Coforge sends mixed signals, Street divided

Digital services and solutions provider

Coforge, which has set a target to double its revenue in the next 4-5 years while underlining a challenging demand environment in FY24, has put a dampener on the stock sentiment.

The company announced this plan at its investor day on June 19, 2023.

Shares of this digital services and solutions provider have risen 20 percent in one month, though from the high of Rs 5,890 in December 2021, the scrip has rather fallen to Rs 4,523 on June 20.

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Management commentary

Coforge outlined plans to double revenue to $2 billion in the next 4-5 years by scaling up key accounts, new verticals, and geographies while focussing on partnership-led growth and mergers and acquisitions.

Coforge is also focussing on 16 key priority accounts, from where it expects 45 percent of incremental growth in FY24.

Talking about delivery capabilities, the technology company’s management sees growth to be driven by hyperscalers, platform partnerships, cloud data and Artificial Intelligence, and digitisation and automation.

However, Coforge also pointed out that the demand environment remains uncertain and a recovery in the second half of FY24 is unlikely. This has already been factored in the revenue growth guidance for FY24. The company has reiterated its revenue growth guidance of 13–16 percent for FY24.

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What analysts say

Although Coforge flagged off a challenging spending environment in the near term, especially among BFS clients, JM Financial Institutional Securities noted that a strong 12-month executable order book lends visibility as the company does not expect any leakage here.

The brokerage firm believes Coforge’s FY24 revenue visibility is the highest among Indian IT Services players at this stage.

Meanwhile, Nuvama Institutional Equities noted that Coforge has a strong track record of acquisitions-- four in the last seven years-- adding around $200 million to its current revenue.

It also expects the technology company to deliver the fastest growth in the sector in FY24, despite macro uncertainties on the back of strong growth in the Travel, Transportation and Hospitality (TTH) and Insurance verticals.

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Valuation

“At 20 times FY25E PER (Price to earnings ratio), we find valuations reasonable as well,” said JM Financial Institutional Securities.

On the contrary, Motilal Oswal Financial Services believes that the robust outlook has already been baked into the price. This means there is barely any potential upside from here on.

Even Jefferies said that the company’s rich valuation of 27 times PE (Price to Earnings ratio) and promoter stake sale overhang could limit an up move in the stock.

About the company

NIIT Technology was rebranded as Coforge in 2020 after Baring Private Equity Asia acquired a majority stake in the company. Coforge focuses on select industries with three key units — BFS (Banking and Financial Services), Transport and Insurance. The remaining businesses were clubbed under others, which house three key verticals — Retail and Healthcare & Pharma, Hi-tech & Manufacturing, and governments outside India.

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