COFORGE EYES 4X GROWTH IN 4 YEARS, AS STOCK CRASHES 10% IN A DAY

Noida, Uttar Pradesh-headquartered mid-cap IT services firm, Coforge Ltd, has a long-term target to be among the top five of India’s $254-billion tech outsourcing industry. To do this, the company will look to ramp-up its latest acquisition of artificial intelligence (AI) and tech services firm, Cigniti Ltd—and could also pursue further acquisitions going forward. In the process, reaching an annualized revenue of $4 billion within the next four fiscals is possible, chief executive Sudhir Singh told Mint.

“A revenue of $2 billion is less than three years away. A growth of 18% means that we’ll double our revenue in four years," he said. Even organically, growing at a rate similar to the one in the past seven years, should mean that the company reaches an annual revenue of $4 billion in less than four years. With acquisitions along the way, “$5 billion in annual revenue is not in the distant future,” he said. While future acquisitions will be smaller than Cigniti, a combined growth of $4 billion in revenue should be possible for Coforge in the next four fiscals. "Eventually, growing beyond $6 billion in annual revenue is our goal,” he added.

 

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A senior analyst at a Mumbai-based brokerage, who requested anonymity, said that a projection of quadrupling revenue within four fiscals is “very steep by all estimates.” “Unless Coforge makes a huge acquisition out of the blue, organically growing to $4 billion in revenue within four years seems to be a very tall ambition. The acquisition is unlikely to add such fillip,” she said.

The analyst was also sceptical about the Cigniti acquisition. “No one in their wildest dreams had expected Coforge, a mainstream tech services firm, to acquire a company like Cigniti—which has multiple corporate governance issues. It’s unlikely that Coforge will likely pursue multiple more such acquisitions, which is why the growth target seems steep—but then, you can never say never when it comes to such moves,” she added.

On Thursday, Coforge reported an 11.6% rise in its annual revenue to $1.12 billion for FY24, in the backdrop of an annual constant currency margin guidance of 13-16% revenue growth. On the latter terms, the company’s growth came towards the lower end of its guidance, at 13.3% in constant currency. Adding to that, the company’s margin of earnings before interest, taxes, depreciation and amortization (Ebitda) dropped by 100 basis points (bps) to 16.5%.

Compounding this, Coforge did not offer a revenue growth guidance for FY25, and stated that following its Cigniti acquisition, its margin would expand by 150-200 bps. Analysts have largely read this to be bad news for the mid-cap IT services firm, which was reflected in Coforge’s market performance on Friday, and the past three months.

Shares of the company fell by 10.1% in a day, losing over 500 points to close at ₹4,481.75 for the week. Since hitting a high of ₹6,840 per share in February, Coforge shares have fallen by nearly 35%.

 

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“Amid pressure on existing business, its acquisition adds to execution risk. Also, realizing synergies amid a weak demand environment may be an uphill task. Continued disappointment on margins, weaker growth, and acquisition-related uncertainty in our view warrant a derating of Coforge,” a note to investors on Coforge’s FY24 performance by financial services firm Jefferies India said.

Singh, however, was confident about the acquisition. “Cigniti will help us ramp-up revenue from retail clients to $150 million per annum, while hi-tech and healthcare will reach $50 million per annum, each. The acquisition will also help us strategically increase our presence across North America—right now, most of our clients in the area are focused on the US east coast,” he said.

The company will also ramp up hiring in the near term, after a net addition of 7% to its existing workforce through FY24. “Our headcount addition will be more in FY25 than FY24, because we expect growth to remain. We don’t have a fresher addition target, but Q1FY25 should see a net organic increase in our employee count—both for freshers and others. We’re also upskilling our employee base in strategic generative AI and related skills, which is a material expense, but will help us target key verticals and capabilities,” Singh added.

Generative AI, on that note, still accounts for less than 1% of Coforge’s revenue, Singh said, adding that it has also not brought down employee costs yet. “It is helping our workforce become more efficient but has not brought down cost. In the long run, it should bring down employee expenses, just like automation. In the long run, automation has to reflect on headcount declining for a piece of work.”

 

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All of these estimates, Singh said, are based on “green shoots” of recovery that the company is seeing. “The macroeconomic situation remains challenging, but we are seeing green shoots of recovery across North America, banking, and even insurance clients—despite the latter being the most under pressure. Travel, transportation and hospitality has also grown as a sector despite one of our biggest clients in this vertical ramping down their business due to uncertainties. He added that the company's betting on this based on the constant need for aviation clients to pursue digital transformation, which is playing out.

Despite that, though, the lack of revenue guidance, and concerns around how Cigniti’s acquisition and subsequent integration will play out, have worried investors.

2024-05-03T16:39:35Z dg43tfdfdgfd