Coforge share price target: MOFSL sees 29% upside potential; here's why

Motilal Oswal Financial Services Ltd (MOFSL) has reaffirmed its Buy rating on Coforge, driven by the company's robust executable order book and resilient client spending across various sectors. MOFSL values Coforge at 38 times its FY27 estimated earnings per share (EPS), setting a target price of Rs 2,240, which implies a potential 29 per cent upside.

Despite a mixed demand environment, Coforge continues to find opportunities by targeting clients with well-defined budgets who prioritise transformational programmes. This approach has helped the company cater to a niche market where traditional solutions are no longer sufficient, according to management insights. Furthermore, the company's proactive approach to solutioning has allowed it to differentiate itself, gaining favour among clients who are seeking more than just generic solutions.

Coforge's management is optimistic about sustaining long-term growth through large deal momentum, sectoral diversification, and inorganic opportunities, MOFSL said. The company aims to sign at least 20 deals worth over USD 20 million in FY26, with a win rate of 40-45 per cent in proactive proposals, a strategy that has outperformed traditional request for proposal (RFP)-led deals. This focus on large deals is crucial for maintaining its growth trajectory.

The company has guided an EBIT margin of approximately 14 per cent for FY26, which management considers adequate to support growth. Recent quarters' margins were affected by one-off items, but these are now behind, suggesting a normalised margin run-rate moving forward. This margin stability is seen as a foundation for future expansion.

Significant room for improvement exists in terms of utilisation, and management expects the share of subcontracting to decrease over time. Coforge is also hiring aggressively, with a net addition rate of about 1,000 employees per quarter to support growth initiatives. This aggressive hiring strategy underscores its commitment to scaling operations efficiently.

Cross-selling opportunities in Cigniti, a company Coforge acquired, are progressing well. The acquisition has bolstered Coforge's capabilities, despite challenges in Cigniti's core mortgage business. Inorganic growth remains a priority for Coforge, with management "open to acquisitions in the right areas" to enhance capability depth and diversify further. This strategy is aimed at broadening its service offerings and market reach.

Coforge remains one of the fastest-growing entities in its sector but faces a cash flow conundrum. The firm's aggressive investments in capacity and acquisitions have led to slower free cash flow (FCF) growth compared to both mid-cap and large-cap peers. However, these investments are seen as necessary for long-term competitiveness.

Overall, MOFSL's endorsement underscores Coforge's strategic positioning and growth potential, citing its strong order book and client spending resilience. The firm's proactive approach to deal-making and acquisition integration is poised to drive continued growth, supporting the reiterated Buy rating. This strategic foresight positions Coforge well for future challenges and opportunities.