'Sell' Coforge! Why this domestic brokerage is bearish on the stock post-Analyst Meet

Coforge Analyst Meet highlights: The Noida-based global digital services and solutions provider company Coforge, formerly known as NIIT Technologies, held its 'Analyst Meet' on Monday, June 19, wherein the company maintained its revenue growth guidance of 13–16 per cent in constant currency terms for FY24. In Tuesday's session, the mid-tier IT company's stock slipped over 1 per cent to Rs 4,502.90 on the BSE.

Nirmal Bang Securities, post-analyst meeting, has maintained its negative stance on the stock as well as the entire Indian IT services pack given the weak macro environment. Below are some of the highlights from the brokerage's Q&A session with the company's management:

• Coforge feels that the market is currently more uncertain than reports have been suggesting. Coforge does not see a 2HFY24 rebound. No client has indicated such a recovery. Most clients are seeing 2023 as a write-off.
• Coforge feels that the market is currently more uncertain than reports have been suggesting. Coforge does not see a 2HFY24 rebound. No client has indicated such a recovery. Most clients are seeing 2023 as a write-off.
• For FY22, Coforge guided 17 per cent growth and delivered 24 per cent organic growth and for FY23, it guided 20 per cent growth and delivered 22 per cent growth. This time, the 13–16 per cent growth guidance for FY24 is on the back of cautiousness in macro and client spending. 2HFY24 will be at best in line with 1HFY24 or only marginally better, Nirmal Bang Securities notes.
• Coforge has 32 key accounts, and it believes 16 of these are high-potential accounts that will drive 45 per cent of the revenue in FY24.
• Higher interest rates are impacting business volumes for banks. There is a lag before which volumes would pick up when rates decrease, but the timing and quantum of the lag are uncertain, which leads to caution in spending by the large banks. Also, post-pandemic, spending was at its highest ever, and what we are seeing now is the normalisation of spending.
• In the BFSI space, payments infrastructure is a niche area of operations for Coforge. It is thinly present in capital markets as well. But the niche in payments infrastructure presents it with an opportunity to show clients other capabilities as well. Retail banking is another area where it started building capabilities and now does end-to-end work.
• 4QFY23 growth was 4.7 per cent QoQ, and it expects 1QFY24 growth to be a bit softer than this. 2Q is usually the strongest quarter, and it will be strong again even in FY24.
• There is no pipeline shrinkage. Coforge believes deal momentum in 1QFY24 should be as good as it was in 4QFY23. 
• From a demand perspective, in the short to medium term, Sudhir believes that generative AI is going to have a deflationary impact. Some technical and process-side impacts will be much more long-term. The programming space, testing, BPO, contact centres, and content creation will be adversely impacted adversely.

Nirmal Bang Securities believes that while Coforge, under CEO Sudhir Singh, has done a good job in the last six years to grow to US$1bn (from revenue of US$420mn), it suspects that as the company grows larger, it will be up against competition from the behemoths in the BFSI space (a very competitive vertical which had embraced outsourcing and offshoring decades ago).

"It will also require, we believe, significant skills in running the business side and in cost optimisation, which we believe Coforge is not the best at. While it will grow faster than the Tier-1 IT set over the next five years, we are not in the camp that it will go back to growing at 20 per cent plus," the brokerage said in its post-Analyst Meet report, released on June 20. 

The brokerage has maintained "Sell" on the stock with a target price of Rs 3,281.

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The brokerage added that the Indian Tier-2 set would suffer more because of vendor consolidation under the pressured profit picture for customers, a less diversified revenue mix (client, service line, vertical), which could throw up negative growth surprises, and a larger exposure to non-Global 1000 clientele, whose profits are more vulnerable in the current macro environment.

Besides, the risk of PE investor dilution exists. Barings, the PE company, has reduced its shareholding in Coforge from a peak of 70 per cent to the current level of 30 per cent. "The sense we get is that it would likely exit fully over a period of time as it is a financial investor with a mandate to return capital to its investors within a certain timeframe. We believe that the ADS offering is likely a way of accomplishing that goal by addressing a new set of global investors who do not want to take India's currency risk," it added. 

Coforge's share price history and Q4 numbers

Over the past 12 months, the stock has risen over 32 per cent, Trendlyne data show. 

For the March 2023 quarter, Coforge reported a net consolidated profit of Rs 116.7 crore, down 48.08 per cent from Rs 224.8 crore logged in the year-ago period. The profit was down largely due to a one-off expense of Rs 52.3 crore marked as the provision for its curtailed fundraising bid approved in 2021. Revenue from operations stood at Rs 2,170 crore, up 24.50 per cent from Rs 1,742.9 crore in the corresponding quarter a year ago, the company said in an exchange filing. 

Coforge also added that the total order book executable over the next 12 months stands at $869 million, up 20.7 per cent YoY. Order intake was at $301 million, while 10 new client logos were added during the quarter.