Brokerage firm Nomura Research has initiated coverage on Coforge Ltd with a 'buy' rating and the target price at Rs 5,050 implying a 14 percent potential upside.
Nomura in its report said that the Coforge's strong growth and improved market value have been driven by several key factors, including a revitalised and secure management team with a solid track record of execution, an increased emphasis on current businesses and the development of new markets, and a restructuring of the company's go-to-market approach.
The sales effort has been rekindled with a motivated sales force and effective incentive structures, and strategic acquisitions have been pursued to enhance capabilities. "We believe Coforge will continue to outperform with 25 percent EPS CAGR over FY23-25," Nomura said in its report.
Coforge, a mid-level IT services company, saw a significant increase in net profit with an on-year growth of 24.2 percent. The company recorded a net profit of Rs228.20 crore during the quarter ended December 2022, despite being a typically slow period. In the same quarter, the company's revenue also experienced growth with an on-year increase of 23.99 percent to Rs 2,055.80 crore.
Based on its performance, Coforge has upgraded its yearly revenue growth forecast for FY23 to 22 percent in constant currency terms. The company remains confident in its previous adjusted EBITDA annual margin guidance of 18.5 percent to 19.0 percent for the same fiscal year.
Nomura said under the leadership of CEO Sudhir Singh, Coforge has experienced a significant acceleration in revenue growth, rising from a CAGR of approximately 6.1 percent during FY15-18 to a CAGR of roughly 16.9 percent during FY2018-22, despite a substantial impact on its travel segment due to the COVID-19 pandemic.
Key changes implemented by the CEO include the hiring of senior talent from major global companies, a four-fold increase in incentives with substantial upfront payments to sales, a GTM strategy based on verticals, investments in acquisitions to enhance capabilities and reach new clients, and a divestment from non-core verticals such as GIS and a focus on other verticals. These changes have brought a renewed focus on execution, leading to improved success rates in securing large deals for Coforge, Nomura report said.
"We expect USD revenue CAGR of 14 percent in FY23-25, with improving margins leading to a 25 percent EPS CAGR. Our TP of Rs 5,050 is based on 23x FY25 EPS (similar to Persistent’s. Our EPS estimates are 6-12 percent higher than consensus over FY24-25 due to our higher margin expansion expectation. Key risks: weaker than expected revenue growth, slow margin improvement, and overhang of large stock sale by Baring PE," Nomura Report said.
A rise in the proportion of offshore components in recently won large deals, combined with ongoing moderation in industry-low attrition rates and improved utilization, is expected to enhance Coforge's margins in FY24. Over the medium term, the company is expected to benefit from operating leverage on sales and marketing expenses.
It's worth mentioning that Coforge has already made significant investments in sales, particularly in the European market, Nomura said. The brokerage house anticipates the EBIT margin to increase from 14.3 percent in FY23 to 15.2-16.1 percent in FY24-25.
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