Coforge Ltd (BOM:532541) Q1 2025 Earnings Call Transcript Highlights: Strong Sequential Growth and Strategic Expansions

• Banking Financial Services: 10.4% YoY growth, 31.8% of revenue mix.
• Insurance: 2.5% YoY growth, 21.4% of revenue mix.
• Travel: 5.4% YoY growth, 18.1% of revenue mix.
• Government (excluding India): 10.5% YoY growth, 7.8% of revenue mix.
• Other Emerging Verticals: 12.4% YoY growth, 21% of revenue mix.

Release Date: July 23, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Coforge Ltd (BOM:532541, Financial) reported a 3.7% sequential constant currency (CC) growth excluding India, with a concurrent expansion in EBITDA by 210 basis points year-over-year (YoY).
• The company achieved a record headcount quarterly increase of 1,886, indicating strong hiring and growth potential.
• Operating cash flow significantly improved to $23.2 million for Q1 FY25, compared to negative $20.5 million in Q1 FY24.
• Order executable for the next 12 months increased by 19.3% YoY, reflecting strong future revenue potential.
• Coforge Ltd (BOM:532541) secured a 28% stake in Cigniti Technologies and expects to secure 51% to 54% ownership during Q2 FY25, indicating strategic expansion.

Negative Points

• India's revenue contribution declined by 30% quarter-over-quarter (QoQ) and now contributes only 3.8% to the overall global revenue.
• The financial services vertical showed weakness, which was attributed to a temporary normalization after a strong previous quarter.
• The company experienced a decline in segmental margins in the EMEA region, partly due to transaction-related expenses.
• There was a significant increase in non-operating cash and cash equivalents primarily due to QIP proceeds, indicating potential future financial obligations.
• The company deferred wage hikes to July 1, which, if implemented earlier, would have depressed margins by approximately 140 basis points.

Q & A Highlights

Q: Was there a wage revision in the current quarter? If not, what would the profitability performance have been on a YoY comparison if the wage was effective from April 1?
A: Wage increase has happened effective July 1. If it had happened effective April 1, margins would have been depressed by 130 bps to 150 bps, with a broad assumption of 140 bps. - Sudhir Singh, CEO

Q: What would you attribute the weakness in the financial services vertical to?
A: We believe it's a temporary blip due to normalization, as last quarter our BFS business had grown sequentially 6.4%. It is still YoY 10.4% higher. We expect robust growth in this fiscal year. - Sudhir Singh, CEO

Q: How do you see the growth outlook compared to three months ago?
A: The demand outlook across financial services has materially improved, the aviation sector remains strong, and there's a rebound in our insurance business. Our next 12-month order book is increasing, now at $1,070 million, 19.3% higher YoY. The significant headcount addition also gives us confidence in future growth. - Sudhir Singh, CEO

Q: Can you explain the significant step-up in on-site hiring and the increase in on-site mix?
A: The on-site increase has been marginal and should not adversely affect ARC. We have a program in place to keep a strong check on ARC, and a new global delivery head will ensure we meet our margin commitments. - Sudhir Singh, CEO

Q: What factors led to the margin decline quarter on quarter?
A: The margin decline was due to visa costs, increased on-site headcount, and renewals of Microsoft licenses. We expect wage hikes in Q2 to be much lower than in the past. - Saurabh Goel, CFO

Q: What is the outlook for the travel vertical?
A: Travel is expected to do better than last year. Airlines are seeing a 10.7% YoY increase in passenger demand, and we work with 5 out of the top 10 airlines in the world. Hospitality and logistics sectors also show positive trends. - Sudhir Singh, CEO and John Speight, Customer Success Officer

Q: How do you view the impact of Gen AI on the testing portfolio, particularly with the acquisition of Cigniti Technologies?
A: We don't see a risk from Gen AI. The acquisition was made to set up new verticals in healthcare, retail, and high-tech, not just for testing expertise. We expect Cigniti to grow faster under our operational control. - Sudhir Singh, CEO

Q: Can you elaborate on the exceptional items for Cigniti in this quarter and the expected core margins going forward?
A: Exceptional items included government incentives, TDS on ESOPs, and long-service bonuses. Adjusted EBITDA margin for the quarter was 12.6%, and we expect margins to be 16%-plus in the coming quarters. - Saurabh Goel, CFO

Q: What is the relation between the order book growth and revenue growth?
A: The growth in the executable order book is in line with the deals we are seeing. The difference between order book growth and reported revenue growth is due to new business in existing accounts and new customers ramping up. - Saurabh Goel, CFO

Q: What will be the impact on depreciation and amortization costs after consolidating Cigniti into our financials?
A: We expect an increase of $8.5 million to $9 million in amortization on account of purchase price consideration from Q2 onwards on an annualized basis. - Saurabh Goel, CFO

For the complete transcript of the earnings call, please refer to the full earnings call transcript.