Coforge: Why HSBC recommended 'Hold' rating on the IT midcap stock
HSBC has maintained a 'Hold' rating for IT stock Coforge, citing significant growth achievements alongside potential risks associated with recent deals and financial strategies.
- Sep 1, 2025,
- Updated Sep 1, 2025 12:36 PM IST
HSBC has issued a 'Hold' rating on Coforge, a midcap IT firm noted for its aggressive growth strategies in FY25. The brokerage highlighted several key factors contributing to this decision, including Coforge's acquisition of Cigniti Technologies and a substantial $1.56 billion deal with Sabre over a thirteen-year period. The company's revenue growth rate has been impressive, with a compound annual growth rate of approximately 17% over the past eight years.
The financial year FY25 was pivotal for Coforge, marked by a 30% growth in constant currency terms. The company's management anticipates further acceleration in growth for FY26 and beyond, bolstered by an all-time high order book of $3.5 billion. This strong momentum in large deal wins and platform enablement is expected to continue, contributing to Coforge's leadership in the industry.
Despite the promising growth trajectory, HSBC noted concerns regarding Coforge's financial strategies. The company's growth has resulted in a stretched balance sheet due to investments in data centres and upfront savings provided on new deals, leading to low free cash flow (FCF). This challenge was compounded by a notable deterioration in Ebitda margins, attributed mainly to higher employee stock options and the integration of Cigniti.
HSBC emphasised the risks associated with the $1.56 billion Sabre deal, which although substantial, carries potential uncertainties given Sabre's current operational challenges. Additionally, Coforge's approach of offering upfront savings to clients could further strain its financial health if not managed carefully. These aspects were key in maintaining the 'Hold' rating.
Coforge's approach to artificial intelligence (AI) reflects industry standards, with the company building AI use cases leveraging its engineering capability. While this strategy aligns with industry peers, HSBC pointed out that execution could differentiate Coforge's AI initiatives. The integration of AI into delivery and internal operations is expected to enhance the company's efficiency and service delivery.
The company's capital expenditure has risen sharply, with significant investments in infrastructure, such as data centres. This has impacted their FCF conversion rates, which declined from around 15% in FY20 to about 5% in FY25. This shift was partly due to increased capital expenditure and the strategic choice to invest heavily in growth.
HSBC's outlook for Coforge includes expectations of reaching $2 billion in revenues by FY27, provided that current challenges are managed effectively. However, the bank anticipates only moderate improvements in FCF conversion, as capital expenditures are projected to remain high. The 'Hold' rating reflects a balanced view, acknowledging growth prospects while cautioning against financial risks.
Overall, Coforge remains a significant player in the IT industry, poised for continued growth. However, the potential risks associated with its aggressive expansion strategies and high capital expenditures remain points of concern for investors, as underscored by HSBC's analysis and recommendations.
HSBC has issued a 'Hold' rating on Coforge, a midcap IT firm noted for its aggressive growth strategies in FY25. The brokerage highlighted several key factors contributing to this decision, including Coforge's acquisition of Cigniti Technologies and a substantial $1.56 billion deal with Sabre over a thirteen-year period. The company's revenue growth rate has been impressive, with a compound annual growth rate of approximately 17% over the past eight years.
The financial year FY25 was pivotal for Coforge, marked by a 30% growth in constant currency terms. The company's management anticipates further acceleration in growth for FY26 and beyond, bolstered by an all-time high order book of $3.5 billion. This strong momentum in large deal wins and platform enablement is expected to continue, contributing to Coforge's leadership in the industry.
Despite the promising growth trajectory, HSBC noted concerns regarding Coforge's financial strategies. The company's growth has resulted in a stretched balance sheet due to investments in data centres and upfront savings provided on new deals, leading to low free cash flow (FCF). This challenge was compounded by a notable deterioration in Ebitda margins, attributed mainly to higher employee stock options and the integration of Cigniti.
HSBC emphasised the risks associated with the $1.56 billion Sabre deal, which although substantial, carries potential uncertainties given Sabre's current operational challenges. Additionally, Coforge's approach of offering upfront savings to clients could further strain its financial health if not managed carefully. These aspects were key in maintaining the 'Hold' rating.
Coforge's approach to artificial intelligence (AI) reflects industry standards, with the company building AI use cases leveraging its engineering capability. While this strategy aligns with industry peers, HSBC pointed out that execution could differentiate Coforge's AI initiatives. The integration of AI into delivery and internal operations is expected to enhance the company's efficiency and service delivery.
The company's capital expenditure has risen sharply, with significant investments in infrastructure, such as data centres. This has impacted their FCF conversion rates, which declined from around 15% in FY20 to about 5% in FY25. This shift was partly due to increased capital expenditure and the strategic choice to invest heavily in growth.
HSBC's outlook for Coforge includes expectations of reaching $2 billion in revenues by FY27, provided that current challenges are managed effectively. However, the bank anticipates only moderate improvements in FCF conversion, as capital expenditures are projected to remain high. The 'Hold' rating reflects a balanced view, acknowledging growth prospects while cautioning against financial risks.
Overall, Coforge remains a significant player in the IT industry, poised for continued growth. However, the potential risks associated with its aggressive expansion strategies and high capital expenditures remain points of concern for investors, as underscored by HSBC's analysis and recommendations.