Coforge has highest revenue visibility in IT space; here're fresh share price targets post analyst meet

At its Analyst Meet, midcap IT firm Coforge laid out what analysts said was a 'credible' blueprint to double its revenues to $2 billion $1 billion within the next five years. Credible, said analysts, as the outlook was predicated on a successful playbook of past five years – focus on sub-verticals, partnerships and geographies. Analysts said the target is a realistic. given the implied growth  of 15 per cent compounded annually against 17 per growth in the last five years.

Coforge reiterated its FY24 constant currency (CC) revenue guidance of 13-16 per cent and added that they expect a 50-bps rise in gross margins in FY24, which reflects the management’s confidence on the revenue visibility for FY24 given the consistent deal intake and a strong executable order book. The company expects incremental revenues to come from scaling existing accounts ($450 million), three new verticals ($150 million), partnerships ($150 million) (ServiceNow, AWS, MS), and tuck-in acquisitions ($150 million).

Coforge's 12-month executable order book (up 20 per cent YoY) provides high revenue visibility, said Nuvama Institutional Equities while suggesting a target of Rs 5,500 on the stock.   it sees Coforge delivering among the fastest growth in the sector in FY24, despite macro uncertainty, on the back of strong growth in the TTH and Insurance verticals.

"In the near term though, the company did flag off a challenging spending environment, especially among BFS clients. However, a strong 12-month executable order book lends visibility as the company does not expect any leakage here. With 75-77 per cent of FY24 revenues in the bag, Coforge’s FY24 revenue visibility is probably the highest among Indian IT Services players at this stage. This forms a key rationale of our constructive stance on the name. At 20 times FY25E PER, we find valuations reasonable as well," said JM Financial said.

Sharekhan said the management's focus on scaling and mining of key accounts, expansion and strengthening of existing partnerships and logo additions, besides consistent deal intake, will continue to drive performance. It has a revised target of Rs 5,000 on the stock.

June quarter likely to be weak

Demand commentary of Coforge management implies June quarter is likely to be weak for IT services industry, said ICICI Securities. The management believes growth is unlikely to rebound in H2FY24, which is contrary to ICICI Securities' view of revival in demand.

"Our view of revival in H2 is supported by higher CQGR in H2 for global tech companies and larger IT services peers as implied by their full year CY23/FY24 guidance," it said.

While Coforge under CEO Sudhir Singh has done a good job in the last six years, Nirmal Bang Institutional Equities suspects that as the company grows larger, it will be up against competition from the behemoths in the BFSI space. It will also require significant skills in run the business side and in cost optimisation which 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. Post the analyst meet, it maintained its estimates for FY24-FY26.

"We continue to have a ‘cautious’ view on the IT sector and especially on Tier-2 IT set. We fear that they would suffer because of vendor consolidation, a less diversified revenue mix (client, service line, vertical), which increases vulnerabilities and a larger exposure to non-Global 1000 clientele, whose profits are more at