Coforge addressing market chatter; growth, margin story set to play out

A couple of brokerages have come out with research notes on Coforge, following the IT firm's annual report. Emkay Global retained its 'Add' rating on Noida-based IT firm, highlighting robust growth and margin trajectory. Coforge is addressing market chatter and that its growth and margin story is set to play out going ahead, the domestic brokerage said.

Coforge's  FY25 annual report highlighted how its deep capabilities, hyper-specialisation in verticals and robust execution helped drive strong growth. There is also sharpening focus on AI, said IIFL Securities. This brokerage, however, noted that there are concerns around quality of revenues due to deterioration in free cash flow to 54 per cent, increasing DSOs, doubling of capex YoY, and rising contract costs.

"We believe these concerns can be largely explained by the company’s focus on aggressive growth and large deal wins, and should reverse overtime. COFO is utilising its balance sheet to drive market share gains in a weak spending environment. Management has guided for 65-70 per cent CFO/Ebitda, and normalising capex from 2QFY26 should help improve FCF. Production expenses will remain elevated, given large deal focus. Strong deal wins offer visibility in FY26. Maintain Buy," IIFL Securities said. 

Coforge’s FY25 revenue growth and adjusted Ebitda growth were both healthy, although reported Ebitda, profit, and cash conversion lagged expectations, raising key concerns among investors. 

Emkay Global said key takeaways from Coforge's annual report included: 1. Contract costs have risen 82 per cent YoY, with incremental cost for obtaining a new contract being 2.5 times YoY. 2. Elevated capex (114 per cent YoY) and capex intensity (4.6 per cent of revenue vs 5-year average at 2 per cent) largely attributed to the Cigniti acquisition and investment in a data center for a client. 3. Increased ESOP expenses (+84 per cent YoY, 1.4 per cent of revenue), primarily due to higher new grants issued. 4. All-time high deal intake of $2.1 billion led by the Sabre deal, with the next 12-month executable order book at $1.5 billion (+48 per cent YoY). 5. Steady OCF/Ebitda conversion of 73 per cent (in line with the 5Y average of 70 per cent)."

In addition, the management aspires to, sign 20 large deals (TCV of over $20 million each) in FY26. A total of 5 large deals signed in Q1. The management looks to cut ESOP costs to 100 basis points in H2FY26 and also narrow divergence between GAAP and non-GAAP EBitda, with absence of one-offs.

The management remains confident of sustaining momentum in FY26 on the back of broad-based growth, and robust deal intake and deal pipeline, along with reported EBITM expansion. This confidence is underpinned by the company’s ability to consistently deliver on its strategic objectives, even as it navigates a challenging macroeconomic environment. The focus on execution discipline and operational efficiency is expected to help mitigate cost pressures and drive further margin expansion.

Factoring in all the aforementioned, Emkay Global has retained 'Add' on Coforge with a target price of Rs 1,850, at 36 times June 2027E EPS. This valuation reflects the brokerage's positive outlook on Coforge’s medium-term prospects, supported by a robust order book and healthy deal pipeline. The company’s proactive approach to managing costs and investments, especially in areas like technology infrastructure and talent, is seen as a key enabler for sustainable growth.

Coforge delivered strong and consistent revenue growth performance on the back of execution discipline, strong delivery, and focus on large managed service deals. The company has consistently outpaced large-cap peers in constant currency growth, with TCV expanding from $507 million in FY18 to $3.5 million in FY25, supported by steady large-deal wins.

Even during periods of macro uncertainty, such as the Covid pandemic, Coforge maintained its growth trajectory through diversification and strategic acquisitions like SLK Global (BFSI) and Cigniti (quality engineering and digital assurance). These moves have broadened its addressable market and sharpened its competitive edge across high-growth verticals. As a result, Coforge achieved a 19.5 per cent dollar revenue CAGR in FY20-25, outpacing industry averages and reinforcing its position as a leading IT services provider.