loader2
Partner With Us NRI
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%)
Q4FY22

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  

Terms & conditions and other disclosures

ANALYST CERTIFICATION

I/We, Sameer Pardikar, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

Terms & conditions and other disclosures:

ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products.

ICICI Securities is Sebi registered stock broker, merchant banker, investment adviser, portfolio manager and Research Analyst. ICICI Securities is registered with Insurance Regulatory Development Authority of India Limited (IRDAI) as a composite corporate agent and with PFRDA as a Point of Presence. ICICI Securities Limited Research Analyst SEBI Registration Number – INH000000990. ICICI Securities Limited SEBI Registration is INZ000183631 for stock broker. ICICI Securities is a subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com. 

ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities and its analysts, persons reporting to analysts and their relatives are generally prohibited from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. 

Recommendation in reports based on technical and derivative analysis centre on studying charts of a stocks price movement, outstanding positions, trading volume etc as opposed to focusing on a companys fundamentals and, as such, may not match with the recommendation in fundamental reports. Investors may visit icicidirect.com to view the Fundamental and Technical Research Reports. 

Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. 

ICICI Securities Limited has two independent equity research groups: Institutional Research and Retail Research. This report has been prepared by the Retail Research. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, and target price of the Institutional Research. 

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. 

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. 

ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. 

ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. 

ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months. 

ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report. 

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. 

ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. 

RATING RATIONALE

ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according -to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts valuation for a stock

Buy: >15%

Hold: -5%to 15%;

Reduce: -15% to -5%;

Sell: <-15% 

Pankaj Pandey

Head – Research

pankaj.pandey@icicisecurities.com

 

 

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

 

 

research@icicidirect.com

Read More