6,050 (was Rs6,100), pegged at 27X 2YF P/E. Maintain BUY. 

Growth remains healthy: 

COFO’s growth in Q2 was broad-based across verticals led by BFS (+3.5% QoQ), Insurance (+1.8%) and Transportation (+1.8%). COFO signed 3 large deals in the quarter, including one from a new BFS client. Executable orders in the next 12 months increased to USD935mn (+17% YoY), which equals 78% of analysts of IIFL Capital Services next 12 months revenue estimate. While Q3 may be tepid due to seasonality, Q4 should see sharp acceleration; resulting in COFO meeting their guidance. 

Margins impacted by one-offs: 

Ebit margin stood at 11.9% (+40bps QoQ), as productivity improvement and lack of visa costs were offset by higher ESOP expenses (+120bps), continued hedging losses (+40bps) and annual client event. Adj. Ebitda margins expanded by 160bps; mgmt is confident of improving it in H2, driven by normalisation of ESOP costs, hedging gains and benefits from its program around Average Resources Cost optimisation. COFO maintained that FY24 would see 50bps gross margin (GM) expansion and flat adj. Ebitda margins, even as it continues to invest for growth. Sequential headcount increased by ~400 employees. 

Maintain BUY: 

COFO is trading at 26x FY25 P/E, in line with the mid-cap peers. Analysts of IIFL Capital Services 12-month TP of Rs6,050 is pegged at 27x 2YF EPS. They maintain BUY and believe valuations can expand, given a strong track record of top-quartile growth and healthy outlook. Key risks: Supply-side.