Coforge Ltd Q4 FY2024 Concall Summary

Key Takeaways

• Record order book, confident tone: FY24 order intake hit a record \$1.97 billion, up 56% YoY, and the executable order book entering FY25 is 17.3% higher, giving management confidence for robust organic growth despite a tough macro year.
• Cigniti acquisition is the headline event: The deal adds three new verticals, 28 Fortune 500 clients, and a path to a \$2 billion revenue target by FY27 with 150-250 bps of margin expansion, funded by a QIP and structured as a cash purchase followed by a merger.
• Margins expanded sequentially but fell for the year: Q4 gross and adjusted EBITDA margins each expanded 102 bps QoQ, but FY24 adjusted EBITDA margin fell 64 bps to 17.6% due to higher SG&A and on-time salary increments.
• Travel vertical held back by one large client: The largest travel tech account suffered a severe drawdown, limiting the vertical to 5% growth; management says the account is now plateauing and airlines are beginning to invest in transformation.
• What to watch next quarter: The pace of Cigniti integration and synergy realization, whether the travel vertical rebounds as promised, and any explicit FY25 growth guidance after management declined to provide a number this quarter.

The Cigniti Acquisition: Rationale, Structure & Synergies

• Strategic rationale: The acquisition adds three new industry verticals (Retail, Healthcare, Hi-tech), expands North America revenue by ~33% with a beachhead in the West, Southwest and Midwest US, and adds 28 new Fortune 500 clients, most with standing MSAs.
• Horizontal AI Assurance offering: The combined entity will build an AI Assurance practice covering data interrogation, bias detection, stability, precision drift testing and model optimization, leveraging Cigniti's nine-year-old Blue Swan AI testing framework.
• Revenue synergy in travel: Cigniti's largest global client is a leading airline where Coforge has been attempting to sign a partnership for over a decade; the merged entity can now sell nine other service lines into that account.
• BFSI cross-sell: Cigniti holds marquee financial services clients that are not Coforge's clients today, which management expects to mine.
• Client stability: There is churn in the long tail of Cigniti's client portfolio, which Coforge has baked in, but significant stability exists in the \$5 million-plus client cohort, with many 10-year-plus relationships.
• Leadership retention: Coforge's going-in position is to recognize, reward and embrace Cigniti's senior leadership; CEO Mr. Srikant has indicated willingness to continue as an executive leader.

Sudhir Singh: "The biggest reason why we're making this big bet is because we've been interacting with them extremely closely across levels starting with the CEO and his team, his directs and their directs for a long time now and we feel truly confident of both their capability and their commitment and our going in position is going to be we will do everything we can to recognize them, to reward them, and to embrace them."

• Transaction structure: The deal is structured as a cash purchase first (to take board control) followed by a merger, because public shareholders wanted an exit, promoters wanted a cash down payment, and a full share-swap merger would have taken 8-12 months for NCLT approval. [32-33]
• Funding: A QIP will fund the cash purchase of up to 54% of Cigniti; the final raise will be much lower than the ₹3,200 crore enabling resolution, with \$250 million a fair assumption. A \$250 million bond is bridge financing that management intends never to use.
• Integration timeline: CCI approval expected in 45-50 days, then board control taken and teams can integrate while both companies remain listed and operate at arm's length. Open offer completion by mid-August, giving 51% stake, followed by shareholder approval for merger via share swap.
• No promoter lock-in: Coforge has not insisted on a lock-in for Cigniti promoters who will receive Coforge shares in the merger; management wants them to be free agents.
• Due diligence comfort: Coforge spoke directly with Cigniti's sales team down to minus-three levels, their clients, and analysts, and worked with Bain on anonymous NPS; financial and forensic due diligence were completed; board composition provided additional reassurance. [31-32]

Order Book & Large Deals

• Record order intake: Q4 order intake of \$774 million was exceptionally robust, bringing FY24 total to \$1.97 billion, the highest ever and up 56% YoY. Eleven large deals were signed, including two exceeding \$300 million TCV.
• Executable order book: The next-12-months executable order book reached a record \$1.02 billion, up 17.3% from \$869 million a year back, which management cites as the basis for confident FY25 growth.
• Key Q4 wins: A \$400 million 10-year BFS deal; a \$55 million 3-year insurance transformation deal with a new client; a \$16 million 3-year US insurance core platform deal; a \$35 million 5-year US P&C Application Management Services deal; a \$28 million UK government agency deal; and a \$10 million UK government ECM deal.
• Large deal renewal locked in: A large deal with a top client, where Coforge had displaced a large cap 18 months ago, came up for renewal with the incumbent trying to re-enter; Coforge locked it in for the next 10 years as sole vendor, which is why the executable order book did not move up sharply despite the renewal. [35-36]
• Large deal margin dynamics: In existing clients, large deals carry margins 50-100 bps lower than current operating margins. In new accounts, upfront investments are high and overall deal margins are lower. Coforge has offset this by improving cost structures across the board through the year.
• Cost takeout capability: The \$55 million deal was a consolidation deal; Coforge has accelerators, frameworks and methods for cost takeout deals that deliver value quickly and mitigate risk, making them attractive to customers and prospects.

FY24 Performance & Margin Walk

• Revenue growth: Q4 sequential revenue growth of 1.9% CC was led by the BFS vertical at 6.6% QoQ; insurance was flat, travel up 1%, and other verticals declined 2%. FY24 organic revenue growth reached 13.3% CC despite significant macro headwinds.
• Vertical growth for FY24: Growth was broad-based across every industry vertical, led by BFS at 17.1% YoY. Insurance grew ~10%, Travel grew 5%, and all three core verticals plus emerging verticals grew.
• Travel underperformance explained: The largest account in travel tech underperformed severely through the year because the business was under acute pressure; it is only now plateauing. Without that drawdown, travel would have grown double digits.
• Gross margin miss: FY24 gross margin fell short of the 13-16% guidance pushing toward the higher end because new business came in at much lower margins in a tough demand environment, even though salary hikes of 250 bps were negated.
• Adjusted EBITDA margin: Fell 64 bps to 17.6% for FY24, driven by a 60 bps increase in sales, solutioning and pre-sales costs (SG&A), plus full employee increments rolled out on time with no deferral.
• Q4 margin expansion: Gross margin and adjusted EBITDA each expanded 102 bps sequentially, driven by a 230 bps improvement in utilization to 81.7% and continued ramp-up in offshore revenue percentage.
• Cash flow: Strong cash generation of \$75 million in Q4, driven by growth and lower DSO (down 7 days to 56 days), enabling \$65 million in debt repayment. Management intends to repay another \$40 million by end of Q1 and be a net cash company by end of FY25.

Sudhir Singh: "Our ability to claw out and literally claw out a 13.3 percent CC organic growth despite a very tough macro environment in Fiscal Year '24."

Vertical & Client Strategy

• New client qualification: Coforge is being more selective about new logos, instructing the enterprise sales team to open only logos that can scale to at least \$10 million over three years, following the model the BFS team has successfully replicated.
• Travel vertical outlook: Airlines are beginning to invest in transformative areas like one offer-one order and digital retailing; logistics and cargo are of interest due to low code/no code and RPA; hospitality is experiencing high demand and increased digital spends around web, mobile and data analytics.
• Public sector opportunities: Strong opportunities are seen, especially with elections in the UK, a traditionally strong area for Coforge.
• Newer verticals: Significant growth is expected across retail and automotive in Europe.

Sudhir Singh: "Six, seven years back, we did go pell-mell under my leadership because at that point in time, we were just trying to aggregate logos. Right now, we think we have a significant number of marquee clients with huge wallet spends that we can address more effectively following the model that the BFS team under Gautam has been replicating and we want to make that enterprise-wide."

Gen AI & Innovation

• Gen AI solutions launched: A bespoke Knowledge Management Tool for contact center agents; a novel job search platform for a global staffing organization; Quasar Orion autonomous self-service solution; an M365 co-pilot offering and advisor co-pilot for insurance underwriting on the Microsoft Azure Marketplace; and the QE 360 platform for AI-powered quality engineering.
• Cigniti's AI testing framework: Cigniti has a nine-year-old Blue Swan AI testing framework with eight modules focused on AI-specific testing; most of what Cigniti does is non-functional testing (UI/UX, performance, security), not functional testing.
• Revenue cannibalization risk: An analyst asked whether GenAI disruption of testing and BPO was baked into the \$2 billion target; management confirmed it was, citing upside in non-functional testing areas and broader vertical and geographic synergy, but did not quantify the assumed cannibalization.

People & Operations

• Headcount and attrition: Net headcount addition of 1,502 during the year; attrition fell to 11.5%, one of the lowest in the industry.
• Salary hikes: Effective April 1, normal hikes following the same average pattern as the last seven years.
• ESOPs for Cigniti leadership: The existing ESOP bucket will be used for issuing ESOPs to senior leaders of Cigniti, with no new cost.
• Cigniti contractor cost: The 16% cost of hired contractors is likely related to on-site subcontracting work now coming down; Coforge hopes to work with Cigniti to get it as close to zero as possible given Coforge's scale and recruitment engine maturity. Management acknowledged uncertainty on the precise nature of this cost.

Guidance & Commitments

Key Metrics