Friday, May 3, 2024

Coforge Records Weak Operating Performance; Cigniti Acquisition To Support FY27 Goals


TARGET PRICE (Rs) : 5,200

Coforge posted weak Q4 results – revenue and margin both missed estimates. Deal intake grew >2x in Q4, QoQ and YoY, on the back of a large renewal deal (USD400mn TCV; 6Y tenure). NTM executable orderbook grew 5%/17% QoQ/YoY; growth was slower than the deal intake on higher share of renewal. Mgmt refrained from giving quantitative revenue guidance, unlike in prior few years, due to market uncertainty. Coforge has entered into a share purchase agreement with promoters/select public shareholders of Cigniti Technologies, for acquiring up to ~54% stake for cash consideration of Rs1,415/sh, to scale new verticals/improve US presence. We cut FY25E/26E EPS by 15.3%/11.8%, factoring-in the Q4 miss, slower revenue and weak margin trajectory. We do not incorporate the Cigniti acquisition in our estimate, awaiting more clarity. Given the soft margin trajectory, potential equity dilution, and merger-related risks, we cut target PER to 28x (from 30x). Despite the 10%/22% correction in stock price in the last 1M/3M, we believe valuation is rich as the earnings cut remains rather severe; retain REDUCE; cut TP to Rs5,200 at 28x Mar-26E EPS.

Results Summary

Revenue grew 1.7% QoQ (1.9% cc) to USD286.8mn, lower than our estimate of USD290.2mn. For FY24, the company delivered revenue growth of 13.3% YoY (in cc), close to the lower end of its guidance of 13-16%. Adjusted EBITDAM (excluding ESOP and acquisition related expenses) expanded by 100bps QoQ to 19%, and missed Management guidance of 150-200bps expansion as well as our expectation of 19.7%. Reported EBITM missed our estimates by 120bps due to the adjusted EBITDAM miss and higher ESOP costs. Revenue growth was led by BFS (6.6% QoQ) and Travel (1%). The insurance vertical was flat, whereas other emerging verticals declined (-2%). Total TCV of fresh-order intake was USD774mn (including 2 large deals) vs USD354mn in Q3. Executable order book over the next 12 months is USD1,019m compared with USD974mn in Q3. The quarter saw 8 new client additions. Headcount grew 0.5% QoQ to 27,726. The company declared a final dividend of Rs19 per share. What we liked: Strong deal wins, traction in BFS. What we did not like: EBITM miss and guidance trajectory.

Earnings Call KTAs

1) Company has agreed to enter into a share purchase agreement with the promoters and select public shareholders of Cigniti Technologies, to acquire up to ~54% stake (between ~51% and ~54%, depending on the open offer outcome). It intends to merge both companies via share swap, after obtaining shareholder approval post-open offer. 2) Cigniti acquisition will help Coforge grow into a USD2bn firm by FY27, with ensuing synergies aiding it to improve margin by 150-250bps over the same period (more details ahead). 3) Demand environment remains challenging amid macro uncertainties, though Mgmt expects all verticals to register growth. 4) Order intake for Q4 was USD774mn, with 8 new client logos being added. This quarter included 2 large deals: a USD400mn 6-year deal in the BFS vertical, and a USD55mn 3-year deal in the insurance vertical. Company ended FY24 with its highest-ever order intake of USD1.97bn. 5) Management is confident about delivering robust growth in FY25, backed by a 17.3% higher executable order book YoY. 6) Mgmt. believes that gross margin and adjusted EBITDAM will expand by 50bps each in FY25. Reported EBITDAM should remain flat in FY25 due to higher ESOP costs (50-60bps higher YoY due to first year of the new ESOP scheme). It expects 70-80bps margin tailwinds in ESOP costs in FY26. 7) Weakness in travel was on account of the largest account in the vertical being under immense pressure. Ex this, travel vertical would have grown in double digits. This account is bottoming out now. 8) BFS continues to lead the growth in FY24, while Insurance has turned around smartly.

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