Coforge Ltd (COFORGE) Q4 FY23 Earnings Concall Transcript

Coforge Ltd (NSE:COFORGE) Q4 FY23 Earnings Concall dated Apr. 27, 2023.

Corporate Participants:

Ankur Agrawal — – Head, M&A and Investor Relations

Sudhir Singh — – Chief Executive Officer & Executive Director

John Speight — Customer Success Officer

Ajay Kalra — Chief Financial Officer

Saurabh Goel — Deputy Chief Financial Officer

Analysts:

Vibhor Singhal — Nuvama Equities — Analyst

Abhishek Bhandari — Nomura — Analyst

Sandeep Shah — Equirus Securities — Analyst

Shradha Agrawal — AMSEC — Analyst

Ashwin Mehta — Ambit Capital — Analyst

Gaurav Rateria — Morgan Stanley — Analyst

Manik Taneja — Axis Capital — Analyst

Abhishek Kumar — JM Financial — Analyst

Abhishek Shindadkar — InCred Capital — Analyst

Presentation:

Operator

[Starts Abruptly]

Will be in listen-only. And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

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, M&A and Investor Relations

Very warm welcome to all of you. We thank you for joining us today for our Coforge earnings conference call. As you are aware, we announced our Q4 and full year FY 2023 results today. They have already been filed with the stock exchanges, and they are also available on the Investors section of our website.

I have with me today, our CEO, Mr. Sudhir Singh; our Chief Customer Success Officer, Mr. John Speight; our CFO, Mr. Ajay Kalra; and our Deputy CFO, Mr. Saurabh Goel. As always, we’ll start with the opening remarks from the management team. And post that, we will 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 & Executive Director

Thank you very much, Ankur, and a very good morning, very good evening to all of you across the world, ladies and gentlemen. Thank you very, very much for joining us. I’m pleased to share that despite the uncertain macros, quarter four has been a successful quarter for the firm.

Our growth in quarter four has not just been robust. It has equally importantly been broad-based across our verticals, across our service lines, across regions and across client size-based cohorts. We remain steadfast in our belief that organizations and teams that accelerate execution are always the best placed to face and negotiate headwinds like the ones that the industry faces today. We remain focused on execution, and we remain committed to driving robust, sustained and profitable growth despite the ambient challenges in fiscal year 2024 as well.

I’m also pleased to share that fiscal year 2023 was a milestone year for the firm, and we crossed the US$1 billion mark. We believe that we shall look back at fiscal year 2023 as not just the year where we crossed the US$1 billion mark, but also equally importantly, as a year where we laid the foundation for an accelerated growth journey towards the next milestone of US$2 billion through the very significant investments to enhance the firm’s capabilities that we did make in fiscal year ‘2023.

Our employees continue to be the architects of our growth journey and their commitment reflected over the years is one of the — in one of the highest employee retention and the lowest employee attrition rates that Coforge prides itself on and has driven us and will continue to drive us in the future as well.

We marked the US$1 billion revenue milestone, the firm will, starting tomorrow, gift all active employees with an Apple iPad. With that quick context, let me start with an overview of our performance in quarter four fiscal year 2023.

Starting off with the revenue analysis. I’m pleased to report that during the quarter, the firm registered a sequential revenue growth of 4.7% in constant currency terms, 5% in US dollar terms and 5.6% in Indian rupee terms. The growth, particularly important in an environment like this, was broad-based.

The BFS vertical grew 4.5% quarter-on-quarter in CC terms. The insurance vertical grew 5% quarter-on-quarter in CC terms, the travel vertical grew 2.54% quarter-on-quarter in CC terms and the other verticals together grew 6.4% quarter-on-quarter in CC terms, clearly broad-based growth.

Our top 5 clients and our top 10 clients grew 23.9% and 26.6% year-on-year, respectively, and they contributed 23% and 35.5%, respectively, to our overall quarter four revenue. As I’ve remarked in earlier calls, we derive a lot of our confidence in driving surprise-free sustained growth from our lack of overdependence on a single or a group of client relationships.

Our strong sequential revenue growth performance comes despite headwinds in the BFS sector, particularly in our more business portfolio. Overall, as a firm, we see the growth of the firm during the quarter as a reflection of the very strong execution engine that the farm has built, the deep client relationships that remain resilient and our ability, even in an environment like this to continue to identify, to chase and to close large deals.

I shall now move on to the margins and the operating profits coming here. Our quarter four gross margin sequentially increased by 71 bps, following an earlier sequential increase of 133 bps in quarter three. The gross margin for quarter four was 34.1%. Our quarter four adjusted EBITDA margin sequentially increased by 109 bps and was at 19.6% for the quarter.

Our ability to not just hold the line but to expand gross margin and EBITDA margin sequentially once again reflects the strong execution ethos of the organization. The increase in adjusted EBITDA was driven by a material increase in utilization by a continued increase in offshoring revenue percentage and the relative absence of furloughs that being formed in quarter three.

The consolidated profit after tax for the quarter, excluding one-off charges stood at INR2,327 million. The reported PAT for the quarter was INR1,148 million. The quarter saw two one-off expenses. The first is on account of expenses linked to the USD1 billion milestone celebrations, primarily the gift of an Apple iPad to each one of our 21,000-plus employees to our 6:56 cat. The second is on account of provisions done against ADR expenses so far.

Moving on to the annual performance, and I’ll start once again with the revenue analysis. We registered a consolidated revenue of USD11.7 million billion and we have clocked a growth of 22.4% in CC terms for the year. In U.S. dollar terms, that translates to 15.6% and in Indian rupee terms to 24.6%. You will recall that at the beginning of fiscal year ’23, we had provided a revenue growth guidance of around 20% CC growth for FY ’23. We had subsequently revised it upwards in quarter three to at least 22% CC growth.

Our revenue performance for the year is in line with our track record of meeting and exceeding the revenue guidance every year for the last six years. Vertical wise performance for the year was as follows. BFS grew 47%, travel grew 21.5%, insurance declined 3.7% and the other segment grew 23.1% in CC terms. Geographically, perhaps, Americas grew 16.3%, EMEA grew 37%, and the rest of the world grew 7% in CC terms during the year.

Annual performance, margins, operating profits, the commentary reads as follows. We are pleased to report that in fiscal year ’23, our gross margin increased by 55 bps to 32.5%. The increase has allowed us to significantly expand our investments in sales and capability build throughout the year. The adjusted EBITDA margin for the year stood at 18.3%. It is important — I think very important to note that during fiscal year ’23, we incurred a hedge loss of INR239 million versus a hedge gain of INR224 million in fiscal year ’22. And just that adverse swing on the hedge gain loss has led to a negative impact of about 60 bps on the EBITDA margin.

Commentary around the order intake. What are the highlights of our quarter four performance was the continued blocking of large deals and a very high level of order intake despite the strong prevailing headwinds across our industry. The total order intake for the quarter was US$301 million. This is the fifth consecutive quarter where we have clocked an order intake of more than US$300 million.

With our performance in Q4, we closed fiscal year ’23 with the highest ever recorded yearly order intake of US$1.3 billion. Equally important, particularly at a point like this and a time like this, during the quarter, we signed two large deals. They came from the BFS and from the travel sector, respectively.

From an annual perspective, fiscal year ’23 was a landmark year in that we signed 11 large deals through the year, of which two were over US$50 million TCV and buying were over US$30 million TCV. Our deal pipeline continues to be both robust and resuming, as exemplified by our quarter four performance. We expect this deal momentum to continue in quarter one fiscal year ’24 as well. The executable order book, which reflects the total value of locked-in orders over the next 12 months stands at a record US$869 million. This number was US$720 million a year back.

The confidence that you will see in our revenue forecast guidance for fiscal year ’24 in this commentary later also stems from the next 12 months committed order book, which continues to be unimpaired. 10 new logos were signed during the quarter, taking the total count to 44% for the full financial year. Finally, as I round up the section, I wish to note that during the quarter, we also signed up as a preferred technology partner with one of the largest retailers in the world. This is not a large deal. But our partnership status now and the size of the wallet that we will address at this retailer is what makes this a material event for us.

People front, good metrics again, our total headcount at the end of quarter four fiscal year ’23, stood at 23,224, and we saw a net addition of 719, which is an increase of 3.2% in net to our headcount during the quarter. So this net headcount increase has come despite a very significant expansion in utilization by 120 years. Utilization during the quarter stood at 81.5%.

Our LTM attrition for the quarter fell further and fell again, and is now at 14.1%. We remain and we’ve talked about this in the past, we remain one of the lowest, if not the lowest attrition firms across the industry.

With those comments, I will now hand over the call to John Speight, Chief Customer Success Officer for providing insights into our operations and our capability creation initiatives. John, all yours.

John Speight — Customer Success Officer

Thank you, Sudhir. I shall now touch upon the highlights of the quarter related to our delivery operations. In the insurance sector, Coforge continues to grow its upgrade business. All on the back of successful implementations and upgrades across the US and Europe, a real positive move in this quarter has been the successful expansion into new areas, Australia and New Zealand.

For a leading US life and annuity insurance carrier, we successfully completed a major enterprise-wide business transformation program to simplify their processes, drive operational efficiencies, thereby, delivering significant cost savings. We also helped the top 100 US carrier successfully complete a multiyear tax compliance program enhancing their legacy policy opening systems to ensure their life insurance products were compliant with the latest IRS regulations.

Our AdvantageGo business successfully launched its new ecosystem leaving our proprietary underwriting work range that connects the best-of-breed data providers to provide real-time exposure in sites to select. In our TTH business, we successfully enabled a leading airlines major transformation journey, involving one of the largest and most complex migrations of airline passenger services systems. We leveraged our travel domain capabilities, our global search engineering team, our proven agile delivery framework and more than 12,000 business test case automations to execute the migration successfully and on plan.

Moving to our BFS business. Our Tier 1 bank recently appointed us as their strategic data and analytics partner to help them accelerate their cloud adoption, analytics and visualization initiatives across the bank. We are leveraging our strong partnerships with AWS, Snowflake, Databricks, Microsoft to help drive their transformation programs by delivering best-in-class solutions. Pecker continues to be a strength for Coforge. Recently, we closed a major 18-month program of work for another global bank in, which we are combining data, quality engineering capabilities to help drive their digital transformation agenda.

We’re also seeing sustained growth in our sales force business, underpinned by our new industry-specific solutions. For example, we have recently rolled out our Broker 360 Management Solution for insurance customers. MuleSoft Salesforce Service Cloud and Experience Cloud, this solution provides our customers with a complete view of the activities performed by their agents and brokers.

The growth was recognized by IHG with Coforge named as a leader in the sales force application managed services and has a variety of stars in sales force market implementation. We continue to explore and invest in our central excellence in collaboration with our technology partners, we develop expertise that enable the creation of digital humans. We’re now working with our customers to help them integrate digital humans along with AI and chat-bots to create like-like customer experiences within the experts.

Our continued focus on Metaverse and Web3 technologies was recently recognized by HFS when they awarded us Enterprise Innovator status in their 2023 Verizon Support for Metaverse Service Provider. Recognizing the importance of cyber security, we have invested to extend our services in this area, adding threat intelligence to our extensive portfolio. We can now leverage our advanced capabilities in areas such as dark web and deep web monitoring, brand protection and cyber threat intelligence to help secure the safety and privacy of information access.

To conclude, I will update you on our constant endeavor to up-skill employees globally. We continue to invest in technical and domain training and certification programs. Our focus continues to be on core engineering skills, such as AWS, Pega, Appian, Azure, ServiceNow, GCP, ISTQE. However, we have now also extended our learning programs for trained teams in areas such as how to navigate leadership transitions and how to build the select teams.

With that, I conclude the update on the operations. And I would now like to hand over to Ajay for further details on the financials. Over to you, Ajay.

Ajay Kalra — Chief Financial Officer

Thank you, John. Let me briefly touch upon the key balance sheet items and tax metrics. Our cash-in-cash and bank balances at the end of financial year 2023 stood at $73.4 million compared to previous quarter of $22.4 million net of working capital to deterring. The capital expenditure during the quarter was US$4.3 million. Day sales outstanding were 61 days in Q4 versus 73 days in Q3 in INR terms. In US dollar terms, the DSO were 59 days for quarter four compared to 68 days in quarter three. The effective tax rate for quarter four financial year 2023, excluding the one-off charges which Sudhir mentioned, was at 18.3%, and for the full year financial year it was 20.4%.

The operating cash flow for the full year 2023 was about 68% of the reported EBITDA. As you are aware, Coforge had filed an ADR for which we had incurred an expense of INR523 million rupees over the last 18 months. These expenses were reflected as recoverable from the selling shareholders in our balance sheet. As the market conditions continue to be unfavorable for the ADR issue, basis accounting prudence, a provision of INR523 million for these expenses has been made in Q4 FY 2023. We will continue to watch market conditions to see if a favorable window opens for the ADR.

Additionally, the board has approved an amount of US$11.5 million towards gifts to all the employees and celebrations across all locations for achieving US $1 billion milestone. An amount of US$9.8 million worth gifts has been incurred in quarter four financial year 2023 and the balance celebration amount will be incurred in quarter one financial year 2024.

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

Sudhir Singh — – Chief Executive Officer & Executive Director

Thank you very much, Ajay. And as I mentioned exactly a year back ladies gentlemen, you know then quarterly conference call we had started planning towards our next revenue milestone of US$2 billion. And fiscal year 2023, the year that closed, was all about proactively putting the right building blocks in place for that goal and beyond.

During the year, we have significantly invested in and bolstered the front-end leadership teams, our capabilities and the execution machinery across the organization. During the year, we also initiated a new organization structure to position us well for this journey to the US$2 billion revenue milestone.

The new org structure focuses on scaling existing key accounts to US$100 million and US$50 million each, leveraging a broader ecosystem of alliances and deal advisers, charging up the revenue hunting engine and creating differentiated service offerings. The core verticals will work as global integrated business units and the service lines have been reclassified into six global horizontal business units, which will be market facing and actively contribute to revenue growth.

The new org structure has already been rolled out effective 1st of April 2023. This new structure that has now settled with teams that are now clearly primed, the continued large deal wins, the strong executable order book, a resilient deal pipeline, anticipated broad-based growth across our core businesses gives us confidence that we should continue to drive robust, sustained and profitable growth in fiscal year ’24 as well.

For fiscal year ’24, our revenue growth guidance is 13% to 16% growth in constant currency terms. On the profitability front, we expect our gross margin to increase by about 50 bps in fiscal year ’24 over fiscal year ’23 and adjusted EBITDA margin to remain at similar levels as fiscal year.

With that, ladies and gentlemen, I conclude our prepared remarks, and all of us open the floor to all of you for your comments and your questions. Thank you.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.

Vibhor Singhal — Nuvama Equities — Analyst

Yeah. Hi. Good morning, everyone. Thanks for the taking my question and congrats on a very strong performance yet again. I just got accustomed to getting surprised by the company every quarter. So Sudhir, basically, if I could just start the visibility that you have for the guidance for FY ’24, we ended the year with an order backlog 12 months executable order backlog, which is up 21% on a Y-on-Y basis. And we are guiding to basically the revenue growth of 13%, 15%. So just wanted to take your take on what is the visibility that you have, let’s say, towards the top end of the guidance given that we are ending the year at such a strong growth in the executable order book. So does that mean that you might expect some slowdown on a Y-o-Y basis? It’s not necessarily a decline, but will be a disposition on a Y-on-Y basis, the order inflow in the first half of the year. Or do you think the demand environment remains strong enough for us to be able to do the guidance and, of course, take it as we see it during the course of the year.

Sudhir Singh — – Chief Executive Officer & Executive Director

Well, Vibhor, mathematically we need to clock roughly around 3% sequential growth every quarter over four quarters on an average to get 15%. If you look at our track record around the execution, the guidance that we’ve given at the beginning of the year over the last two years, we’ve been able to revise at both those years upwards and then exceeded by the time the year ends.

So 13% to 16% clearly is something that we believe is in the realm of the possible. The RAM that we have because of the quarter four growth, the fact that large deals pipeline continues to be resilient and large deals continue to be closed also gives us a lot of comfort.

The order executable number, which is the next 12-month orders booked at $869 million is more than — is roughly about 20% more than where it was at the same time last year. So there’s a lot of comfort that we derive from that as well. Margin velocity has continued unimpaired.

Order intake has been at more than $300-odd million for five quarters running. So we feel that the guidance that we’re giving you is clearly in the realm of the possible. Our intent, as always, will be to try to hit the upper end, and hopefully, if all goes well try to exceed it also over time.

Vibhor Singhal — Nuvama Equities — Analyst

Got it, Sudhir. That’s really helpful. Really get together. My second question was on the margin front. So I think this year also we saw a very good expansion in the gross margin front, but slightly lower at EBITDA. But of course, as you had mentioned that we are investing a lot in our sales capability. For the next year also, you just guided to sales in that we’re looking to expand our gross margin for 50 basis points, but the overall EBITDA margins — adjusted EBITDA margins might remain flat.

So just wanted to understand, I mean, do you believe this higher than — I mean, the last year kind of investment in sales and marketing to — will continue and that will continue to have that gap between the gross margin expansion and the EBITDA margin expansion. And just a related book-closing [Phonetic] question, if we could just maybe get a broad idea as to how much would be the gap between reported adjusted EBITDA margins in FY 2024?

Sudhir Singh — – Chief Executive Officer & Executive Director

Yes. So the second question is something that I’m going to deflect to Ajay..

Vibhor Singhal — Nuvama Equities — Analyst

Yes, sure.

Sudhir Singh — – Chief Executive Officer & Executive Director

As far as the margin issue is concerned, a very key point to note also is that if you look at FY 2023 performance of the firm, there’s a 60 bps negative that has come just on account of the hedge gain loss, right? So the 18.3% that we reported for fiscal year 2023 would have been 60 bps higher had the hedge gain loss not pan out the way it has. Going into FY 2024, we are confident of — of a continued expansion in gross margin from where we are right now, but we are equally committed to making sure that most, if not all of it, gets funneled into additional investments into capability build, into a solution built, into sales enhancement. It’s a tough macro. We do want to meet the guidance. We do want to exceed the guidance if it’s possible, and the intent is going to be to keep pressing the pedal and make sure that the capabilities and the investments are helping us power growth at timings. Ajay, would you like to take question number two, please?

Ajay Kalra — Chief Financial Officer

Sure. The difference between the EBITDA and the adjusted EBITDA is primarily the cost of employee stock options. The current year options, the cost would be a good decline and would be around 60 bps for the next financial year. However, the auctions, which are given in the current year, they are not factored in there and we will update that in our next earnings call.

Vibhor Singhal — Nuvama Equities — Analyst

Got it. So it’s going to be north of 60 basis points, 60 basis points is from earlier ones, plus on top of that, whatever the cost of subsidiaries will be, that will be over and above that.

Sudhir Singh — – Chief Executive Officer & Executive Director

That is correct.

Vibhor Singhal — Nuvama Equities — Analyst

Perfect. Thanks to everybody for your valuable time and wish you all the best.

Sudhir Singh — – Chief Executive Officer & Executive Director

Thank you, Vibhor.

Operator

Thank you. Next question is from the line of Abhishek Bhandari from Nomura. Please go ahead.

Abhishek Bhandari — Nomura — Analyst

Thank you, and good morning gentlemen. I had two questions. First is on the insurance vertical. Finally, we have started seeing some sequential growth momentum picking up. If you could help us understand how should we think about this vertical in FY ’24 given that it has been a laggard, and we have been trying to do some leadership changes. Are you seeing a sustained momentum of growth coming back here?

Sudhir Singh — – Chief Executive Officer & Executive Director

Abhishek, the answer is a clear unqualified, yes. It’s been a 5% sequential growth. The way we look at our insurance businesses, our insurance business on the P&C side is largely focused on commercial specialty, small and medium ones. That place the transformation spends are continuing, and our partnerships are working very well. So there’s a clear continued growth vector that applies there.

The second thing that’s happened on the insurance side is our expansion into new geos within the insurance vertical has played out very well. I talked about 10 new logos, 4 of them actually came from insurance across APAC largely centered around Australia. So that element is working well.

On the L&A side, there is pressure when it comes to discretionary spending, but looking at our top 10 clients in that space, looking at a grounds-up view. We think growth there, again, is going to be resilient. So the answer — the short answer to your question is, yes, we believe the turnaround that we’ve seen actually it’s a fairly significant turnaround that we’ve seen on the insurance side gets sustained. What I do also want to call out is, next year, this year, if you look at the dispersion across business units, it was very stark in our case. BFS was just on a tier, insurance was pulling us down. Next year, the guidance that we’ve offered, we believe all the three core verticals will more or less be in line centered around that growth guidance number and deliver growth numbers that will be roughly similar. So insurance should turn in a performance, where the growth should be indicatively around 15% for the year as we see it now.

Abhishek Bhandari — Nomura — Analyst

Got it. Thank you. sir. The second question is on your longer-term margin outlook. While for this year, your aim is to improve 50 bps on GM and refunnel that into sales and marketing. But eventually, where would you want to stabilize on your sales and marketing expenses. We are already closer to 14.5% kind of number. Do you think maintaining this kind of S&M is necessary for the growth to remain where that is or eventually you can taper it off to more like a 12% to 13% number what we have seen in the past.

Sudhir Singh — – Chief Executive Officer & Executive Director

So Abhishek, six years back, the S&M of the firm was roughly around 19%. We brought it down very drastically through COVID all the way down to 12.5%. We’re now at about 14-odd percent. The way we look at adjusted EBITDA versus S&M investments is the plan that we had internally around hitting a $2 billion mark in visage that had $2 billion revenue the firm will have an adjusted EBITDA that is at least 150 bps higher than where we are. And on the outside, all the way up in a good scenario, 300 bps higher than where we are. So it’s obviously going to be a pull and a push depending on the year. This year is a tough year. We want to keep pushing the pedal to make sure growth is maximized. And hopefully, some of the results of these investments will play out next year, possibly even this year in taking the revenue needle and the revenue growth rate is much higher.

Abhishek Bhandari — Nomura — Analyst

Thank you, sir, and all the best for FY 2024.

Sudhir Singh — – Chief Executive Officer & Executive Director

Thanks very much Abhishek.

Operator

Thank you. Next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.

Sandeep Shah — Equirus Securities — Analyst

Yes. Thanks for the opportunity. Congrats on — contribution. Sudhir, the first question is in terms of entering–

Operator

I think your voice is not very clear. May I request you use the handset, please.

Sandeep Shah — Equirus Securities — Analyst

Yes. Is it clear now?

Operator

Yes.

Sandeep Shah — Equirus Securities — Analyst

Sudhir the first question, entering FY 2024, do you believe most of the portfolio-specific issues are largely behind in terms of cohort where you are now turning positive even on insurance?

And second related question, are you witnessing any client-specific issues because of the increased macro pressure, especially with the exposure with some of the regional banks in some of your acquired SMK in the mortgage business?

Sudhir Singh — – Chief Executive Officer & Executive Director

Sandeep, thanks for the question. Portfolio-specific, we believe when I just answered the question, insurance is on a clear turnaround. Portfolio-specific, we also believe that the dispersion across the business units in terms of growth is not going to be as stark as we sign fiscal year 2023. And the growth, which is very important in a year like this, growth should be broad-based. I expect our core verticals to show broad-based growth. I expect our service lines to show broad-based growth. I expect growth across geos to be broad-based. And I expect client cohorts, I can’t specifically call out one or two clients individually, but client cohorts top five, top 10, top 20, top 50 should all be resilient and should be more or less it in line with the kind of guidance that we provided and the planning that we’ve done.

Client-specific regional banks, our exposure is minimal. The only material exposure that we have is to the relationship that we have with Fifth Third Bank. It is largely centered around operations, not technology. I am speaking to you after having hosted the COO and the CIO in Bangalore the day before. That’s a relationship that is only likely to grow. I see absolutely no contraction. We see absolutely no contraction. So, that’s how I would characterize things that we see today

Sandeep Shah — Equirus Securities — Analyst

Okay, okay. And in terms of adjusted EBITDA margin, when we have given the guidance at the Q3 result, we were knowing about the forex hedge loss, which may be there for the nine months plus prediction for the fourth quarter. Despite that, there is a miss on the guidance as a whole. And how do you see the forex hedge loss entering into FY 2024 as a whole? It will continue to pay you on adjusted EBITDA margin? And also a related question, when do you expect your investment into sales marketing capability building would be largely over because I think despite a robust industry-leading growth, I think the SG&A leverage is not turning out the way it should have been.

Sudhir Singh — – Chief Executive Officer & Executive Director

So I mean, when we look at the numbers that we’ve delivered, 60 bps negative was on account of it. You’re right, nine months was baked in, but currency has been volatile through the year. Our exposure to Europe is far more than our peers. And you know this, almost 40% of our revenue in this quarter has come from Europe-based lines. And that’s been one plane.

The second, of course, is gross margin has continued to climb very starkly. We could through the quarter have decided that we will not invest anymore and meet the $18.5 million guidance. But we’ve taken a conscious call to make sure that we keep investing because FY 2024 is going to be a year which we do not see necessarily as a doom and gloom, normal commentary that we are hearing. We see clear opportunities in the terms. We see spaces like commercial speciality, SMB. We see spaces like CPB in banking. We see spaces like airlines, airports, hospitality as places where demand is likely to be resilient and in some cases, growing actively.

So the intent was to make sure that we continue spending. We’re at about 14.5 odd percent on S&M. We would be absolutely okay with taking that number overtime all the way up to 15% and capping it there. So that’s how we see it overtime.

In the current context, given the uncertainty in the macro, the primary imperative is to meet the guidance that we’ve offered and a very strong incentive that all of us carry is to try to exceed it also if it is possible.

So that’s how we’re looking at it. That’s why we invested. And that’s why we took a very conscious call that we would continue investing even why gross margin was going on, was going up and not just focus on meeting 18.5%.

Sandeep Shah — Equirus Securities — Analyst

Okay. Thanks. And the question on the ForEx hedge line expectation in the FY 2024?

Ankur Agrawal — – Head, M&A and Investor Relations

Ajay, would you like to take that?

Ajay Kalra — Chief Financial Officer

We expect that, if you see over the last one year, the movement — currency movement and the hedges have been very, very sharp. And the INR has depreciated very sharply and which has actually led to the losses that were there in financial year 2023.

In financial year 2024, if the currency stays where there is obviously the loss would be much lower. And it will be — will not feel the gain. But if the currency continues to decline in future, these losses could be higher. So, it all depends upon how the currency movement happens in the future.

Sandeep Shah — Equirus Securities — Analyst

Okay. Okay. And just a bookkeeping sir, in terms of the ADR expenses, I think the process has been started more than a year back, so why the provision now? And you are saying when the ADR listing happens it will be recovered from a selling shareholder.

Ajay Kalra — Chief Financial Officer

Yeah. So these expenses are for the ADR, and these were recoverable from the shareholders. So as we started doing the ADR, the expenses were accrued and were recorded as recoverable from the shareholders.

However, given the situation and the market condition we are in. And there is — obviously, we are committed to the ADR, but there is a clear — there is no clear visibility when that will happen.

So from an accounting prudence perspective, we have taken a provision in this quarter. And this still remains recoverable from the shareholders. It’s a provision we have not written this off.

Sandeep Shah — Equirus Securities — Analyst

Oh. Thank you. All the best.

Ajay Kalra — Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from the line of Shradha Agrawal from AMSEC. Please go ahead.

Shradha Agrawal — AMSEC — Analyst

Yeah. Hi. Come back to the good revenue execution, so just one question on the margin trend. So the margin miss in this quarter was entirely because of hedge losses? Or was there something else also that led to margin hit against what was expected earlier?

Because if I look at the hedge loss item, it was close at INR13 crores last quarter was INR14.5 crores that weakness to a around. So not much of a change on the Q-on-Q basis, but margin expectation was about 70% what we have delivered in just 110% different.

Ankur Agrawal — – Head, M&A and Investor Relations

Well, you’re right, Shradha but margin just come in at north of about 19.5%, right? So there was really nothing that was terribly unexpected. We could always have, and I said this in response to the earlier question, we can always have toned down our spending through the quarter. We met the EBITDA numbers, but we took a very conscious call to not to continue to spend, and we will continue to spend in quarter one as well.

As I said earlier, the deal pipelines are resilient. We expect quarter 1 also the deal pipeline to be resilient. So the last thing we want to do at a time like this when there is revenue pressure is to miss the revenue opportunity that exists out in there in market. Hence, we took a conscious call to do it. There was nothing on the margin front that came as a material negative surprise to the management.

Shradha Agrawal — AMSEC — Analyst

Because if I look at the tailwinds that would have worked for us in this quarter was cost [Indecipherable] improvement in utilization and hedge loss not been materially different from what it was in last quarter. But still, our margin is — was close to 60 bps versus what we had guided to. So was just looking at was there anything exceptional that went into beyond the hedge loss that we have been talking.

Sudhir Singh — – Chief Executive Officer & Executive Director

No. More than 100 bps increase in margin is a fairly significant increase. 170, obviously, has always been especially in a year like that. If you look at our margin in FY ’23 versus FY ’22 and you compare that performance with some of our peers, I think we’ve held up very, very strongly. Even the 40 bps decrease that you see on an annual basis, 60 of that was accounted for — by a hedge gain loss in. Net of that, margins performance perspective on a yearly basis went up to 20 bps in a very, very tough year.

So that’s how I would characterize it, Shraddha. We remain confident around the margin guidance that we’re giving for fiscal year 2024. We will hold the line at the number that we have had on the adjusted EBITDA front, and we will continue to push to meet the revenue guidance and hopefully try to exceed

Shradha Agrawal — AMSEC — Analyst

Sure. Thanks. And the next question is, we’ve had an impressive performance across client bucket. But if you look at the top five client performance, that’s relatively compared to other buckets, a bit soft. So is there any client-specific challenge or was it broad-based softness is relative to other buckets that prove relatively softer.

Sudhir Singh — – Chief Executive Officer & Executive Director

No. And I think in this case, the classic case of success being its own enemy, right? If you do very well as a firm and then you start looking relatively, there’s bound to be a cohort that we underperformed versus the others. There’s absolutely no issue with clients. Client relationships are resilient, client relationships are strong. client relationships are strengthening. And if I look at my top 5 or top 10 clients, when we look internally at gross margins, we actually see margins expanding there. So we feel very, very solid about this. From a pipeline perspective, from a resiliency perspective, from a from an ability to cross-sell and improve our foot in their perspective.

Shradha Agrawal — AMSEC — Analyst

And sir, the last bit, the salary hike cycle remains as of 1Q and — what is the kind of margin drop that is expected in first quarter? And what is the quantum of hike that we are touching.

Sudhir Singh — – Chief Executive Officer & Executive Director

Surely hikes will happen as committed to our employees. It’s not just an issue of giving them a hike — you’re not giving them hike — I want to have — absolutely nonnegotiable. Salary hikes on an average will be lower than the numbers that we’ve seen in terms of increments over the last one — day one. When the supply side was stressed, we went — we went out took a step out with higher than ordinary increments, and that’s reflected in the very lower vacation that we have. So from our vantage salary hikes will be lower. — margin — the margin impact, however, will be more or less in line with the same kind of margin drops that we’ve seen in the past. Quarter 1 for us normally is about a 16.5% adjusted EBITDA quarter. Quarter 4 is somewhere around a 19.5% adjusted EBITDA quarter, and we expect the same seasonality to be out. So it should be more or less the same by quarter in FY ’24 as it was in FY ’22

Shradha Agrawal — AMSEC — Analyst

That’s great. And then one last question, if I can squeeze in. In BFS, do you see any delay in deal conversion cycle or any impact on the pipeline buildup given the macros at BFS?

Sudhir Singh — – Chief Executive Officer & Executive Director

BFS, Shraddha, we see a very significant deceleration next year in growth. This year, BFS for us has gone 47%. There’s no scenario under which we expected to register that kind of a growth in fiscal year ’24. So the way we look at it is BFS will more or less fall to the 15% to 16% kind of growth range, 13% to 16% or 15% to 16% kind of growth range from a 47% growth that we registered in FY ’23 in that space. There is a clear slowing down. There is clear cost pressure, but BFS is playing out in interesting ways, right? When you look at us, within BFS, we really play in only four areas. We play materially in asset and wealth management, we play in retail and commercial banking, we play in central banking and we play in fintech disruption.

Now in this space, run the bank is where most of the pressure is, that entire run the bank space, there are significant cost pressure to try to drive cost out through automation through transforming the workforce, to managed services through extreme offshore. Change the banks, especially security, specialty data, specialty compliance is still resilient. So those are the areas from which we will still see, we believe, around 15% yearly growth but the number will come down very drastically from the 47% that we saw. That’s how we see it, and that’s how I would answer it. Did I answer your question?

Shradha Agrawal — AMSEC — Analyst

Yes, yes. Thank you. And all the best for immediate quarter.

Sudhir Singh — – Chief Executive Officer & Executive Director

Thank you, Shraddha

Operator

Thank you. The next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead. Yes. Hi. Can you hear me all right?

Sudhir Singh — – Chief Executive Officer & Executive Director

Crystal clear.

Ashwin Mehta — Ambit Capital — Analyst

Most of my other questions have been answered. Just one clarification. I missed the point in terms of how much is the expense for iPad in the next quarter?

Sudhir Singh — – Chief Executive Officer & Executive Director

Ajay, all yours?

Ajay Kalra — Chief Financial Officer

Yes. Ashwin, the impact of the gift would be additionally iPads be only a couple of hundred k, but there are other celebrations that have been planned and total expenses for the $1 billion celebration is $1.7 million in the next quarter.

Ashwin Mehta — Ambit Capital — Analyst

Okay. Okay. Thanks. I think that’s the only thing.

Operator

Thank you. The next question is from the line of Gaurav Rateria from Morgan Stanley. Please go ahead.

Gaurav Rateria — Morgan Stanley — Analyst

Hi, thank you for taking my question. So two questions. Firstly, what proportion of our business would be linked to cloud, whether it is migration or development work on the cloud? Secondly, a lot of people have talked about 2023 to be a year of cloud optimization. Are you seeing that in your own client base? And what is your expectation with respect to which service offering is going to see a slowdown, which service offering going to be more resilient in the current macro context. Thank you.

Sudhir Singh — – Chief Executive Officer & Executive Director

I’m sorry, can you build on what you mean by cloud optimization because we’ve been talking about cloud optimization for the last decade. So what do you mean by 2023 being a year of cloud optimization?

Gaurav Rateria — Morgan Stanley — Analyst

A lot of the surveys that is being done with the CIOs are talking about that people overcommitted to the cloud spend and 2023 is where they are trying to optimize and reduce it and then it’s a temporary issue. But you wanted to hear it from you in terms of have you seen anything similar to that?

Sudhir Singh — – Chief Executive Officer & Executive Director

Well, I mean, let me take the second question first. What you’re talking about is something that does impact hyperscalers, and I think that information is in the public is, right? The hyperscalers have called on the revenue numbers, so clearly the cloud migration activities are not seeing a degradation, but they are clearly seeing a deceleration. So the numbers were that the data base it, and that obviously is the hard growth being straight away from the numbers at the high escalating up. So we do see that.

But our play and I suspect the play of most of the SIs like us is less around the migration piece. It’s more around how do you enable operations on the cloud. It’s more around how do you make sure that ROI on work that is done on the cloud is measurable, especially in an environment like this. And it’s more around everything that you talk about in innovation terms, how does that get translated on the cloud.

From our vantage, the cloud service line is a material service line. We would not expect it to grow at a slower pace than the rest of the firm, but possibly at a slower pace than the pace that we recorded in fiscal year ’23. So that’s how we’re seeing cloud spend translating into revenue from our point of view, paying out. Did I answer your questions, both your questions?

Gaurav Rateria — Morgan Stanley — Analyst

Yes, that’s very helpful. So any particular service offering that you’re seeing like more impact under the current macro context in your portfolio than others? That would be helpful. Thank you.

Sudhir Singh — – Chief Executive Officer & Executive Director

So I’ll tell you the ones that we see actually expanding and the ones that are more impacted, and this is all relative, this is not absolute. So I don’t expect any service offering to start deploring. Service offerings where demand is very positive, still going. The first one is Nocor, Nocor, particularly Norcor, within low core Norcor. The demand there is strong. It is solid. It is resilient. The second one in an environment like this is integration. So integration continues to be unimpeded.

And the third one, I classify as being data, especially more on the analytics side than on the Tech Data Services side. Those three areas, clear bright spots. Product engineering still a bright spot. People are talking about transformation going away, but increasingly, what was the legacy ADM business is under pressure. But product engineering, which fundamentally is all about full snack developers under a scrum pod based models, continued demand despite the slowing down.

So those are the areas that we see on a relative basis we see demand outpacing the other service lines. Again, on a relative basis, tying this back to your earlier question, cloud on a relative basis, the demand has gone down compared to the other service. So cloud, clearly an area that is cloud, infra, clearly an area in most of the verticals with the exception of travel is a space that is under stress.

Travel, of course, as a vertical continues to be buoyant, right? When I look at our travel client base, we see a more committed, a more confident spend on technology for the next 12 months because of a return to profitability, because of the increased business demand, particularly airports and airlines. So there even cloud is visiting. But for the others I would stick with what I am just called out.

Gaurav Rateria — Morgan Stanley — Analyst

Thank you so much.

Sudhir Singh — – Chief Executive Officer & Executive Director

Thanks, Gaurav.

Operator

Thank you. Next question is from the line of Manik Taneja from Axis Capital. Please go ahead.

Manik Taneja — Axis Capital — Analyst

Hi. Thank you for the opportunity. Just wanted to get your thoughts around the fact that we’ve seen our offshore revenue mix increase materially over the course of last three years. How do you see this playing out over the next 12 to 24 months? And also a related question to our segmental margin performance. What is driving the significant drop-off in terms of our segmental margins in India as well as America? Thank you.

John Speight — Customer Success Officer

Sure, so I’ll take question number one around offshore and Ajay, I request the Saurav or you to take question number two. Offshore, we’re at about 51 odd percent right now, Manik. I believe from our size, all the journey up to $2 billion, the cap will be about 54, 55. I don’t expect us to be galloping towards that cap anytime soon. If you look at us over the last eight quarters, you’ll find that the rate of offshore revenue increase has been decelerating. Last quarter, again, as a payoff point. So that’s how we see it. We’re at 51. We used to be at 36 about two, two and a half years back. So we’ve obviously galloped our way to 51. I see the pace of growth now decelerating, and possibly inching towards a 53, 54, if all goes well. Segmental margins, Ajay, all yours.

Ajay Kalra — Chief Financial Officer

Yes, Saurav, would you like to take that question?

Sudhir Singh — – Chief Executive Officer & Executive Director

Okay. Thank you, Ajay. So I think the reason why we are looking at little stress in margins, a little drop in margins between India and US. So there are two factors there. One, obviously the growth that has come in, there are investments that have been done at the front end. So when we look at our margins for the geographies, it also includes the investment that has come in, there are investments that have been done at the front end. So when we look at our margins for the geographies, it also includes the investment that has gone into S&M. So the large factor coming is actually the S&M investments and the capability investments that have been done at the front end.

Manik Taneja — Axis Capital — Analyst

Sure. Thank you, and all the best for the future.

Sudhir Singh — – Chief Executive Officer & Executive Director

Thank you, Manik.

Operator

Thank you. The next question is from the line of Abhishek Kumar from JM Financial. Please go ahead.

Abhishek Kumar — JM Financial — Analyst

Hi, good morning and thanks for taking my question. See our guidance and order book conversion it appears it is at the lower end of what we have achieved historically. But still it needs $250 million to $300 million of additional revenues coming in through new deals, etc, through FY 2024. Now in the current environment, where most of our peers have seen unforeseen ram downs, or instances of vendor consolidation, etc. Do you see any risk to the guidance that we have given? And have you seen in our client base, you know, any instances where we might have lost out in a vendor consolidation scenario to larger peers? Thank you.

Sudhir Singh — – Chief Executive Officer & Executive Director

Sure. I mean, there’s always risk, Abhishek, its the question of whether that’s a theoretical risk or a practical risk. Look at our track record, the guidance that we’ve given at the beginning of the year is a guidance on revenue that we’ve always met and actually exceeded. And our record really over the years has been somewhere around quarter two or quarter three, we go ahead, revise it, and revise it upwards, and then close the year and close it ahead of the revised guidance that we provided. So I mean, if the question is, is there a risk to the guidance? I guess the honest answer to that is there’s always a risk to any guidance, but practically do we see a risk and how significant is the risk? We don’t, we feel pretty confident is how I would call it out of the numbers that we provided of meeting them.

And as I’ve said repeatedly on the call, the intent will be to exceed them and we’ll see how the year panther. On a client basis, we have seen absolutely no instance with any material client where under a consolidation exercise, we got edged away. It’s a question that I’ve received a lot. I understand there are some theoretical concepts out there that large size players can come in and start displacing the mid sized ones. We don’t believe in it. We don’t buy into it. We have not seen it, and we will not allow it. If there’s one thing we pride ourselves on, it is execution. Execution means being in the trenches with our clients and knowing what’s going to happen to their business and what their decision pattern is in the quarters and the months to come. We like to think we’ve done an exceptional job over the last six years of doing that. And at this point in time, we’ve seen absolutely no displacement out be at it under any circumstance, absolutely no displacement. So that’s the answer to the question that you posed, Abhishek.

Abhishek Kumar — JM Financial — Analyst

Thank you and all the best.

Sudhir Singh — – Chief Executive Officer & Executive Director

Thanks.

Operator

Thank you. The next question is from the line of Abhishek Shindadkar from InCred Capital. Please go ahead.

Abhishek Shindadkar — InCred Capital — Analyst

Hi. Thanks for the opportunity, and congrats on a good quarter. I just wanted to understand the growth rates in the fresh order intake and the executable book. So last year, the executable book growth was lower than the fresh intake while this year, it is the other way around. So how should we read that from a perspective of the quality of book and the tenure of book? If you can explain that, that could be helpful. Thank you for taking my question.

Sudhir Singh — – Chief Executive Officer & Executive Director

Very welcome, Abhishek. Thanks for the question. I mean, I can’t pass through the order intake versus executable numbers on the spot. But what I can tell you is, if you look at the last six years, Abhishek, and I’m not talking one, two or three years, look at the last six years. If you look at the movement on order executable, which we call out every quarter and you track that with the actual revenue growth delivered over the next 12 quarters, there’s been a very, very strong correlation.

I did point out that we closed the quarter with an order executable number of $869 million. That number is 20% higher than where the same number was at the same time last year. So we derive a lot of comfort from an order executable piece.

The other thing also that I very specifically called out is even in a quarter like quarter four, two large deals got signed and we did call out the quarter one that we’re already into, almost a month into is a quarter where we expect the deal velocity, large deal velocity will content. So a lot of the confidence comes from that. Order executable has had a very strong correlation to actual revenue growth. And our intent will be to make sure that we don’t lose that correlation in the year to come.

Abhishek Shindadkar — InCred Capital — Analyst

That’s helpful. What I was trying to understand is that fresh order intake growth lower than the growth of executable order book over the next 12 months. Historically, I mean, the assumption right now is that there are a lot of cost efficiency deals, which are larger in tenure. So that should have been reflected in these growth rates also, while the near-term transformation deals or shorter term projects are more subsiding what the thought process general perception is. So should we read anything from these two growth numbers and correlate to the mix of book or maybe we are thinking too far?

Sudhir Singh — – Chief Executive Officer & Executive Director

Saurabh, you are closer to these numbers than I am, do you want to take a side on the answer?

Saurabh Goel — Deputy Chief Financial Officer

Yeah. So I think last year, when we looked at order intake growth being higher than the executable, I mean we had a large deal coming in, which was spanning over a five-year period. So what is happening this year is I think most of the deals that have come in, they are around a three-year period. So I think when you look at intake as the growth in the intake, it also is a function of five-year versus three-year deals getting signed. So that’s one.

But as Sudhir mentioned, when you derive comfort from the next year projections, that actually comes in from the 12-month executable, because every deal we carve it and derive what will be the next 12 months or 24 months or 36 months revenue. So, I think it’s — it’s more about one or two large deals getting signed, which is longer-term period, and that’s where the intake growth in a particular year would be reflected very, very high. But I think there is nothing more to read beyond that. But when we look at our projections, our immediate growth numbers for next six to 12 months, the comfort that we derive is more from a 12-month executable order.

Abhishek Shindadkar — InCred Capital — Analyst

Perfect.

John Speight — Customer Success Officer

This question around client outlook and order is coming quite a bit. Do you want to provide some quick commentary around what you’re seeing in the key accounts?

Saurabh Goel — Deputy Chief Financial Officer

Yes. I mean I mean you’ve actually or one of the points I was actually going to flag up. I see quite a lot of benefit from our positioning and the fact is that, you mentioned the relation — the deep relationship, the bottom-up approach. We’re in the trenches. We’ve always prided ourselves on execution. And this has actually positioned ourselves very, very well where there are significant cost out because they come to us with our technology capability to drive those cost takeouts. So I actually see as a positive sign may respect for us as an organization.

Ankur Agrawal — – Head, M&A and Investor Relations

Thanks, John. Thanks, Saurabh. Thank you, Abhishek.

Abhishek Shindadkar — InCred Capital — Analyst

Thank you for taking my questions.

Ajay Kalra — Chief Financial Officer

That was the time we had for the last question, and we can take other questions off-line with everyone. Go ahead.

Operator

Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Sudhir Singh, CEO, Coforge Limited, for closing comments. Thank you and over to you, sir.

Sudhir Singh — – Chief Executive Officer & Executive Director

Thank you very, very much. We mean this very sincerely. A lot of us — actually, all of us on the call are going to remember this day very, very fondly the day we crossed $1 billion. And we think it’s fantastic that we were to start the day out here in India with all of you. It’s early morning. Thank you very much for your time, for your interest, for your comments and for your insights. Look forward to seeing you next quarter. Bye-bye.

Operator

[Operator Closing Remarks]