Company Analysis #4 - Coforge Ltd.
Coforge, previously known as NIIT Technologies is a Tier-2 Indian IT player. With a successful restructuring by a PE firm, the company is outperforming its peers.
About Company:
Coforge operates as a global provider of digital services and business solutions, boasting substantial domain expertise across various industry verticals. The company's strategy revolves around delivering scalable capabilities while focusing on emerging technologies. With a proven track record in execution, Coforge prioritizes outcomes and fosters a culture centered on employees, partners, and clients. Established in 1992 as NIIT Technologies Ltd, a division of NIIT, the company's stock is listed on the Bombay Stock Exchange and the National Stock Exchange of India under the ticker symbol COFORGE.
The company maintains a global presence, spanning 21 countries, with 26 delivery centers situated across the US, Europe, the Middle East, India, Asia, and Australia. It employs over 24,000 technology and process experts who engage in engineering, design, consulting, operations, and modernization of client systems worldwide.
Coforge has significantly outperformed the NIFTY IT Index and the Industry leader TCS on a 5-year lookback period. The stock price has risen nearly 500% in last 5-years as compared to the IT Index which has returned 160%.
Company Market Profile:
Customer Profile:
With similarity to other Indian IT companies, Coforge also derive the major chunk of their revenue from Americas making about 46% of the total revenue. Their second largest market is EMEA making upto 40% of the total revenue. India makes up good 10% of the total revenue and the rest comes from APAC countries.
Verticals wise:
BFS makes up the biggest share of revenue with about 32%. Despite very high furloughs in the BFS vertical, it reported a sequential growth of 3.1% in CC terms.
In constant currency terms, the Insurance vertical showed no significant growth and accounted for 22% of the revenue mix.
The Travel vertical experienced a sequential growth of 1% in constant currency terms and contributed 17.8% to the total revenue.
Meanwhile, Other/Emerging Verticals exhibited a sequential growth of 2.5% in constant currency terms, contributing 28.1% to the total revenue mix. Others primarily include Healthcare, Retail, Hi-Tech, Manufacturing and Public Sector.
According to the company’s recent quarterly performance report, the company has gained 6 new active clients from last quarter. With comparison to the same quarter the previous FY, Coforge has 14 new clients. Out of the new wins, only one has been in the category of $10M+ category and rest others are from the smaller category of $1-5M.
We also see that the revenue concentration from the Top 5 as well as the Top 10 clients are on decline. With a growing revenue base and customer base, lower revenue concentration indicates that the largest clients are now spending less on their engagements with Coforge. Although, this has been a trend that is observed across the Indian IT sector. So, it shouldn’t raise any alarm as the industry is facing collective headwinds.
Service Offerings:
Broadly defining, the company’s service offerings can be broken down into six segments: Product Engineering, Intelligent Automation, Data & Integration, Cloud Infrastructure, Software Engineering, and Business Process Management.
While we see Data & Integration, Cloud and Software Engineering garnering more revenue, the other three service offerings are underperforming.
Coforge is also effectively leveraging emerging technologies to remain competitive in the industry. Some of it worth mentioning are:
Generative AI: Over the past year, the company has been at the forefront of promoting Generative AI and has implemented use cases across various verticals such as BFS, Insurance, Travel, Hospitality, and Healthcare. Through close collaboration with Microsoft for the Azure OpenAI platform, a recognized leader in this field, the company has successfully implemented innovative use cases.
Hyper automation powered by AI: Coforge utilizes Appian's Hyper automation to streamline workflows across industries. Industry-specific accelerators for Insurance, Finance, Public Services, and Travel leverage AI for end-to-end automation. Additionally, Coforge designed a crypto brokerage trade management app, integrating real-time market data access and portfolio monitoring using the Tradius system.
Corporate Governance:
Coforge is led by Sudhir Singh who is the CEO and the Executive Director. He has been with the company since May 2017. With a background spanning Unilever (Hindustan Lever), Infosys, and Genpact, he brings 24 years of industry experience to his current role. Sudhir is known for his track record in executing successful business turnarounds, driving revenue and margin growth, and orchestrating impactful acquisitions.
Ajay Kalra stepped down from his position as Chief Financial Officer (CFO) of the IT firm, citing personal commitments. Kalra will remain a full-time employee and Senior Advisor until July 10, 2024. In his resignation letter, Kalra cited personal reasons and desire to pursue other opportunities while expressing commitment to remain as an advisory employee until July 10.
Saurabh Goel has been appointed as the new CFO and key managerial personnel (KMP) effective from January 5, 2024. He joined Coforge in 2011 and has a total of nineteen years of experience in the finance domain. He has played a pivotal role in shaping the company's inorganic strategy over the last decade and has successfully led the post-merger integration of all acquired businesses during this period.
Management Discussion & Analysis:
Analysis of the recent earnings call for Q3FY24 has highlighted the following for the company:
Majority of the Top 10 clients are from the BFSI sector and the sector has been heavily impacted with furloughs in the recent quarters. Despite very high furloughs in the BFSI vertical, it reported a sequential growth of
3.1% in CC terms.
During the quarter, Coforge recorded an order intake of $354 million, marking the eighth consecutive quarter with an intake exceeding $300 million. Geographically, the Americas contributed $110 million, EMEA $172 million, and the Rest of the World $72 million to the Q3 order intake.
In spite of the challenging macros and IT spend environment, the company signed three large deals in Q3, bringing the total number of large deals signed to 8 for the fiscal year. Additionally, Coforge acquired 7 new logos during the quarter.
Financial Summary:
Revenue and Profit Analysis:
Coforge has shown a 10-year revenue CAGR of 15% and 5-year revenue CAGR of 22%. The company has been posting record high revenues y-o-y. For the Net Profit, 10-year CAGR is at 13% and 5-year CAGR is at 21%. Both the numbers show that the company has picked up pace in the recent years and have been clocking record breaking profits.
Key Financial Ratios:
Analyzing the key financial ratios suggest that the company is more expensive on 4 out of 6 parameters when compared to the 5-year average. However, if we compare the same ratios to the previous FY, we see that the valuations have sobered up a bit. For example, the P/E ratio at the end of FY23 was 33.6x. This is higher than the 5-year average of 30x, but much lower than the FY22 figure of 41x.
Shareholding Pattern:
Analyzing the shareholding pattern, we see that during the FY23-24, promoter’s stake has dropped from 30% to 0%. In October 2020, Baring Private Equity Asia (BPEA) acquired a controlling stake in Coforge Ltd for approximately $690 million, obtaining a 63% ownership from NIIT Ltd and other shareholders. Post-acquisition, the shareholding pattern of Coforge was as follows: BPEA held 63%, NIIT Ltd retained 13%, and public and institutional investors held 24%. The acquisition aimed to support Coforge's growth plans and enhance its digital services offerings by leveraging BPEA's expertise and network.
BPEA completed the sale of its entire stake in Coforge via block deals valued at approximately ₹7,400 crore. This divestment follows a series of stake sales over the past few years, including a 9.8% stake sale in February and a 3.5% stake sale in May, totaling ₹2,430 crore and ₹887 crore, respectively. Coforge's shares had surged by nearly 24% year-to-date at the time of the sale, and the company reported a strong first-quarter profit and reiterated its full-year revenue growth forecast. The strategic move by Baring PE capitalizes on Coforge's market performance and the value accumulated during its ownership period, reflecting the trend of private equity firms enhancing company value and exiting for profit. The complete exit of Baring PE renders Coforge a company wholly owned by public investors.
Great analysis