Coforge Ltd Q4 FY23 Earnings Conference Call Insights

Key highlights from Coforge Ltd (COFORGE) Q4 FY23 Earnings Concall

Management Update:

• [00:10:39] COFORGE said its deal pipeline is strong and expects it to continue in 1Q24. Also, the company’s LTM attrition fell to 14.1%, indicating low attrition rates compared to the industry average.

Q&A Highlights:

• [00:23:07] Vibhor Singhal at Nuvama asked that given the strong growth in the executable order book and the guidance of 13-16% growth for FY24, what’s COFORGE’s take on the visibility towards the top end of the guidance and the demand environment. Sudhir Singh CEO replied that COFORGE aims for 15% growth, requiring 3% sequential growth each quarter. With a history of surpassing guidance, a strong pipeline of large deals, and a 20% YoY increase in booked orders for the next 12 months, COFORGE believes it can achieve its 13-16% guidance, targeting the higher end.

• [00:25:41] Vibhor Singhal at Nuvama enquired that will the investment in sales and marketing continue to create a gap between GM and EBITDA margin expansion. Sudhir Singh CEO said that in FY23, COFORGE’s reported margin of 18.3% would have been 60 bps higher without the hedge gain/loss. In FY24, the company aim for continued GM expansion and plan to funnel it into capability and solution building and sales enhancement to meet or exceed its guidance.

• [00:28:40] Abhishek Bhandari of Nomura asked about the growth momentum in the Insurance vertical for FY24, given its past performance and leadership changes. Sudhir Singh CEO said that the Insurance business has seen a significant turnaround with a 5% sequential growth, driven by continued transformation spends in the P&C side and expansion into newer geos within the Insurance vertical. The growth is expected to be resilient and indicatively around 15% for the year.

• [00:30:43] Abhishek Bhandari at Nomura queried about the long-term margin outlook and where COFORGE wants to stabilize its sales and marketing expenses. Sudhir Singh CEO replied that the SG&A of the firm has been reduced from 19% to 14% and the internal plan is to have an adjusted EBITDA that is at least 150 bps higher than the current level at $2 billion revenue. The investments made this year are expected to result in higher revenue growth rates.

• [00:34:33] Sandeep Shah from Equirus asked how COFORGE sees the Forex hedge loss affecting the adjusted EBITDA margin in FY24, given the miss on guidance despite knowing about the loss. Ajay Kalra CFO said that sharp currency movements and INR depreciation led to losses in FY23. The impact in FY24 will depend on future currency movements, with lower losses if the currency stays stable and higher losses if it continues to decline.

• [00:39:15] Shradha Agarwal from AMSEC asked if the margin miss in 4Q23 entirely due to hedge losses or were there other factors that contributed to the margin hit. Sudhir Singh CEO said that the margin came in at north of 19.5% and there was nothing unexpected. A conscious decision was made to continue spending to not miss revenue opportunities, despite revenue pressure, as the deal pipelines are resilient.

• [00:41:53] Shradha Agarwal from AMSEC enquired if there are any client-specific challenge or broad-based softness causing the relatively softer growth of the top five clients compared to other buckets. Sudhir Singh CEO answered that there is no issue with clients and relationships are strong and resilient. Margins are expanding in the top 5 or 10 clients and the pipeline, resiliency, and ability to cross-sell and improve the footprint are solid.

• [00:42:50] Shradha Agarwal of AMSEC asked about the expected margin drop in 1Q due to the salary hike cycle and what is the quantum of the hike. Sudhir Singh CEO said that salary hikes will happen as committed to employees and will be lower than the increments seen in the last two years. The margin impact will be in line with past margin drops and the same seasonality is expected to play out in FY24 as in FY23.

• [00:44:05] Shradha Agarwal of AMSEC asked if COFORGE sees any delay in the conversion cycle or impact on the pipeline build-up in BFS due to the macro situation. Sudhir Singh CEO replied that BFS is expected to see a significant deceleration in growth next year, falling to the 13-16% range from 47% in FY23. There is cost pressure in the run-the-bank space, while change-the-bank areas such as security, data, and compliance remain resilient.

• [00:51:49] Manik Taneja at Axis Capital asked how COFORGE sees the increase in offshore revenue mix playing out over the next 12-24 months. Sudhir Singh CEO replied that the offshore revenue mix is currently at 51% and is expected to reach a cap of 54-55% on the journey to $2 billion. The rate of offshore revenue increase has been decelerating and is expected to inch towards 53-54%.

• [00:52:00] Manik Taneja at Axis Capital also asked what is driving the drop in segmental margins in EMEA and Americas. Saurabh Goel Deputy CFO said that the drop in margins between EMEA and the US is due to investments in S&M and capability at the front end, which are included in the margins for the geographies.

• [00:57:11]Abhishek Shindadkar from InCred asked how one should interpret the change in growth rates between fresh order intake and executable book in terms of the quality and tenure of the book. Sudhir Singh CEO said there has been a strong correlation between the movement in order executable and actual revenue growth over the last six years. The order executable number of $869 million is 20% higher than the same time last year and large deal velocity is expected to continue in 1Q.