Coforge’s strong order book and execution point to better margins and growth

ET Intelligence Group: The stock of Coforge has gained 12% over the past month, outperforming the 0.5% drop in the BSE Infotech index. The mid-tier IT exporter showed strong business momentum in the June quarter with margin expansion at a time when larger peers grappled with execution delays. The company also has strong revenue visibility, helped by sustained order flow and inorganic expansion, which has resulted in higher addressable market. Analysts have raised valuation multiples and price targets for the stock citing the strong order pipeline, growth visibility and fast adoption of new technologies.

While the company has maintained the momentum in order booking, it has also focused on execution. The $158 million worth deal announced in April has been ramped up while the $ 230 million deal announced in the current quarter is in the initiation stage. This augurs well at a time when new deals are flowing in. In the June quarter, it booked $691 million worth of new deals compared with $507 million in the year-ago quarter. This took the total executable order book to $2,228 million from $1,545 million by similar comparison. The company expects the deal flow to strengthen further in the September quarter while the execution rigour of the deals won earlier would support the revenue growth.

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The company's margin profile has improved over the past few quarters aided by rising revenue quality in terms of the use of new technologies including artificial intelligence (AI). In the June quarter, 86% of revenue was from AI-led engineering, integration, and cloud services. The operating margin (EBIT margin) expanded by 414 basis points year-on-year to 16%. The margin is likely to stay upbeat since company-wide salary increases are not expected until the fourth quarter of the current fiscal year.

For the June quarter, revenue grew by 24.2% sequentially to ₹5,527 crore, helped by the integration of recently acquired Encora. Net profit dropped 15.3% to ₹518.6 crore on account of higher depreciation, amortisation and interest outgo.

Given a higher revenue visibility, analysts have raised earnings forecasts and target prices for the stock. JM Financial has revised the earnings per share (EPS) estimate for FY27-29 by 6-9% after incorporating the June quarter performance and Encora's integration. It has also increased the FY28 forward price-earnings (P/E) multiple to 25 from 24, raising the target price to ₹1,795 from ₹1,610.

Axis Securities has catapulted the FY28 forward P/E multiple to 30 from 26, implying a higher price target of ₹2,275 from earlier ₹1,690. The stock ended Tuesday's session at ₹1,983 on the BSE.