COFORGE share price has a buy rating; target of ₹ 5,160: ICICI DIRECT 


About the stock: Coforge share price offers system integration, apps & BPO services to BFSI, travel & healthcare verticals.  

Revenues and PAT grew at a CAGR of ~12% each over the past five years. 

Healthy OCF, EBITDA (~75%) and robust return ratios (RoCE > 20%).  

Q3FY22 Results:  

Coforge share price reported robust Q3FY22 results on the revenue front.  

Dollar revenues increased 4.2% QoQ of which organic was 4.5% QoQ. 

EBITDA margin improved 77 bps QoQ due to cost control. 

Revised organic guidance upwards to 24.0% YoY (in CC terms) in FY22E and 37% in CC terms for overall (organic & inorganic together). 

What should investors do?  

Coforge share price has grown by ~11x over the past five years (from ~ ₹ 423 in January 2017 to ~ ₹ 4690 levels in January 2022).  

ICICI direct revised their rating on the stock from BUY to HOLD.  

Target Price and Valuation:  

ICICI direct values Coforge share price at ₹ 5870 i.e. 30x P/E on FY24E EPS. 

Key triggers for future price performance:  

The company signed many good deals such as BFS deal worth US$ 105 mn for four years, US$ 20 million insurance (three years) & strong book order to drive growth. 

Bottoming out of travel vertical (in US), preferred partnership with Fortune 500 insurance & Tier 1 banking companies, recent acquisition and aggressive hiring to drive 22.6% revenue CAGR over FY21-24E. 

A 190-bps improvement in margins over FY22-24E due to offshoring, higher margins in acquired company, reversal of travel discount and growth. 

Alternate Stock Idea:  

Apart from Coforge share price, in their IT coverage ICICI direct also likes LTI.  

BUY with a target price of ₹ 8,050. 

Key highlights of recent quarter & conference call takeaways: 

The company further revised revenue guidance upwards.  

Coforge share price is now guiding for 24% organic CC growth in FY22E (vs. 22% organic growth guided in Q2FY22).  

The company also indicated, on an overall company level, it guided for minimum 37% growth in CC for FY22E (vs. 35% in CC terms given in Q2FY22). 

Organic revenues increased 4.6% QoQ to US$199.2 million, led by 21.5% QoQ growth in BFS (28% of revenues), travel up 6.6% QoQ (19% of revenues) and others up 6.6% QoQ for the quarter.  

Top five on organic basis declined 1.9% QoQ and top 10 by 3.1% QoQ.  

Inorganic revenue grew 0.9% QoQ.  

The company reported 5.2% QoQ growth in CC terms. 

The company indicated that order book has been on the rise as the order book executable over next 12 months is at US$701 mn while order intake for the quarter was at US$247 mn, which consists of one contract worth US$45 mn, which it won in Europe and to be executed over next six years.  

During this quarter, the company added 13 new clients. 

The order intake of 9MFY22 is 7% higher than that of FY21. 

Coforge share price expects the travel vertical to bounce back, going forward, as the impact of the new variant seems limited. 

This company continue to shore up hiring as it hired two senior executives during the quarter.  

It has hired 1) Global sales head (BFS and BPS) and 2) North America insurance head, who had three decades of experience in the Tier I organisation prior to this role. 

Coforge share price also indicated that they will continue hiring in sales & marketing, which reflects in the headcount in this department, which has increased to 281 people in Q3FY22 vs. 189 a year ago.  

The company also indicated that the sales & marketing count has seen a decline in Q3 vs Q2, because of temporary blip as some new employees are expected to join after Christmas holidays in the beginning of Q4. 

The management indicated that margin tailwinds will continue and they expect at least 130 bps QoQ expansion in margins in Q4FY22.  

It has retained the adjusted EBITDA margin guidance of 18.5-19% for FY22E. 

The company indicated that core insurance is doing well as it grew 6% QoQ, while softness in this vertical is a reflection of deferral of license revenue of advantage go (which forms 2.5% revenue mix) from Q1 to Q3.  

The company is confident of revenue bookings of advantage going in Q4, which will help to see growth in insurance vertical as well as some positive rub off in consolidated margins. 

The management indicated eight levers for the margin expansion in Q4 and beyond:  

1) large deal ramp-up, 

2) higher offshoring,  

3) the AdvantageGo rebound, 

4) higher working days in Q4 vs. Q3, 

 5) higher billing days,  

6) utilisation improvement,  

7) operating leverage, and  

8) flattening of the pyramid.  


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