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Coforge Ltd>
  • CMP : 3,934.5 Chg : 33.40 (0.86%)
  • Target : 4,370.0 (19.53%)
  • Target Period : 12-18 Month

13 May 2022

One of the lowest attrition in industry…

About The Stock

Coforge offers system integration, apps & BPO services to BFSI, travel & healthcare verticals.

  • Revenues grew at 18.1% CAGR in the past five years
  • Healthy OCF, EBITDA (~75%) and robust return ratios (RoCE > 20%)

Coforge reported robust Q4FY22 results on the revenue front.

  • Dollar revenues increased 4.9% QoQ (5% QoQ CC growth)
  • EBITDA margin improved 68 bps QoQ to 18.9%
  • Guiding for 20% revenue growth in FY23
What should Investors do?

Coforge’s share price has grown by ~7.6x over the past five years (from ~₹ 476 in May 2017 to ~₹ 3656 levels in May 2022).

  • We revise our rating on the stock from HOLD to BUY
Target Price Valuation

We value Coforge at ₹ 4370 i.e. 25x P/E on FY24E EPS

Key Triggers for future price performance
  • Increase in deal size; signed a US$105 mn BFS deal (for four years), insurance US$20 million (three years) & healthy order book to drive growth
  • Bottoming out of travel vertical (in US), preferred partnership with Fortune 500 insurance & Tier 1 banking companies, recent acquisition and aggressive hiring to drive 19.1% revenue CAGR over FY22-24E
  • A 40 bps improvement in margins over FY22-24E due to offshoring, higher margins in acquired company, reversal of travel discount and growth
Alternate Stock Ideas

Apart from Coforge, in our IT coverage we also like LTI.

  • LTI and Mindtree to create a large entity of US$3.5 bn revenue through merger. The combined entity will enjoy scale benefit, large order wins etc
  • HOLD with a target price of ₹ 4,990

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Net Sales 3,676.2 4,183.9 4,662.8 6,432.0 18.1 7,972.1 9,122.5 19.1
EBITDA 645.2 719.8 786.5 1,115.4 18.1 1,522.7 1,778.9 26.3
EBITDA Margins (%) 17.6 17.2 16.9 17.3 - 19.1 19.5 -
Net Profit 403.3 444.1 455.6 661.8 12.7 918.3 1,087.4 28.2
EPS (|) 65.7 71.4 73.3 106.5 - 147.8 175.0 -
P/E 55.7 51.2 49.9 34.3 - 24.7 20.9 -
RoNW (%) 19.5 18.5 18.5 24.2 - 28.4 28.3 -
RoCE (%) 25.2 23.0 23.3 25.6 - 31.5 31.8 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

  • US$ revenues grew 4.9% QoQ to US$232.4 million (5% QoQ growth in CC) while rupee revenues grew 5.1% QoQ to | 1,732 crore. For FY22 The company reported growth of 37.6% in CC terms (organic + inorganic) vs guidance of 37% given. The company is now guiding 20% revenue growth in FY23 in CC terms. The company is aspiring to reach US$2 bn revenues in the medium term. The company does not see any impact of current geopolitical issues as well as macro headwinds. Hence, they are not baked in the revenue guidance.


  •  It reported adjusted EBITDA margins of 18.9% in FY22 vs. guided range of 18.5-19%. The company has maintained adjusted EBITDA margin band of 18.5-19% for FY23


  • Geography wise, the revenue growth for the quarter was driven by EMEA regions, which reported 23.9% QoQ growth while America region reported 1.8% QoQ decline. Vertical wise, BFSI reported 2.3% QoQ revenue growth while Transport vertical witnessed sharp recovery and reported growth of 15.2% QoQ for Q4.


  • The company indicated that order intake was US$301 mn for the quarter, which was up 22% QoQ and 50% YoY. For FY22, order intake was robust at US$1.15 bn, which was up 47.2% vs. FY21


  • The company won 11 large deals in FY22, which includes one US$100mn+ deal with large European bank and three US$50mn+ deals (one in Europe and one in BFSI space).  The company indicated that they continue to chase deals as in case of any adverse impact on tech spending, smaller deals are the first one to get slipped. The company expects to add at least two large deals in FY23


  • Coforge have witnessed sharp rebound in travel vertical in Q4 and the company expects the travel vertical to accelerate its growth momentum in the next fiscal year. The company expects elevated spending in the travel industry on new areas such as cloud transformation, cyber security and touch less travel, etc


  • Coforge also indicated that they will continue to hire aggressively in sales & marketing in FY23 as well. For FY22, its sales and marketing headcount increased to 288 vs.188 and the company also indicated their EBITDA margin guidance baked in higher spend on S&M


  • The management indicated following margin levers: i) continued focus on off-shoring, the company’s revenue mix from offshoring has increased to 44% vs 38% in FY21 ii) Continued focus on pyramid optimisation, the company added 1.6K freshers in FY22 and planning to elevate fresher hiring in FY23. Iii) recovery in travel business which will drive the growth iv) better performance of product business (advantage GO) v) The company also indicated pricing albeit minor lever for margin improvement in the subsequent years
  • Insurance business reported 20% revenue growth in FY22. The company expects continued strong growth from this vertical in FY23 as well. Some of the growth drivers for this business segment are core platform modernisations, automation of claim processing, etc
Variance Analysis
   Q4FY22   Q4FY22E   Q4FY21   YoY (%)   Q3FY22   QoQ (%)  Comments
 Revenue in USD           232.4          228.2        172.4 34.8        221.6 4.9 Revenue growth of 5% QoQ in CC, driven by BFSI and recovery in travel vertical
Revenue 1,742.9 1,718.7 1,261.5 38.2 1,658.1 5.1  
Employee expenses 1,162.0 1,151.5 858.0 35.4 1,121.0 3.7  
Gross Margin 580.9 567.2 403.5 44.0 537.1 8.2  
Gross margin (%) 33.3 33.0 32.0 134 bps 32.4 94 bps  
SG&A expenses 251.6 240.6 191.3 31.5 235.1 7.0  
EBITDA 329.3 326.6 212.2 55.2 302.0 9.0  
EBITDA Margin (%) 18.9 19.0 16.8 207 bps 18.2 68 bps Adjusted margins for the quarter ( adjusted for ESOP and acquisition related costs) was at 20.6%, up 90 bps QoQ 
Depreciation & amortisation 58.4 55.0 44.9 30.1 56.6 3.2  
EBIT 270.9 271.6 167.3 61.9 245.4 10.4  
EBIT Margin (%) 15.5 15.8 13.3 228 bps 14.8 74 bps  
Other income (less interest) -11.9 -12.2 10.9 -209.2 -12.2 -2.5  
PBT 259.0 259.4 178.2 45.3 233.2 11.1  
Tax paid 34.2 41.5 40.8 -16.2 36.0 -5.0  
PAT 207.7 204.4 133.0 56.2 183.7 13.1  

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