Coforge Ltd (COFORGE) Q3 FY23 Earnings Concall Transcript

Coforge Ltd (NSE:COFORGE) Q3 FY23 Earnings Concall dated Jan. 20, 2023.

Corporate Participants:

Ankur Agrawal — Head Investor Relations and M&A

Sudhir Singh — Chief Executive Officer and Executive Director

John Speight — Chief Delivery Officer & Head of Business Advisory

Ajay Kalra — Chief Financial Officer

Analysts:

Ravi Menon — Macquarie — Analyst

Vibhor Singhal — Nuvama Equities — Analyst

Shradha Agarwal — Asian Market Securities — Analyst

Rahul Jain — Dolat Capital — Analyst

Rishi Jhunjhunwala — IIFL Institutional Equities — Analyst

Rajiv Berlia — Citigroup — Analyst

Ashish Dash — Mirae Asset Capital Markets — Analyst

Hiten Jain — Invesco — Analyst

Abhishek Shindadkar — InCred Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Q3 FY ’23 Earnings Conference Call of Coforge Limited. [Operator Instructions]

I now hand the conference over to Mr. Ankur Agrawal, Head Investor Relations and M&A at Coforge Limited. Thank you and over to you, sir.

Ankur Agrawal — Head Investor Relations and M&A

Thank you, Cezanne. A very warm welcome to all of you and thank you for joining us today for Coforge Q3 FY ’23 earnings conference call. As you are aware, we announced our Q3 results today. These have been filed with the stock exchanges and they are also available on the Investors’ section of our website, www.coforge.com.

I have with me today our CEO, Mr. Sudhir Singh; our CFO, Mr. Ajay Kalra; and our Chief Customer Success Officer, Mr. John Speight. As always, we’ll start with the opening remarks from our CEO and post that we’ll open the floor for your comments and questions.

With that, I would now like to hand it over to our CEO, Mr. Sudhir Singh. Sudhir, all yours.

Sudhir Singh — Chief Executive Officer and Executive Director

Thank you, Ankur. A very good morning, good afternoon and a very good evening to you — all of you across the world, folks. At the outset, let me wish all of you a very healthy, happy and a meaningful New Year. With that, I shall now share our quarter three fiscal year ’23 performance and the business outlook.

Q3 this year has been a very strong quarter for the firm, despite the fact that it was the shortest quarter and a furlough-ridden quarter. In this quarter, we signed five large deals, which is the highest number of large deals signed in any quarter in the history of our firm. On quarterly order, intake for the firm again has been the highest recorded ever in our history. Our utilization this quarter jumped 300 bps sequentially, our attrition levels came down further to 15.8%, and they are probably now one of the lowest or the lowest across the industry. And finally, this quarter, our 12-month executable signed order book stands at $841 million and that again is the highest ever.

With that overall context, I shall now talk you through the results, the quarterly performance and our assessment of the outlook. Moving on with the quarterly performance, revenue analysis. I’m pleased — very pleased to report that during the quarter, the firm registered a sequential revenue growth of 3.7% in constant currency terms. In USD and INR terms, the growth was 2% and 4.9% respectively. The 170 bps difference between the constant currency and dollar growth was an account of 70 bps of hedge losses and 100 bps came from cross-currency headwinds.

On a YTD basis at the end of the first nine months of the current fiscal, the firm has grown 22.9% in CC terms, 24.6% in INR terms and 16.3% in USD terms. On a Y-o-Y basis, the firm has grown 20.7% in CC terms, 24% in INR terms, and 13.6% in USD terms.

I shall now detail vertical-wise growth for the quarter under review. During this quarter, the BFS vertical grew by 39.3% year-on-year in CC terms and contributed 31.1% to the total revenue. The strong growth came, despite the impact of very considerable softness in our bps mortgage portfolio. Our travel vertical grew 25.6% year-on-year in CC terms, and it contributed 19.3% to the revenue mix.

The insurance vertical revenue declined by 6.8% Y-o-Y in CC terms and contributed 22.1% to the Q3 revenue. The others vertical grew by 24.1% Y-o-Y in CC terms and contributed 27.4% to the revenue mix. Within the others vertical, retail and healthcare now stand at about 8% of global company revenue and the public sector outside India stands at around 7%. These two verticals are the probable next two global verticals that the firm will carve out over time.

Within the geographies, Americas contributed 49.2%, EMEA contributed 40.3% and the rest of the world contributed 10.5% of the revenue. The farming engine of the firm continues to drive the growth of our top customer relationships. We continue to very successfully mine our key client relationships under a structured enterprise-wide key accounts program.

In quarter three, our top five customers grew 5.4% sequentially and top 10 customers grew 3.5% sequentially in U.S. dollar terms. Our top five clients contribute now 23.9% to our aggregate revenues, while the top 10 contribute 36.3%.

We see the current state of our top 10 client relationships offering two distinct advantages to us. First, as you would have noticed, we are not overly reliant on or overly concentrated in any single client relationship. Second, we expect to significantly expand our wallet share in the top 10 clients given the clear success that our key accounts program has driven for us in the recent quarters.

The offshore revenue saw a further pickup and crossed the 50% mark, representing 50.5% of the total revenue in quarter three. You will recall that just nine quarters ago, in quarter two FY ’21, offshore revenue was only 36% of the firm’s revenue. This has been a structural shift in the firm’s operating profile and an important and sustainable margin lever.

With that, I shall now move on to the margins and the operating profits discussion. Talking about quarterly performance margins, and operating profits. Our Q3 gross margin sequentially increased by 133 bps to 33.4%. The significant increase in gross margin in Q3 came about because of, one, offshore revenue contribution increase; two, a 300 bps improvement in utilization; and three, continued increase in billing of graduate engineer trainees hired directly from college.

We believe that the structural shift in the gross margin profile of the firm, augurs well for an increased margin gradient in the years to come. It takes considerable effort to effect a 14% swing in offshore revenue contribution, which we have done. Again, it takes considerable effort to build a campus, hiring engineers at scale, which is now in full play at Coforge, and at a considerable effort to move the needle on utilization by 300 bps in a seasonally short furlough-ridden quarter, which is what we’ve achieved.

Today, as we speak, we have another 1,000 graduate engineer trainees, who are undergoing training. And as they become available over the next four quarters, that should provide a further gross margin [Indecipherable]. It is important to note that our gross margin increase has been driven by these three efficiency levers that I’ve noted above and not, I repeat, not, by currency tailwinds. The entire tailwind on margins on account of rupee depreciation was wiped away by the hedge losses sustained during the quarter. That hedge loss of INR129 million during the quarter created a headwind of 60 bps on the margins.

As we’ve shared in the last two quarterly calls, we are investing aggressively, and I mean aggressively in the front-end leadership and capability build to further drive accelerated growth. As a result of those investments, SG&A as a percentage of the revenue for the quarter was 14.9%, that’s almost a 121 bps increase over Q2 FY ’23. Despite these very significant investments, adjusted EBITDA margin increased to 18.5% for the quarter, the consolidated profit after tax for the quarter stood at INR2,282 million, which reflected a Y-o-Y increase of 24.2% in INR terms.

Moving on to order intake; interesting story, order intake. The shortest quarter of the year has proved to be the most productive for the firm, both in terms of the number of large deals and the order intake registered. We closed five large deals during the quarter, which is the highest number ever recorded in the history of our firm. One of these was a $50 million plus deal within the insurance vertical. Our order intake of $345 million during the quarter was again the highest quarterly intake for the firm. The $50 million plus TCV deal was structured with a specialty insurance carrier, to support its core systems upgrade, as well as servicing and building capabilities in newer areas of operations.

Another $30 million TCV deal was signed with a banking major. This deal was anchored by our data and analytics service line, and involves advanced analytics in financial crime and fraud management, BI reporting, and platform modernization for the next three years.

Americas contributed $208 million, EMEA $113 million and the rest of the world $24 million to the overall order intake. Our executable order book, which reflects the total value of locked orders over the next 12 months, stands at a record high of $841 million compared to $802 million in the previous quarter. This metric which we track closely and have reported quarterly over the last five-plus years is also indicative of strong expected growth beyond just the current fiscal year. We also signed 11 new logos during the quarter.

Moving on to the people metrics; at the end of quarter three, total headcount stood at 22,505. The quarter saw an increase in utilization by 300 bps, and as a consequence, we were able to deliver the volumes with a marginal decrease of 138 people in tech services. Attrition during the quarter further declined to 15.8% in Q3 from 16.4% in in Q2. Employee attrition at Coforge, and I’ve said this often, continues to remain amongst the lowest and probably is the lowest across the IT services industry.

I will now hand over the call to John Speight, Chief Customer Success Officer, for providing insights into our operations and capability creation. John joined the firm around five years back, shortly after I did, and I’ve had the pleasure of having him as my colleague over the past 12 years across organizations. He currently drives our customer success function and oversees key accounts growth and consulting capability build agenda.

Over to you, John.

John Speight — Chief Delivery Officer & Head of Business Advisory

Thank you, Sudhir. I will now touch briefly on our key delivery operation highlights. As you’re aware, effective delivery execution has and continues to be a core part of our customer value proposition. In our insurance business, we successfully implemented an automated underwriting solution for a large U.S. based customer. This resulted in significant reduction in time taken to issue policies and the corresponding reduction in their cost base.

For a global specialty insurance group with offices across the US, South America, UK and Europe, we’ve been chosen as their global strategic partner to work with them in their digital transformation programs. This encompasses the run, the build and transformation across all of their systems and will leverage our end-to-end services, spanning capabilities, such as consulting, digital, data, analytics, cloud and automation.

Before I move on from insurance, I just want to let you know that we were recognized for the first time in the recent Everest PEAK Matrix for application and digital services in both P&C and L&A insurance segments. We were classified as a star performer in the Major Contender segment, a significant achievement for us.

Moving on to banking and financial services; we have successfully completed a very large transition from the incumbent provider at a Tier 1 bank. With the transition completed, we’ve now embarked on transforming the delivery to outcome-based service models. The partnership with this bank has grown on the back of our delivery excellence and we’re moving up the value chain. One such example is the modernization of their business intelligence platforms, that provide advanced analytics services in areas such as financial crime and fraud protection.

In travel, transport and hospitality business, we’ve successfully partnered with one of the global airlines to improve their customer experience when using kiosks. We’ve now rolled out the new kiosk platform at 25 airports worldwide and are currently planning the rollout for further 20 airports. The new kiosk supports 12 different languages and have helped improve the customer experience by significantly reducing the self-service check-in time.

We continue to explore and invest in emerging technologies. Our Metaverse CoE is now operational. The Coforge Metaverse experience center is a virtual reality space that is being used to demonstrate used cases [Technical Issues] industries. We’ve also embarked on a program to use the Metaverse for our leadership assimilation programs on employee onboarding here at Coforge. It’s a great way to deliver value, while we build up our Metaverse capabilities.

Finally, we recently announced a partnership with the Mack Institute for Innovation Management at the Wharton business school. The Mack Institute supports both industry and academic communities, helping to apply innovation research into real-world deployable solutions. This partnership will help reinforce our efforts to enhance our technology capabilities and to help us deliver value-added solutions to our customers.

I would now like to hand over to Ajay for further details on financials.

Ajay Kalra — Chief Financial Officer

Thank you, John. A very happy new year to everyone. Let me briefly touch upon the key balance sheet and tax metrics. Our cash and bank balances at the end of Q3 financial year ’23 stood at $49.5 million, compared to previous quarter — sorry about that, there are some audio issues. Let me begin again.

Let me briefly touch upon the key balance sheets and tax metrics. Our cash and bank balances at the end of Q3 financial year ’23 stood at $49.5 million compared to previous quarter of $50.3 million. Capex spend during the quarter was $5 million. Days sales outstanding were 73 days in Q3 versus 70 days in Q2 in INR terms. In USD terms, the DSO were 68 days compared to 66 days in Q2. The effective tax rate for Q3 financial year ’23 was at 23.3%, as compared to 17.7% in Q2. You may recollect that we had one-time benefit last quarter that we got from one of our foreign subsidiaries, where we were able to take the benefit of net operating losses. Our normalized tax rate for Q3 is around 21.5% and our ETR will continue to be in the range of 21% to 22%.

The operating cash flow for the three months ended 31st December 2022 was at $30.4 million, which is about 69% of EBITDA, the OCF and DSO were impacted due to collection of one of our large clients coming in the first week of January and impacted the DSO by five days.

In addition, I just wanted to give an update also on the Company’s proposed ADR offering. The current market conditions are not favorable and hence ADR listing has been delayed. Though the company remains fully committed to the ADR listing, the company continues to monitor market conditions closely.

With that, I will hand over the call back to Sudhir for his comments on outlook.

Sudhir Singh — Chief Executive Officer and Executive Director

Thank you very much, Ajay. Let me move on with the summing up in the outlook section, ladies, gentlemen. The five large deals signed during the quarter, the highest order intake and I said this earlier in the history, in any quarter, in the history of the firm and finally, the highest 12 month signed order book in the history of the firm and the current point in time, gives us confidence in our ability to drive sustained robust growth in the coming quarter and in the coming year, despite the uncertain macros.

The fact that the farming engine across the accounts is delivering sustained, derisked, robust growth. The change in our client portfolio mix, where we today have 60 plus Forbes Global 1000 client relationships to farm further. The aggressive, very aggressive investments in sales, marketing, tech and functional capability build that we are making, allied with an improving margin gradient that allows us to invest further, gives us further confidence in that assertion that I just made. As a consequence, we are now upgrading our full year revenue guidance to 22% organic CC growth, and we maintain our adjusted EBITDA annual margin guidance.

With those words, and with that, ladies, gentlemen, I conclude my prepared remarks, and I look forward to hearing your comments and to addressing your questions. Back to you folks [Phonetic].

Questions and Answers:

Operator

[Operator Instructions] The first question is from the line of Ravi Menon from Macquarie. Please go ahead.

Ravi Menon — Macquarie — Analyst

Hi. Thank you, gentlemen and congrats on a pretty good quarter. Sudhir, you said that there were significant headwinds in BPM, but despite that you seem to have grown there, so, if mortgage was a headwind, what are the other parts of BPO that actually did grow?

Sudhir Singh — Chief Executive Officer and Executive Director

No, I said that there were significant headwinds in BPS mortgage — BPO mortgage, Ravi. And the numbers that I called out were for the BFS portfolio, which includes the BFS-BPS portfolio. So, the mortgage business saw a considerable decline, but given this very significant momentum that we have ongoing across our broader BFS portfolio, it continues to power ahead with the speed that it has been over the past few quarters.

Ravi Menon — Macquarie — Analyst

Thanks very much. I was saying that specifically, BPM itself seems to have grown from like $25.7 million to $28.8 million. So are there parts of BPM that is still growing out, that’s…

Sudhir Singh — Chief Executive Officer and Executive Director

BPM is growing, but it’s — I mean, as the pieces or the aspects of BPM, the parts of the business across BPM, which are not on the mortgage side are doing very well. We’ve talked about this in earlier calls as well, Ravi. The cross-sell is moving very well. We’ve been able to make forays into the travel BPO space. We’ve been able to very aggressively start getting into the analytic space, which is an allied area. We’ve been able to cross-sell very effectively in the insurance space with the BPS offerings, which for the acquired entity, SLK, were initially only on the BFS side.

Interestingly, in this quarter, the BPM business also signed a $20 million plus deal. So, one of the five large deals that I talked about was a BPM led deal that we closed. Did I answer your question?

Ravi Menon — Macquarie — Analyst

Yeah. Great. Thank you. And one more follow-up on this data and service line. Data integration, given that seemed to have done really well over the last year or so, but this particular quarter, we’ve seen a decline there. I mean is there furloughs or some projects coming to an end? How should we see this?

Sudhir Singh — Chief Executive Officer and Executive Director

Most of the business right now on the data side is BFS. There were very significant furloughs this quarter in the BFS clients that we saw. That’s why you see a temporary blip. Data analytics, we feel very, very good about it. It’s really scaled up multiples over the last two or three years and we see that growth continuing, hopefully accelerating hereon.

Ravi Menon — Macquarie — Analyst

Great. Thanks so much and best of luck.

Sudhir Singh — Chief Executive Officer and Executive Director

Thanks, Ravi.

Operator

Thank you. The next question is from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.

Vibhor Singhal — Nuvama Equities — Analyst

Yeah, hi, good morning, sir. Thanks for taking my question, and congrats on a very strong deal flow in the [Indecipherable] this quarter. So sir, on the deal flow itself, if I could get some color on — as you mentioned, there was a $50 million deal that we booked in the insurance segment. Would it be possible to provide some breakup of the $345 million? I mean, how was it in terms of vertical, what would be the number from banking, from travel and from the other verticals?

Sudhir Singh — Chief Executive Officer and Executive Director

Vibhor, I provided numbers around the geos. I can give you some more color around the five deals and where they came from. Two out of the five deals were from the insurance vertical, which we suspect starting Q4 is going to rebound smartly. One of them was a D&A, data analytics-led deal from the BFS space. The fourth came in from the BPM profile that I talked about. So that’s broadly where four out of those five deals came from. The geo-wise split is what I have given you. If I look at the current quarter, the quarter that got over, most of the large deals was centered around the BFSI space. So they came almost evenly from insurance and from the banking.

Vibhor Singhal — Nuvama Equities — Analyst

Got it, got it. That’s really helpful. Also just wanted to pick your brains on the guidance part. So, we’ve upgraded our guidance — growth in this quarter and maintained the guidance for the margins also. And if — I mean, in this quarter, of course, the growth was impacted because of a seasonally soft quarter. Given the number that we have, that these are really tall asks for Q4, both in terms of growth and margins. Margins, I know you mentioned that we decided to spend more on the L&D [Phonetic] part this time, which can be recovered next quarter itself.

But I think on the growth part, the required rate for the next quarter comes out to be quite steep. So I mean, is this the info that we got in this quarter that’s giving us the confidence or the overall momentum that you are seeing? And a related question to that is slightly a little bit of longer-term. I mean how do you see — again, the next couple of quarters play out in terms of, I mean, U.S. possibly heading into a slowdown? How the client conversations have been around that, and how do you see that deal mix changing because of that?

Sudhir Singh — Chief Executive Officer and Executive Director

No, let me take the questions in order. The first one was a question around the growth that we anticipate in Q4. The guidance that we gave, Vibhor, and we’ve always given consistently is in organic constant currency growth. At the end of the first nine months, YTD, the firm already growing 22.9%. So the 22% — at least 22% constant currency growth guidance by our estimates is a relatively conservative guidance. We believe that we only need to grow in CC terms 3.5% to get there, and clearly, given the momentum that we have given the five deals that we’ve signed, given that we’ve just grown 3.7% in a shorter, seasonally weak, furlough-ridden quarter where mortgage industry was also seeing a very significant drawdown, gives us confidence that we should be able to meet and exceed the annual 22% CC guidance that we talked about. So that’s answer one to question one that came from you.

Second question from you was, how do we see the somewhat longer-term play out? And I did call that out in the commentary that I talked about towards the end. This is a good time in the year, and I — we actually at Coforge believe it’s also a good time in the industry, when the world is looking at uncertain macros to actually lean into growth. That has underpinned our very strong, very committed, very aggressive investments in sales, marketing capability built and you’ve seen that in the current quarter itself.

So given the five deals, which will now start ramping up, I suspect we’ll start seeing the impact effectively from Q1 of next year. This quarter is likely to be a transition. We feel that despite the uncertain macros, despite the fact that there is a lot of ambient noise around what may or may not happen, we’ve been able to start insulating ourselves from a lot of that conversation.

The order executable I told you was the highest ever. The order intake was the highest ever, the number of large deals have been the highest ever. So clearly there is a good ramp for the next few quarters, which hopefully will insulate us even if some of the worst case scenarios start playing out, and we should continue to be on what we’ve always called out as robust growth. And I think it’s going to be a very good time for us to prove that we can deliver sustained growth, even when the market [Technical Issues]. So we’re looking forward to it. We’ll see what happens, but we feel good about the future.

Vibhor Singhal — Nuvama Equities — Analyst

Got it, got it. Great. Thank you so much for taking my questions and wish you all the best.

Sudhir Singh — Chief Executive Officer and Executive Director

Thanks very much, Vibhor.

Operator

Thank you. The next question is from the line of Shradha Agarwal from Asian Market Securities. Please go ahead.

Shradha Agarwal — Asian Market Securities — Analyst

Yeah. Thanks for taking my question. Hi, congrats on a good quarter, Sudhir. Couple of questions, our deal with the insurance has been pretty strong. But somehow that is not reflected in growth. For the last few quarters, insurance has been on a soft trajectory. So do you see there is a delay in deals getting converted into revenue, or is there something else, which is holding back growth rates in insurance? That is question number one. And then I’ll ask the other question.

Sudhir Singh — Chief Executive Officer and Executive Director

Insurance, Shradha, quarter four, which is the quarter that we’re already in, we should see the clear turnaround, and that vertical, that business for us, get back onto a path that it should be. You’re absolutely right, this quarter, we closed two large deals. We’ve had a large deal closure if I remember correctly in the previous quarter as well. It takes a little bit of a time to transition these deals — to lean into these deals. But Q4, the quarter we’re in, insurance should be exactly where it’s been for us over the last four, 4.5 years.

Did you have a follow-up, Shradha?

Operator

The line from Ms. Shradha Agarwal has got disconnected. We’ll move onto the next question from the line of Rahul Jain from Dolat Capital. Please go ahead. Rahul Jain from Dolat Capital, please unmute your audio from your side and proceed with your question.

Rahul Jain — Dolat Capital — Analyst

Yeah. Hi. Thanks for the opportunity and congrats on strong performance. Sudhir, I’m sure you would share the precise guidance for FY ’24 in April. But just to understand the maths now, based on your 12-month order book that is up 20% and also based on multiple conversations with the client and potential pipeline that the company is chasing, is it safe to assume that we may be able to replicate the current growth momentum at least for next two, three quarters, if not beyond?

Sudhir Singh — Chief Executive Officer and Executive Director

It’s a tricky question, and I think you know that yourself, Rahul, as you posed it. We feel good and I’m saying this again, and I wouldn’t say this if we did not really feel good about where things stand right. It’s always a very sweet spot to be in, when you can get into quarter four, the new year is about to start and you have tailwind of five large deals, which will really start delivering from quarter one of next year. Clearly, there is a buffer you’ve talked about it. The order executable being at $845 million, the order intake being at $345 odd million that we’ve looked at.

So the way I would characterize it is, I mean, one doesn’t know the future, but everything that we could have done to insulate ourselves from a deteriorating or a significantly deteriorated macro in the quarters to come, we seem to have done a fair bit of it. We feel given our size, we’re certainly not a large scale IT player, we should be a $1 billion IT services firm. Growth is as much a function of the ability of the firm to wrest wallet share, especially when things are slowing down by leaning into that opportunity, as it is about what is the rate at which the broader market is growing. The broad market is way too big. We still have a very small piece in that sandbox. We think as things change, we should be able to expand wallet share and we should be able to drive, what I would for now characterize as robust growth. Hopefully robust growth, despite the macros going up and down.

And I’ll leave it there, Rahul. I know it doesn’t answer the question completely, but that’s how I would present it.

Rahul Jain — Dolat Capital — Analyst

Maybe Sudhir, just a suggestion, which may help a lot of us is that, I really appreciate that you came out with your first-ever guidance at the most uncertain time, and which somewhere — sales that you have some slight as — and an important word you always keep is, at least, in your guidance, which is also a rare thing to see, which clearly says you have a certain grip or understanding or visibility on the kind of an outlook that you share.

So what if we could — can think of giving guidance on a 12-month forward rolling basis, rather than giving an annual guidance? Because that guidance at the beginning of the year is far more supportive of the thought, but as the year progress, I mean, having a guidance for Q4 now, is not helping as much as it was helping me earlier. So maybe that’s a different aspect, which we could work it over a period of time. Just a small suggestion. Thank you.

Sudhir Singh — Chief Executive Officer and Executive Director

No, I think it’s a great — it’s a fantastic suggestion, Rahul. Thank you very much for that. And you’re absolutely right. The first time we started giving guidance, was around the time that COVID struck and we had very significant exposure to the travel industry, and which is why we thought it was imperative that — we like to think we have a very strong execution engine and a very strong grip on the business, that we step-up to the plate and offer that guidance. I take your point.

The only response I will have to you is, over the last five years if you look at us, every quarter we call out the next 12 months order book, right, which is what we call out as order executable. And if you look at our growth over the last five years, over the last 20 quarters, there has been a very strong correlation between the graph, the order executable graph, and the actual revenue recorded over the next 12 months. So while we can’t — and you will appreciate this, while we can’t keep on giving a 12-month forecast, we do try to give some comfort, some indication around how much is already locked in and I think we have not just a fairly, I’d like to say a very good record in terms of a very strong correlation between the OE movement and the actual revenue that comes over the next 12 months.

So I’ll leave you with that thought, but I take your suggestion, and I think it’s a fantastic suggestion.

Rahul Jain — Dolat Capital — Analyst

Thank you so much.

Operator

Thank you. The next question is from the line of Shradha Agarwal from Asian Market Securities. Please go ahead.

Shradha Agarwal — Asian Market Securities — Analyst

Yeah, hi. Sorry, I got dropped off. Just another question on BFS, sir. Some large IT names have expressed some concerns on capital markets. So from that perspective, what is our positioning in capital market in overall BFS and how do we see macros playing out in that segment?

Sudhir Singh — Chief Executive Officer and Executive Director

So capital markets, buy-side, especially asset and wealth management from our vantage, Shradha, has always been a good happy hunting area. The big change that’s happened within our BFS portfolio, what’s actually driven growth for us really stemmed from that $105 million, four-year, eight-month deal that we’ve announced about a year and a half back. The very significant ramp up in that bank. The very, very significant ramp up in some of the other top 10 relationships that we have.

So if I were to look at it, if I were to start characterizing how we look at BFS, we still see spends even on the capital markets buy side, when it comes to enterprise-wide modernization. We see a lot of interest coming in around low code/no code, and we see data solutions still in demand. So as we see it and if I were a betting person, we would still like to say that for the next few quarters, irrespective of the macros, irrespective of what we are already picking up, irrespective of the fact that at BFS, we’ve seen very significant furloughs in the quarter that closed, that momentum from a Coforge BFS business perspective, should sustain.

We’ve seen nothing as a leading indicator given the pipeline that we have, the locked orders that we have to indicate that it will go down. That’s how I would put it. There are issues, there are headwinds but then given the momentum we have, getting into that, we feel good about where we are and we think it is likely to sustain.

Shradha Agarwal — Asian Market Securities — Analyst

Yeah. Thanks, Sudhir. That’s good to hear. Another thing is of the five large deals that we closed this quarter, was any deal driven by any vendor consolidation exercise taken by any large account? And were we on the favorable side of it, or any cost take-out deal in the pipeline, that increasing intensity of cost take-out deals versus transformational deals? Anything on the deal pipeline and the deal closure, with respect to vendor consolidation if you can talk about?

Sudhir Singh — Chief Executive Officer and Executive Director

Yeah, I’m just reflecting on it as we speak. The $50 million order deal was clear vendor consolidation. That came in if I remember right, about $55 million over three years, and that was a win, that was a clear win. The BPM deal was again interesting, smallest deal, but very material for us $24 million deal, that again was a vendor consolidation. Cost is increasingly at play, John, you might want to add some perspective here, but in almost all of these five, cost and transportation seem to be going hand-in-hand — and transformation, I beg your pardon. John, over to you for your comments.

John Speight — Chief Delivery Officer & Head of Business Advisory

Thank you, Sudhir. Yeah, I mean we are seeing an increased interest in cost optimization programs. Obviously, vendor consolidation is one of those levers that can be applied. I expect to see more and more use cases around costs coming through. We also see an awful lot of interest around process efficiency, again looking to drive down to automate and reduce costs through efficiencies.

Shradha Agarwal — Asian Market Securities — Analyst

All right. Thank you, Sudhir. If I can squeeze in one last question. So your margin guidance, according to my calculation still implies at 200 bps plus sequential improvement that is required in 4Q, to even get to the lower end of the guidance band. So what do you think are the levers available to us to bring — to have such a sharper margin improvement exercise to happen in 4Q?

Sudhir Singh — Chief Executive Officer and Executive Director

Yeah, Shradha, if you reflect back, the first two quarters of this year, our margins were higher in the first two quarters of the previous year. Last year, our quarter four margin, always has a gradient [Phonetic]. Last year, our quarter four margin was 20.4%. We need to add 170 bps over quarter three in quarter four to get to the lower end of the guidance.

At the current point in time, we feel good about it and I’ll tell you why. We feel good about it, A, because there was a 100 bps, impact in the current quarter because the mortgage drawdown — a lot of our mortgage business is transaction linked. There is a lag by — between the volumes going down and the costs being taken out. The cost is now nearly up, corresponding to the lower volumes. So that 100 bps is a natural flow that we will get, getting into next quarter.

The other pieces again are the specific around the GET numbers that we have. I talked during my commentary around the fact that we have 1,000 GETs who are now getting built, which is a second lever it comes in. And the third lever, of course, will continue to be a modicum of operating leverage, that we’ve always got around margin.

So, our calculation shows we need to go up by about 170 bps, and we feel that we should be able to do it. We need to deliver about 19.7%. Last year, we delivered 20.4% in quarter four, given the fact that the offshore engine has scaled up far more than it was at the same time Q4 last year, we feel we will deliver, and that’s why we made the discussion that we will deliver on it.

Shradha Agarwal — Asian Market Securities — Analyst

Just to add here, somehow my calculation shows that you need to get to 20.8% margin in 4Q, which is a 230 bps improvement. So is this discrepancy because of your guidance being in constant currency and we looking at dollar terms — sorry, we looking at reported EBITDA margin? Just want to get a confirmation on the margin guidance.

Sudhir Singh — Chief Executive Officer and Executive Director

Ajay, do you want to address that?

Ajay Kalra — Chief Financial Officer

Yeah, Sudhir. Basis — thank you, Sudhir. Shradha, basis our calculation, the margin uptick that is required is 170 basis points. It’s between — actually between 150 basis points to 170 basis points depending upon where our revenues will go. Since there is an uptick of the revenues from quarter three to quarter four, that will also help us improve the margin from a year perspective as well. So you need to factor that as well, while calculating the margin uptick. We can talk in detail offline.

Ankur Agrawal — Head Investor Relations and M&A

Shradha, if there is — yeah, if you can — we can have a follow-up with you on the exact calculations and…

Shradha Agarwal — Asian Market Securities — Analyst

Sure, sure, sure. Thanks, Ankur. Thanks, Ajay. Thanks, Sudhir. Yeah.

Sudhir Singh — Chief Executive Officer and Executive Director

Thank you, Shradha.

Operator

Thank you. The next question is from the line of Rishi Jhunjhunwala from IIFL Institutional Equities. Please go ahead.

Rishi Jhunjhunwala — IIFL Institutional Equities — Analyst

Yeah. Thank you for the opportunity. Sudhir, a couple of questions. Firstly on the margin side, right, so if you really look at it over the past five, six years, our gross margins have continuously trended down even if — even though we have delivered industry-leading growth. And you have recently talked about the expansion on the gross margin side in the near term as well. I know to some extent, it was also in the last two years because of the pain on the travel and hospitality side. But just wanted to understand if you really look at us going up in terms of the margin bands, where do you think the gross margin profile ideally should be? And do we have those levers or is it structurally that we are going to remain around these levels?

Sudhir Singh — Chief Executive Officer and Executive Director

So, Rishi, you can look at this quarter, we walked the talk, right? I mean, the talk that you heard from us over the last two or three quarters we walked it, our gross margin has jumped sequentially by 133 bps and we believe very strongly, it’s going to jump again sequentially in quarter four over quarter three. So your question is valid, but I would point you to our numbers for the current quarter. This quarter, gross margin has jumped very significantly. Now at 33.4% and 32% last quarter and we believe we’re going to be certainly north of 33.4%. If I were a betting man, I’d say, more than 34% for sure in quarter four. So I hear you. All I’d say is just look at current quarter, we were the talk.

Rishi Jhunjhunwala — IIFL Institutional Equities — Analyst

Understood. The other question is, if we look at the trajectory of your year-on-year growth in executable order book for the last three quarters, we have seen some bit of acceleration from 16 to 20 from 1Q to 3Q. And this is despite the fact that during this period, the mark — the overall macro has continued to become worse or at least, sentimentally worse. And if I look at it from the perspective of where your next 12 months or FY ’24 growth could be, even at 15% growth, it would imply that your executable order book as a proportion is probably one of the highest that we’ve seen in the past four, five years. So just wanted to understand in terms of conversion of this order book into revenues, how much of it would be dependent on macro not becoming significantly worse or the other way to put it is, what could be the risk to this revenue conversion, if at all?

Sudhir Singh — Chief Executive Officer and Executive Director

There’s no risk to the revenue conversion. This is locked in orders, Rishi. What we call out every quarter, 12 month locked in orders, right? This is not a pipeline. This is what’s already locked in. The risk clearly remains between the revenue that we going for versus what we already have locked in. So very rarely do we find that what’s already locked in kind of washes away.

If you were to go back and look at the order executable that we [Indecipherable] and the actual revenue that we recognized, I would disagree with that assertion that getting to 15% means that we have to significantly up what we already have. I think the order executable that we are at or currently, mathematically, nobody knows how it’s going to pan out in the future, should make 15% a slam dunk for the future.

Rishi Jhunjhunwala — IIFL Institutional Equities — Analyst

Yeah. No, I was actually asking the other way around, that it looks like you will definitely do at least that much. So, was there a risk to that? That’s what I was asking.

Sudhir Singh — Chief Executive Officer and Executive Director

So may be there was a compliment that I did not grasp.

Rishi Jhunjhunwala — IIFL Institutional Equities — Analyst

Yes, yes, absolutely.

Sudhir Singh — Chief Executive Officer and Executive Director

No, we haven’t — we like to hope that we will and I’ve obviously been trying to wordsmith my way out of here by talking about robust growth, sustained growth. We’ve always said robust growth, sustained growth for the last two or three years. You can — and I know that you know our revenue growth numbers over the last three years. We still think despite the ambient noise, despite macros, which even in the best case are likely to deteriorate somewhat, we’ve got enough of a tailwind to be able to push into the storm if a storm does arise, and do — and still deliver that robust growth, Rishi. That’s about all I can say, and I know you understand that. But we feel good about it. There’s just a lot of good tailwind, there is momentum building up at the right time right now as we see on next year.

Rishi Jhunjhunwala — IIFL Institutional Equities — Analyst

Yeah, yeah. Fair enough. And one last question. Can you give some color on AdvantageGo? I mean, it’s clearly has been a differentiated product on the insurance side historically done really well. Just wanted to understand where it is — how do you think about it progressing over the next couple of years. Are there any changes required in terms of growth or positioning of that product?

Sudhir Singh — Chief Executive Officer and Executive Director

We realized about six months to nine months, two to three quarters back, Rishi that we definitely needed change within that business. That business has not been growing at the pace that the rest of the organization has. To the extent that now it’s likely just about 1% — maybe 1.2%, 1.3%, Ajay, keep me honest on this, of our aggregate revenues, right.

So this quarter, when I say this quarter, I mean quarter three, we onboarded Ian Summers, who was the CEO of Sequel, our biggest competitor, our principal competitor in that same London Lloyd’s reinsurance market. He’s now become the business leader. He is the person who is going to be driving this now in the London Lloyd’s reinsurance, the Bermuda and the US market going forward.

So long story short, abbreviating my answer, we recognize the fact that we needed a fresh pair of eyes to look at the business, we recognize the fact that that business was actually pulling the firm down and I’m not talking down in absolute terms but in relative terms and that we needed to relook at it. Last quarter, I talked about the fact that we’ve relaunched our underwriting platform, and Ian and team are reconstructing the overall front-end. Next year, not quarter four, next year, we think we should see in percentage terms, it’s a small business in percentage terms, the growth from that business, it should be materially higher than what the firm will require. But again, absolute terms given the size not very material.

Rishi Jhunjhunwala — IIFL Institutional Equities — Analyst

All right. Thank you so much.

Sudhir Singh — Chief Executive Officer and Executive Director

Thanks very much, Rishi.

Operator

Thank you. The next question is from the line of Rajiv from Citi. Please go ahead.

Rajiv Berlia — Citigroup — Analyst

Thank you for the opportunity. Just one question. If I look at your executable order book or order intake, it looks really good — robust but at the same time, if I look at the headcount, it is only up 2% Y-o-Y and the utilization is almost at its peak level. How do we connect all these three data points?

Sudhir Singh — Chief Executive Officer and Executive Director

This is the first quarter, Rajiv, where you would have seen us not adding to the headcount and that’s largely because in the last four to seven quarters, we very consciously kept our utilization low because there was a lot of supply-side disruption. So we were operating at about 77%. Today, with the attrition rate having come down, in our case, to only about 15.6%, 15.8%, today, given the fact that where the market is joining ratio. Joining ratio is the number of people who are actually joining versus the offers you roll out having gone up almost 20% to 25% over the last three to four months. We felt confident enough to be able to take back our utilization up by 300 bps within a quarter, which both you and I know it’s a furlough-ridden shorter quarter, right? So that released a lot of people that we could get into the bidding pieces.

For us, starting Q4, once again, you will see the same cycle, which has been going on for the last eight to 10 quarters continuing, net headcount will go up. The second thing I want to point you to is when we talk about headcount reduction, most of it in the current quarter was led by the mortgage BPS business. It’s not a very material business, but it’s a business that we do largely linked to volumes and we have to react very, very quickly to volumes going down. So last two quarters has been back [Indecipherable].

Otherwise where we stand today, I talked about this in my commentary as well, we have 1,000 GETs, graduate engineer trainees who have either completed training or are undergoing training and it’s a six-month training in our case, and are available to build anytime, right? So we’re not short of people who will be needed to staff the large deals that we won. And starting Q4, you will start seeing the net headcount back on the trajectory it’s been at. This was a utilization correction quarter, it’s been a very significant jump in utilization in a seasonally weak furlough-ridden quarter. Next quarter onwards, we’ll try to keep utilization at around 80%, 81%, possibly take it a little bit more and the rest is obviously going to come in by headcount indeed.

Rajiv Berlia — Citigroup — Analyst

Sure. Thank you.

Sudhir Singh — Chief Executive Officer and Executive Director

Thanks, Rajiv.

Operator

Thank you. The next question is from the line of Ashish Dash [Phonetic] from Mirae Asset Capital Markets. Please go ahead.

Ashish Dash — Mirae Asset Capital Markets — Analyst

Yeah. Good morning. Thanks for giving me the opportunity. So, Sudhir, when you’ve spoken in your initial remarks, you talked about retail and public…

Operator

Sorry to interrupt you, Mr. Dash. The audio is not clear from your line. Please use the handset mode.

Ashish Dash — Mirae Asset Capital Markets — Analyst

Is it audible? Better now?

Operator

Yes, sir.

Ashish Dash — Mirae Asset Capital Markets — Analyst

Okay. So thanks for giving me the opportunity. So, Sudhir, in your initial remark, you talked about two sub-verticals, retail and public. And you expect that to perform well going ahead. So just want to know, what type of — what growth you reported in those verticals in Q4, and what is the outlook going ahead?

Sudhir Singh — Chief Executive Officer and Executive Director

So, Ashish, this is the first time, you’re right, where we called out the contribution. We are not calling out the growth numbers on a quarterly basis in this quarter or in the quarters to come till this scale up a little bit more. Outlook, we think is positive for both of them. We’d like to think very positive, which is why we’re planning to carve them out at some stage as standalone verticals to become vertical number four and number five for the organization.

John, do you want to add anything else to that? Or Ajay?

John Speight — Chief Delivery Officer & Head of Business Advisory

Nothing from me, Sudhir. I think you covered it well.

Ashish Dash — Mirae Asset Capital Markets — Analyst

Okay.

Ajay Kalra — Chief Financial Officer

Nothing from me, Sudhir, as well.

Ashish Dash — Mirae Asset Capital Markets — Analyst

So, my second question is on your TTH vertical. So you’ve reported a large deal in Q1 FY ’23. So last two quarters you have not talked about any deals on TTH level vertical. So we have good quality, good competencies in TTH segment, as well as client base also looks strong. So again, I just want to understand like, are we winning deals, how is the deal momentum in the TTH vertical and what kind of growth you’re expecting in FY ’24?

Sudhir Singh — Chief Executive Officer and Executive Director

So TTH this year should be and I’m talking TTH more from a North America and a Europe perspective. We are anticipating pretty robust growth, 25% plus and I’m talking broad numbers at the current point in time, Ashish, from that piece itself. What’s working very well for us, you’re right, last two quarters, we haven’t declared a material large deal. But the farming engine something that John drives for the organization, right, has continued to chip away very, very efficiently.

Our travel transportation, obviously, has rebounded, both the passenger side and the cargo side. There seems to be a lot of confidence and a lot of commitment around spends going up. So spends are going up, we’ve been riding that wave, we’ve been farming, we have used the COVID period to rest wallet share, in many cases, become the only partner in a client situation. So we’ve been riding that wave, we’ve been growing through the farming engine on the travel side. It’s not as if there are no large deals that we are pursuing, we are but we’ve had none to report over the last two quarters.

Ashish Dash — Mirae Asset Capital Markets — Analyst

Thanks. So that’s it from my side. Thank you.

Sudhir Singh — Chief Executive Officer and Executive Director

Thank you, Ashish.

Operator

Thank you. The next question is from the line of Hiten Jain from Invesco. Please go ahead.

Hiten Jain — Invesco — Analyst

Hi, Sudhir. One question. So, how do you think about the margins over the medium-term, say next two to three years? Now, given that there are definitely tailwinds on the supply side, we’ve got one of the lowest attrition in the industry, at the same time, the growth is looking quite strong. So it depends on how you think about investments in your business. Do you think investments will accelerate from here on? Or do you think operating leverage will be good enough for you to continuously report margin expansion going forward given growth continues to be strong?

Sudhir Singh — Chief Executive Officer and Executive Director

Hiten, we’re very committed to margin expansion. We don’t believe that growth for the sake of growth is the only goal that we should be going after. There are three things that gave us a lot of confidence, and which have allowed us to keep investing even at a time like this when macros are uncertain on the margin front.

First is what I called out, our offshore revenue as a percentage of overall revenue is now 50.5%. The offshore factory has grown very significantly, our CQGR in the last six or seven quarters for offshore revenue has been almost 8%. So that structural tailwind means along with the increased utilization, along with the fresher factory, the GET factory that is working, we think we should be able to move the margin needle materially.

The only call, the execution call that Ajay and I have to take is when does one actually start letting the — when does one start moderating investments and letting the — some of these margin levers start impacting the bottom line. This quarter and I talked about this earlier in response to a question, which I had come from the IIFL team, gross margin has already gone up very significantly. So it’s more a question of margin. At what point in time, do we stop this very aggressive investment in sales, marketing and capability?

We believe — I’m just trying to make sure that I characterize this correctly. We believe that even as we stand as a firm, there are enough levers for us in the short term if we wanted to do a material uptick — driver material uptick around margins. So a year, two years down the line, margins should be up. We have done a planning exercise where we planned around what we should look like at $1 billion roughly where we are versus at [Phonetic] $2 billion and we would expect the margin profile to be superior — significantly superior at $2 billion given the operating leverage that will come in.

Ajay, would you like to take this and add some more color around data on this?

Ajay Kalra — Chief Financial Officer

Sure, Sudhir. As we have seen in this quarter, our gross margins have improved, but we’ve also done an investment. And as we go ahead in the near future, at least we will accelerate those investments and keep investing for future growth. However, as Sudhir had mentioned, we will take the call on when to rein in those investments and start expanding the margins and that should happen in a couple of — in one year or — from one year onwards.

Sudhir Singh — Chief Executive Officer and Executive Director

And then I’m not sure we’ve answered your question. But if you have a follow-up, feel free to step in.

Hiten Jain — Invesco — Analyst

No, no, it does give me a lot of colors. Thank you.

Sudhir Singh — Chief Executive Officer and Executive Director

Thanks a lot.

Ankur Agrawal — Head Investor Relations and M&A

Thanks, Hiten. Operator, just keeping a time check here. We have time for one last question, please. And then of course, we can individually follow up with everyone who has any questions. Over to you, operator.

Operator

Thank you. We’ll take the next question from the line of Abhishek Shindadkar from Incred capital. Please go ahead.

Abhishek Shindadkar — InCred Capital — Analyst

Thank you for accommodating me and congrats on a good quarter. Sir, just one question. It seems that broadly for the quarterly earnings, we are hearing that the vendors have been able to defend vendor consolidation deals better. Any color in terms of who is losing right now in the market and any particular mechanisms in terms of pricing delivery? What’s working for, generally, our business? Any color could be really helpful.

Sudhir Singh — Chief Executive Officer and Executive Director

I’ll request John to step in as well. The only thing I can tell you is, we certainly are not losing as you would have figured out. But John, would you like to talk about some of the levers that we see in play?

John Speight — Chief Delivery Officer & Head of Business Advisory

Yeah. No problem, Sudhir. I think one of the biggest things that we’ve been very, very successful at over the last few quarters, yes, it’s actually being translating IT into business outcomes. We — it’s really resonated well with our customers. Obviously, it’s all based on a very, very strong execution by us on delivery. But what we have actually accelerated has been the use of consulting, consulting-led solutioning and this has actually paid significant dividends in the positioning of us with our customers and also the types of conversations we’re having with the customers and actually, how we can then take that to closure on deals.

Sudhir Singh — Chief Executive Officer and Executive Director

[Indecipherable]?

Abhishek Shindadkar — InCred Capital — Analyst

Thank you. That’s helpful.

Sudhir Singh — Chief Executive Officer and Executive Director

Ankur, over to you. Thank you.

Operator

Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Sudhir Singh, CEO and Executive Director Coforge Limited for closing comments. Over to you, sir.

Sudhir Singh — Chief Executive Officer and Executive Director

Thank you very much, ladies and gentlemen. I know it’s — it was early morning for most of you in India. And for — and possibly late evening for anyone who joined over from the states. Thank you very much for your questions. Thank you very much for your suggestions and your comments. We’ve always said this and we’ve always maintained the insights that you offer mean a lot to us, they help us significantly. Once again, thank you very much for it and once again, very, very happy New Year to you and yours. Thank you. Good night.

Ankur Agrawal — Head Investor Relations and M&A

Thank you, everyone.

Operator

[Operator Closing Remarks]