Another solid year for Coforge given strong deal pipeline? Yes, but…
Summary
Coforge shares have rallied as much as 68% in the past one year, as the Street rewarded its comparatively better revenue growth trajectory than tier-1 IT companies.Coforge Ltd has entered FY26 with a record high order intake, setting the stage for another strong year. The total contract value of deal wins for the tier-2 IT company was up a whopping 174% year-on-year at $2.1 billion for the March quarter (Q4FY25) after it got a big boost from the 13-year mega contract with Sabre worth $1.56 billion.
Coforge signed five large deals in Q4 across North America, the UK, and APAC, taking the total for FY25 to 14 deals.Its 12-month executable order book at $1,505 million, surged 48% year-on-year. The improving bill-to-book ratio aids its revenue visibility. Thus, despite an uncertain demand situation, the management expects FY26 organic revenue growth to be higher than FY25.
The company’s year-on-year constant currency (CC) and organic growth in FY25 was 32% and 16%, respectively, which is ‘a solid industry leading performance’, according to Nuvama Institutional Equities. “Its strong deal-wins assure another +20% revenue growth year in FY26, which, coupled with margin expansion on lower ESOP costs, should yield a strong 25%+ earnings CAGR over FY25-27E," added the broking firm.
The Sabre deal has got off to a good start with strong execution and ramp-up will occur over the next three quarters, the management said. Nomura expects Sabre to start contributing to Coforge’s revenues in Q1FY26 itself.
As per the management, Sabre deal ramp-up won’t be margin dilutive. However, just like any other mega deal, a key variable is the pace of execution where any delay can jeopardize revenue growth and compress margins. Moreover, one needs to track potential risks arising from Sabre’s weak financial position.
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Coforge expects to achieve its $2 billion revenue milestone before FY27. It sees Ebit (earnings before interest and tax) margin expanding to 14% by FY27 from 13.2% now aided by operating leverage, normalization of ESOP costs, and the absence of wage hikes in Q1FY26. While visa costs may create a modest headwind in Q1, the management reckons that would be manageable.
The company’s shares have rallied as much as 68% in the past one year, as the Street rewarded its comparatively better revenue growth trajectory thantier-1 rivals. This also means a premium to large-cap peers.
Bloomberg data show that the stock trades at a FY26 price-to-earnings ratio of 36x. However, note that Coforge’s acquisition intensity has risen over the last year, so its impact on financials needs to be gauged along with the cost of transition of recently inked large deals.
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