Coforge Ltd

Healthy deal pipeline to fuel growth for Coforge in FY26

Company Profile

Coforge is a global digital services and solutions provider that leverages emerging technologies and deep domain expertise to deliver real-world business impact for its clients. A focus on very select industries, a detailed understanding of the underlying processes of those industries and partnerships with leading platforms provides a distinct perspective. Coforge leads with its product engineering approach and leverages Cloud, Data, Integration and Automation technologies to transform client businesses into intelligent, high growth enterprises. Coforge’s proprietary platforms power critical business processes across its core verticals. The firm has a presence in 21 countries with 25 delivery centers across nine countries.

Investment Arguments

Consistent growth in operations, despite industry challenges, while maintaining steady profitability

Coforge’s revenue growth was strong at 15% in fiscal 2024, compared to single-digit growth in the industry during the same period. Despite a challenging macro-economic environment and continued slowdown in the banking sector, Coforge’s revenue verticals have registered healthy growth of 20% in the banking and financial services sector, 15% growth in the insurance sector, 10% growth in travel, transport, and hospitality (TTH) and 20% growth in others during fiscal 2024 demonstrating its foothold with customers. Coforge’s presence in critical and niche product and services offerings have aided revenue growth. While acquisition of Cigniti will drive revenue growth in healthy double digits in fiscal 2025, medium-term revenue growth is expected to normalise to 10-12%.

Niche service offerings with diversified revenue mix across verticals and practices

Revenue comes from a mix of IT services to the BFS (31.8%), insurance (21.4%), TTH (18.1%), and others (2.1%). Among the practices, it has a diversified portfolio spread across application development and maintenance (28.8%), cloud and infrastructure management (19.2%), business process management (9.4%), engineering (32.1%), data and integration (27.4%), and intelligent automation (11.7%) as of the first quarter of fiscal 2025. Through the Cigniti acquisition, Coforge will benefit through an expanded presence in the BFSI segment and venture into new verticals of retail, hi-tech and healthcare. While prudent acquisitions have augured well for the company, it has also demonstrated healthy organic growth. During the first three months of fiscal 2025, 50% of revenue accrued from America; 38.8% from Europe, the Middle East and Asia (EMEA); and the remaining from the rest of the world.

Cigniti Technologies acquisition to aid growth for Coforge

Cigniti’s acquisition is expected to aid in scaling up Coforge’s presence across South-West, Mid-West and Western US, add new logos and provide more cross-selling opportunities. However, Cigniti’s testing business is likely to remain vulnerable to disruption from Gen AI standpoint. We believe the clarity on disruption from Gen AI on Cigniti’s testing business after the transition will be vital in determining the course of revenue and margin trajectory trend.

Multiple levers in place to spur growth for Coforge

Coforge’s deep-domain expertise in select industry verticals and sub-verticals with heavy investments on technology, proprietary products and resources position it to participate in customers’ transformation journey. Further, the company has reinvested its excess profitability in enhancing the technical capabilities by adding management/sales bandwidth. The company has also started scaling up the sub-segments such as healthcare within other verticals to drive its growth. We believe the company’s differentiated positioning in select verticals, strong leadership, robust executable orders and mining of strategic accounts would position the company to deliver strong revenue growth going ahead.

Q3FY25 Result Highlights

Coforge delivered another exceptional performance in Q3FY25. It reported revenues of Rs.3318 cr, up 8% QoQ in INR terms and up 7.5% QoQ in USD terms at $397.1m (up 8.4% QoQ in CC terms). Growth was led by the TTH vertical (+7.5% QoQ), followed by Insurance, which was up 6% QoQ and Transportation grew by 7.5% QoQ. EBIT margin was flat at 9.5% (up by 9bps QoQ), primarily due to higher ESOP- related costs. Adjusted EBITDA at Rs. 589 crores/ US$ 70.5 million, marking an increase of 16.3% QoQ and 41.2% YoY. Adjusted EBITDA Margin stood at 17.8%, a rise of 122 basis points QoQ. The 12-month executable order book stood at US$1.36bn, up 40.2% YoY with a high degree of repeat business (94.5% in Q3FY25). Deal momentum continues to remain strong; the company reported fresh order intake at USD 501 mn vs. USD 515 mn in Q2 and the last eight-quarter average of USD 451 mn. During the quarter, the company won four large deals, including one in the Cigniti client portfolio, across North America and ASEAN. Coforge added seven clients in the US and seven in EMEA; a total of fourteen new clients were added in Q3. The top 5/ 10 accounts grew 13.5%/ 14.4% QoQ respectively. Headcount increased by 1.9% on a QoQ basis to 33,094. Utilization declined by 90 bps QoQ to 81.3%. Attrition increased by 20 bps QoQ to 11.9%. DSO remained flat at 60 days. PAT growth was better than estimates and grew 9%/5% QoQ/YoY to Rs.256 cr.

Key Conference call takeaways

Key business Highlights

• Order Intake: US$ 501 million - second consecutive quarter of US$ 500+ million order intake.
• Sustained Large Deal Momentum: Four large deals signed this quarter across North America and ASEAN.
• Headcount: stood at 33,094; net addition of 611 sequentially. Headcount has increased 16% organically since the beginning of the year.
• Broad based growth across Americas (69.2%), EMEA (20.5%) and RoW (3.3%) YoY.
• Cigniti business delivered 3.5% cc QoQ growth; EBITDA margin improved to 17.3%; up from 11% in Q4FY24.
• Order book executable over next 12 months stood at $1,365Mn at the end of the quarter, a 40% YoY growth.
• 14 new logos opened during the quarter.

Operational performance

• Order Intake: Reached US$ 501 million, marking the second consecutive quarter over US$ 500 million.
• Large Deals: Major deals secured, including one with a top-five client in North America and ASEAN, highlighting the strategic displacement of an incumbent.
• 12-Month Signed Order Book: $1.37 billion, a 40.1% YoY increase.
• Cigniti Business: Saw a 3.5% growth QoQ in constant currency terms, with EBITDA margin improvement to 17.3%.
• AI & GenAI Expansion: Enhanced portfolio with over 30 capabilities, certifying 95% of the workforce in AI tools.

Recognitions

• ISG recognized Coforge as a ‘Leader’ in the Insurance Services 2024 ' ISG Provider Lens Study – North America.
• Nelson Hall recognized Cigniti, A Coforge Company, as a ‘Leader’ in NEAT Quality Engineering 2024 in the following categories – Overall, Gen AI Use Cases, AI-Based Analytics and Automation, RPA-Based Automation, Application Migration to Cloud Testing.
• Nelson Hall recognized Coforge as a ‘Major Player’ in the Market Assessment on Transforming Core Banking Services in the AI & Analytics Services and Operation Services market segments.
• ISG positioned Cigniti, A Coforge Company, as a ‘Leader’ in ISG Provider Lens™ – Next Gen ADM Services 2024 – Continuous Testing Specialist – US.
• Everest Group positioned Cigniti, A Coforge Company, as ‘Leader’ in Quality Engineering Services for Mid-Market Enterprises PEAK Matrix® Assessment 2024

Partnerships

• Coforge was announced as the winner of the Appian Europe 2024 Partner Impact and Excellence—Industry Award for Public Sector.
• Coforge was awarded the Microsoft Azure Expert Managed Service Provider (AEMSP) status, third year in a row.
• Coforge gained the Microsoft “Solutions Partner” designation for Data and AI.

Future Outlook:

Growth Confidence: Management anticipates robust growth driven by strategic investments and deepening partnerships.

Sector Demand: Steady improvement across all sectors, with a strong rebound in the travel vertical and positive outlooks in insurance and BFS sectors.

Deal Pipeline: Exceptionally robust, with some deals notably larger than recent pursuits, indicating a healthy business trajectory.

Cigniti's EBITDA margin has improved from 12% to 17.3% in three quarters.

Integration with Cigniti has been completed. Synergies have been more than expected.

Upcoming year’s promises to be solid, signed 4 large deals in Q3, orderbook is at $1.3 billion, up 40% YoY. Next year will see sustained robust growth given the pipeline, large deals and signed orderbook.

Attempt is to hit $2billion of revenue run-rate as soon as possible.

Non-Cigniti segment was up 9.4% QoQ in Q3 and Cigniti was up 3.5%.

Other Highlights:

ESOP and Integration Costs: ESOP costs rose to 2.1% of revenue but are expected to decline from Q3 FY26. Integration expenses dropped to $1.9 million and are projected to conclude largely by FY25 end.

Cigniti Amalgamation: The board approved the merger, expecting an effective date of April 1, 2025, with a smooth equity share exchange mechanism in place.

Tax Rate Expectations: Approximately 25%.

Recent Deal Win -  Coforge signed a 13-year product delivery and artificial intelligence (AI) solutions deal worth $1.56 billion with US-based travel technology firm Sabre Technologies.  "This multi-year agreement positions Coforge as a key partner in furthering Sabre’s ability to accelerate product delivery and launch additional innovative AI-enabled solutions, further underscoring the company’s commitment to speed and scale," the company said in a release. This deal wins reinforces its standing within the travel sector.

Further, Coforge is set to acquire TMLabs by purchasing all outstanding shares under a share sale agreement. Coforge will acquire TMLabs for an upfront payment of 20 million Australian Dollars, along with an unspecified earnout linked to revenue and EBITDA milestones for FY26 and FY27. TMLabs primarily operates in Australia, offering implementation services for the "ServiceNow" platform.

For its acquisition of Rythmos, Coforge will pay an upfront $30 million, with an additional earnout of up to $18.7 million based on revenue and EBITDA targets for 2025 and 2026. Rythmos specializes in data capabilities and has expertise in the airline sector, which Coforge sees as an opportunity to strengthen its data and cloud engineering services

Key Risks & Concerns

High revenue dependence on the US market - Like other large established peers in the IT services sector, Coforge is highly dependent on the US market for 48% of its revenue, rendering it vulnerable to sluggish spend by corporates and financial institutions in the US markets.

Exposure to intense competition - The IT industry in India is challenging because of intense competition among local players and entry of multinational corporations that are continuously expanding their offshore operations in India.

Foreign exchange fluctuation risk - The revenues and margins remain exposed to foreign exchange (forex) risks as revenues are derived from the international market. Protectionist measures adopted by governments across the world remain yet another business challenge for Indian IT companies.

Outlook & Valuation

Coforge delivers another exceptional performance for the quarter ended Q3FY25. Established in 1981, Coforge is one of the leading mid-sized Indian IT services company, engaged in providing services in cloud, managed services, data & analytics, automation, application development & maintenance and Business Process Management. Coforge has successfully transformed and re-organised itself into one of the fastest-growing mid-sized IT services providers under revamped management in the past few years. Strong leadership, deep domain capability in select verticals, improved capability, and a marquee client base would help the company sustain growth momentum.

Further, a strategic focus on diversifying the business into emerging verticals, improvement in client metrics, strong executable orders, and sharp recovery in the travel segment would aid growth. The 12 month executable order book and fresh order intake witnessed a sharp jump during the quarter and provides strong visibility for the quarters ahead. We believe the company is well placed to see robust and sustained growth in the quarters ahead given the strengthening of order book, strong large deal pipeline, and consecutive quarters of significant net headcount additions and on account of synergies with Cigniti picking up momentum. The management stated that the merger with Cigniti would help the company to drive operational margin improvement as EBITDA margin of Cigniti has improved from 12%

Strong growth, better digital mix, and operating efficiencies should drive margin expansion in the next two years. We believe the organic business is robust and is likely to regain its strong growth trajectory in coming quarters driven by recovery in key verticals especially BFS, ramp up of deal wins, and recovery of pent-up demand triggered by a better macro environment. Strong deal wins enhances revenue visibility for Fy26. We believe margin expansion & debt reduction to drive profit growth.  At CMP of Rs.7913, the stock is trading at 28x FY26E.  We recommend a BUY rating on the stock for the long term.