HOLD
CMP: Rs4051
Target Price: Rs4000
Coforge reported weaker-than-expected operating performance in Q4, due to a margin miss. Revenue growth in constant currency terms came ahead of expectations; however, impact of lower cross-currency tailwinds (+30bps) and hedge loss (-70bps) led to a slight miss on reported USD revenue. Revenue grew by 4.7% CC QoQ, with growth being broad-based across verticals, geographies and service lines. Adj. EBITDAM expanded 110bps QoQ to 19.6%, but missed Management guidance and our expectations. Coforge delivered a robust deal intake of USD301mn in Q4FY23 (vs. USD345mn in Q3), taking the order book, executable over the next 12 months, to USD869mn – a 20.7% YoY growth. Despite headwinds from mortgage weakness, BFS grew 4.5% CC QoQ. Insurance recovered in Q4, delivering 5% CC QoQ growth. Backed by a healthy large-deal intake, all-time high executable order book, anticipated broad-based growth and diversified business offerings, Management has guided for 13-16% CC revenue growth for FY24. It expects gross margin to expand by 50bps in FY24 and adj. EBITDAM to be at levels similar to that in FY23 (~18.3%). We have tweaked our EPS by 0.5-1.2% over FY24E/25E, factoring-in the Q4 performance and FY24 guidance. We retain HOLD, with TP of Rs4,000/share (Rs3,970 earlier), at 21x Mar-25E EPS.
Result summary: Revenue grew by 5.0% QoQ (4.7% CC) to USD264.4mn in Q4, against our expectations of USD264.6mn. Adjusted EBITDAM (excluding ESOP costs and acquisition-related expenses) expanded by ~110bps QoQ to 19.6%. EBITM expanded by ~100bps QoQ to 15.5%, coming in 50bps below our expectations of 16%. Adjusted profit (excluding the one-off) was up 2% QoQ to Rs2.33bn, below our expectations due to the operating performance miss. Reported profit stood at Rs1.15bn and was impacted by one-off expenses – provision of Rs523mn on account of expenses incurred on ADR listing and Rs803mn towards the gift (Apple iPad) to all employees, to commemorate achievement of the USD1bn revenue milestone. Order bookings were healthy, with total fresh order intake of USD301mn (The Americas: USD130mn; EMEA: USD113mn; RoW: USD58mn), including two large deals signed in Q4 (one each in BFS and Travel). What we liked: Healthy FY24 revenue growth guidance, broad-based revenue growth, healthy deal intake, an all-time high NTM executable order book, moderation in attrition. What we did not like: Margin guidance miss.
Earnings-call KTAs: 1) Q4 was the 5th consecutive quarter of the company signing an over USD300mn order intake. 2) Company is making necessary investments in the front-end team and capabilities, to drive revenue to the next milestone of USD2bn. It expects adjusted EBITDAM to be at least 150bps higher vs FY23, when the company hit the USD2bn revenue mark. 3) Adjusted EBITDAM for FY23 stands at 18.3%, missing the guidance of 18.5-19%, which Management attributes to the higher hedge losses. 4) Salary hike is expected to be lower than last year’s, and will be effective April-23. Management guided for adjusted EBITDAM of ~16.5% in Q1FY24. 5) Company re-assessed future projections of taxable profits of one of its foreign subsidiaries and recorded deferred tax assets on losses of that subsidiary amounting to Rs108mn, consequent to certain amendments made in the customer agreement. 6) Gross margin expanded by ~70bps QoQ to 34.1% in Q4, driven by improved utilization, offshore shift and absence of furloughs. 7) Utilization saw ~120bps sequential improvement and stood at 81.5%. 8) LTM attrition (excl. BPS) came in at 14.1%, improving by 170bps QoQ. 9) Offshore mix stood at 50.7%; Management expects this to top-out at 54-55%. 10) Company does not have significant exposure to US regional banks, barring Fifth Third Bank, with which its relationship is primarily in operations management. 11) It expects ~USD1.7mn expense recognition in Q1FY24 towards the USD1bn revenue milestone celebration.
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