Axis Securities has initiated coverage on Coforge with a BUY rating and Target Price of Rs 3200, implying an upside of 16% from the current levels. Axis Securities says it belives Coforge is well placed to bounce back post the COVID-19 pandemic. Coforge share price closed at 2796, up Rs 45 or 1.6% in last session.

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The recovery will be led by:

1) Significant growth opportunities in cloud transformation and other digital services
2) Sustainable operating margins led by better services mix and operational efficiencies
3) Healthy balance sheet, strong return ratios, and free cash flow generation
 4) Superior execution capabilities
5) Ramp-up in new deal wins and strong client additions

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These factors are expected to help Coforge in attaining sustainable growth in the long term.

Growing demand for Digital Solution to accelerate revenue growth:

Digital forms an important block for Coforge’s future growth journey which is manifested in consistent revenue growth witnessed in the segment. Coforge’s management is seeing strong demand traction in digital transformation where customers are looking at custom-built development on newer technology. The company is targeting overall double-digit revenue growth for FY22E which will be lead by healthy traction in the Digital business, especially in Healthcare and BFSI. The company continues its strategy to focus on digital transformation, software-based offerings, and large enterprise accounts for its future growth. Coforge management has articulated that Data, Digital, and IoT will be key elements for building digital solutions for its customers operating in the Healthcare, Financial, Industrial and Manufacturing verticals.

Focus on strategic clients to provide long term sustainable growth:

Coforge has specialized services in cloud computing, digitisations, and business analytics and has leadership in Enterprise software, Consumer Software and Innovation Services. Coforge’s experienced and competent management team is sharply focused on increasing wallet share of existing clients. It continues to witness good traction in adoption of collaboration tools, cloud, and digitization by its top client. Although the momentum and concentration of the Top Client’s IT spending remain high, the company aims to reduce concentration risk. Stable delivery capabilities coupled with strong deal wins is expected to accelerate growth momentum in the forthcoming quarters.

Robust long-term growth outlook – Recommend BUY:

Axis Securities believes Coforge has a resilient business model supported by multiple long-term contracts with the world’s leading brands. We believe the company is well-positioned to capture the immense growth opportunity on account:

1)      Better service mix
2)       Sharp focus on customer-centricity
3)      Margin tailwinds driven by cost efficiencies, lower input costs, rupee depreciation, and lower travel cost
4)      Healthy cash flow generation

Axis Securities assign 26x to its FY22E earnings of Rs 124 and arrive at a target price of Rs 3200/share, implying an upside of 16% from CMP.