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MOSL : COFORGE: Strong growth outlook factored in the valuation

COFORGE: Strong growth outlook factored in the valuation

(COFORGE IN, Mkt Cap USD2.8b, CMP INR3850, TP INR3820, 1% Downside, Neutral)

• Coforge Ltd (COFORGE) reported 2QFY23 revenue growth of 6.2% QoQ in constant currency (CC), ahead of our estimates of 5% QoQ CC. Reported USD growth was 3.4% QoQ, led by BFS (+11.1% QoQ in USD; 14% QoQ in CC). It reported an order intake of USD309m, with 12-month executable order rising 16.6% YoY to USD802m. EBITDA margin (pre-RSU) of 18.4% (+190bp QoQ) recovered strongly and was 30bp above our estimates. The management reiterated its FY23E EBITDA margin guidance of 18.5-19.0%.
• We see the good topline performance and continued momentum in deal wins as positive, and expect COFORGE to deliver FY23E revenue growth of at least 20% YoY (ahead of its guidance) despite macroeconomic headwinds in 2HFY23. We estimate it to report FY22-24 USD revenue CAGR of c13% despite a 550-700bp cross-currency headwind.
• With strong margin recovery in 2QFY23 and continued gains from offshoring, fresher additions and utilization, we project COFORGE to post 18.7% pre-RSU EBITDA margin in FY23. This, in turn, should help it deliver an FY22–24E PAT CAGR of 22%.
• The stock currently trades at 23xFY24E EPS. Given the additional headwind of the share sale from promoter group, we see limited upside at current level. We raise our FY24 EPS estimate by ~4% on better growth and margin outlook. Our TP of INR3,820 implies 23x FY24E EPS. We maintain our Neutral rating on fair valuations.

Good topline performance, margin improvement in line

• COFORGE posted USD revenue / Adj. EBITDA / Adj. PAT growth of 16%/23%/ 33% YoY, respectively, in 2QFY23.
• In 1HFY23, its USD revenue/ Adj. INR EBITDA/ Adj. INR PAT grew 18%/27%/ 22%, respectively.
• EBITDA margin (pre-RSU) of 18.4% rose 190bp QoQ in 2QFY23 after a sharp decline in 1QFY23 and was 30bp above our estimates.
• PAT of Rs2.0b (+34% QoQ) was in line with our expectation.
• New TCV was at USD304m, 12m executable order rose 16.6% YoY at USD802m
• The company declared a dividend of INR13 per share during the quarter.

Key highlights from the management commentary

• BFS continued to register strong growth. Mortgage was ~2% of revenue so there was no material impact from mortgage. Expect good spends to continue on digital transformation initiatives.
• Travel vertical is expected to perform well in FY23. Though certain clients are cautious on discretionary spending, the outlook remains positive.
• Clients in Insurance vertical are looking to spend more on end-to-end digital transformations along with newer products.
• EMEA will continue to remain strong as it is concentrated to Banking and Travel with fewer and deep client relationships.
• The management will stay in the current band of utilization to prioritize growth. Offshoring, utilization and freshers becoming billable are the key margin levers.