After surging 35 percent in just 5 months, midcap IT firm Coforge is likely to rise further on the back of margin stability, strong earnings growth outlook and its investments in technology improving competitive positioning.
Global brokerage house Nomura initiated coverage on the stock with a target price of ₹5,050, implying an upside of around 20 percent. It believes Coforge will continue to outperform with a 25 percent EPS CAGR over FY23-25F.
"A rejuvenated and stable management team with strong execution and a deepening focus on existing businesses while incubating new verticals, alongside the realignment of Go-To-Market (GTM), reinvigorating sales engine with strong incentive structures and a focus on M&A to bolster capability have been some key factors behind Coforge’s strong growth and re-rating," explained Nomura.
Stock price trend
The stock has jumped nearly 35 percent from its 52-week low of ₹3,210, hit in September 2022. In the last 1 year, however, it is down 4 percent. The stock has lost 8 percent in February so far after a 13 percent rise in January.
Just in today's deals, the stock shed as much as 7.6 percent to ₹4,000 after around 60 lakh shares or 9.8 percent stake in Coforge changed hands via a block deal in early trade. While the buyers and sellers were not known immediately, it was reported earlier that Hulst BV, an entity controlled by Baring Private Equity, was looking to sell some stake.
Q3 Earnings
In the December quarter, the firm reported a 19.6 percent year-on-year (YoY) rise in its net profit to ₹235.9 crore versus a net profit of ₹197.2 crore in the same quarter of the previous fiscal year.
Its revenue during the quarter jumped 24 percent YoY to ₹2,055.8 crore against ₹1,658.1 crore in the corresponding quarter of last year. Revenue from both the US and Europe, which account for about 80 percent of the company's total revenue, rose in the third quarter, despite rising concerns over growth and tech spending in export markets, especially Europe. The adjusted EBITDA margin for the quarter stood at 18.5 percent.
The board had recommended an interim dividend of ₹19 per share, and the record date for this payout was February 3, 2023.
In Q3FY23, Coforge recorded an order intake of $345 million, the fourth consecutive quarter of over $300 million order intake. The company also announced that its total order book executable over the next 12 months was at $841 million.
“The firm has signed the largest number of large deals in a quarter in its history. As a consequence, the order intake at $345 million has been the highest ever. This performance in a seasonally weak quarter sets us up very well for FY2024,” said Sudhir Singh, Chief Executive Officer, Coforge.
The company also upgraded its fiscal year 2023 annual revenue growth guidance to 22 percent in constant currency terms while maintaining its adjusted EBITDA annual margin guidance.
Investment rationale
Management change: Since the appointment of Sudhir Singh as CEO, Coforge’s revenue growth has accelerated, from a 6.1 percent CAGR over FY15-18 to a 16.9 percent CAGR over FY2018-22 despite significant exposure to the travel segment (impacted by COVID), noted the brokerage. Key changes like 1) hiring senior talent from large global firms; 2) a four-fold increase in incentives with a significant upfront payment to sales; 3) vertical-based GTM approach; 4) investments in acquisitions to bolster capabilities and get access to new clients; and 5) exiting non-core verticals (like Geographic Information Systems, GIS) and focus on verticals have brought rigour and focus on execution and improved Coforge’s large deal wins rates, it informed.
Investments in technology improved competitive positioning: As per Nomura, Coforge has been focusing on improving its offerings portfolio by investing in digital technologies like AI/ML, customer experience, data and analytics, product engineering, and cloud. While the acquisition of SLK(unlisted) in 2021 has given Coforge access to banking clients, capability-based acquisitions such as Whishworks (unlisted) in 2019 and RuleTek (unlisted) in 2017 have improved its competitive positioning, it noted.
Margins to expand further: Increased offshoring components in recently won large deals, further moderation in industry-low attrition rates and improved utilisation should improve Coforge’s margins in FY24F, forecasted the brokerage. Over the medium term, Nomura believes operating leverage from sales and marketing expenses will also play out.
It also noted that the company has already invested heavily in sales, particularly in the EU. It forecasts the EBIT margin to rise from 14.3 percent in FY23F to 15.2-16.1 percent in FY24-25F. It expects 180 bps improvement over FY23-25F.
Earnings Estimates
Nomura expects a dollar revenue CAGR of 14 percent in FY23-25F, with improving margins leading to a 25 percent EPS CAGR. Its target price of ₹5,050 is based on 23x FY25F EPS.
"Our EPS estimates are 6-12 percent higher than consensus over FY24-25F due to our higher margin expansion expectation," noted Nomura. Key risks include weaker-than-expected revenue growth, slow margin improvement, and the overhang of large stock sales by Baring PE," it added.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
