Demand in the information technology sector is expected to remain subdued in the near term and any meaningful uptick in the annual budgets of tech clients is yet to show up, Coforge chief executive officer Sudhir Singh said.
However, Singh said Coforge will continue to grow despite depressed demand amid an uncertain macroeconomic environment.
“So, the demand environment will continue to be tough, as it has been through the current year (2023), and we are planning for growth just as we've delivered earlier this year,” Singh told Moneycontrol.
The company has had its ear to the ground and annual technology budgets of clients in 2024 would not be any different than what they were in 2023 globally, Singh said.
Coforge’s net profit rose over 31 percent to Rs 238 crore in the October-December period from Rs 181 crore in the September quarter of FY24. Revenue increased almost 2 percent sequentially to Rs 2,323 crore.
Margin, furloughs
The IT services company’s EBITDA margin increased 39 basis points (bps) sequentially to 18 percent in the third quarter. Furloughs adversely impacted operating margins by about 50 bps in Q3.
“Furloughs across the industry and even with us, were very sharp,” Singh said.
Furloughs refer to when clients in the US and Europe refrain from compensating outsourced employees from Indian IT firms for specific days when their operations are suspended, typically during Christmas and New Year.
“So, whatever we lost on the margin front, we should compensate for in quarter four (Q4) and quarter four should see a very significant uptick in margins over quarter three (Q3),” Singh said.
Asked why the company’s margins were lower than those of most of its peers, Singh said Coforge’s operating margin will increase by 150-300 bps once the topline crosses $2 billion (Rs 16,600 crore).
High furloughs also led to lower employee costs in the December quarter. This is because a major part of the revenue from one large transformation deal in the quarter was recorded without an associated employee cost.
Employee benefit expenses fell 5.2 percent sequentially to Rs 1,345 crore.
Employee metrics
In a departure from what many of its peers said in Q3, Coforge will continue to hire employees on the back of unabated growth.
“The number one, number two, and number three objectives of this firm, going into next year, is driving growth. So we will continue to hire to support that growth,” Singh said.
The company has honoured every hiring offer it made in earlier quarters.
“We are looking at net headcount going up at least in double-digit terms,” Singh said, adding that this would be a mix of freshers and laterals.
In Q3, the company’s headcount fell 38 sequentially to 24,607 employees. On a year-on-year basis, the company’s headcount increased by 2,102 employees. Attrition dropped 90 bps on-year to 12 percent in the December quarter.
Generative AI
Singh said although revenue from generative artificial intelligence (AI) is not significantly high, the nascent technology allows Coforge to create more powerful solutions.
“It is creating net new revenues, which is GenAI only. But more importantly, it is helping us reimagine the solutions we offer on all the existing service lines,” Singh said.
In FY25, 40 percent of Coforge’s incremental investment will be in the AI space. He said automation, analytics, product engineering, and business process outsourcing have started taking a “completely different colour.”
Geographical breakup
In a quarter when most IT companies struggled in the North American market, Coforge’s region-wise demand pipeline was almost evenly split.
“We think North America continues to, at least from our perspective, still have a lot of potential helping us drive growth,” Singh said.
In Q3, the “Americas” region contributed about 47 percent of its total revenue, down from about 49 percent in Q2. Europe, West Asia, and Africa contributed 40 percent, down from 38.8 percent. The share of the “rest of the world” increased to over 13 percent from 11.8 percent sequentially.
Also read: Client budgets delayed due to conflicting macro data, says Happiest Minds
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