Coforge Ltd Q3 FY2026 Concall Summary

Key Takeaways

• Strong quarter, confident outlook: Constant-currency revenue grew +4.4% QoQ in a seasonally weak quarter, driven by six large deal wins and a 30% YoY jump in the next-12-month signed order book.
• Encora acquisition is the defining bet: The \$2.35 bn deal aims to make Coforge the first tech services firm to deliver on the "AI-infused future," with integration expenses of \$10–\$15 mn expected over the next two quarters.
• Margins dipped on wage hikes, recovery promised: EBIT margin fell 60 bps QoQ as a 150 bps wage hike impact was partially offset by cost initiatives; management guided to 15% EBIT in Q4 and further margin expansion in FY27.
• AI delivery is scaling, not just a narrative: The ForgeX platform and new AI assets are deployed across 54 clients, with agentic-AI engagements live in banking, insurance, travel, and legacy modernization.
• What to watch next quarter: The consummation and EPS impact of the Cigniti merger, the Encora regulatory approval timeline, and whether the Q4 EBIT margin rebound to 15% materializes.

Encora Acquisition: The AI-Infused Future Bet

• Strategic rationale: The acquisition establishes scaled AI-led engineering, data services, and cloud services capability, positioning Coforge as "the tech services firm that is likely to be the first to deliver upon the promise of the AI infused future."
• Deal structure: Enterprise value of \$2.35 bn; a \$550 mn term loan over 3 years with a consortium of 4-5 banks is being finalized at "very, very lucrative" mid-single-digit interest rates; management decided no QIP is needed to retire the term loan.
• Integration timeline: All regulatory approvals filed with RBI, exchanges, U.S. Competition Commission (HSR), and other geographies; HSR approval expected in February, all approvals between March and April, with consolidation starting then.
• Integration expenses: \$10–\$15 mn in transaction, integration, and funding expenses expected over the next two quarters; legal and W&I insurance expenses hit in Q4, while contract close and license expenses come in Q1.
• EPS commitment intact: Guidance of no EPS dilution in FY27 for the combined business stays intact even after taking on debt.

Sudhir Singh: "It also sets us up as the tech services firm that is likely to be the first to deliver upon the promise of the AI infused future that lies ahead of our industry."

Demand Environment & Vertical Outlook

• Broad-based growth: Healthcare & Hitech nearly doubled YTD; Travel up 66%; BFS up 21%; Government outside India up 20%; Others (Retail & Manufacturing) up 23%.
• Banking momentum: Banking YTD growing 20%+; two of six large deals in Q3 were from Banking; management expects banking might be the fastest growing core vertical next year.
• Insurance resilience: Insurance did not degrow and grew QoQ; one large deal signed; robust growth expected in FY26, with possibly higher growth in FY27 than FY26.
• Government sector: Government outside India saw a QoQ decline but management expects to close one of the largest deals ever in that sector in Q4.
• Healthcare pipeline: Another net-new large deal expected to be signed in Q4, likely from a Provider client.
• Sabre cross-sell unlocked: Post-Sabre deal, Coforge is on the verge of standing up a \$20 mn relationship with an airline that was not a material customer for Coforge but was one of Sabre's biggest customers; the Sabre ramp-up itself is "going swimmingly well" with exceptional client feedback.

Sudhir Singh: "We believe Healthcare, Hi-tech, Public Sector will grow on steroids next year, if I were to put it euphemistically."

Margins: Wage Hit Absorbed, Recovery Path Set

• Cost optimization levers working: Even after wage hikes and headcount addition, salary costs have not gone up significantly due to reduction in average resource cost (ARC) and pyramid changes where same-band people are replaced with lower-cost resources.
• Other direct cost spike is seasonal: Other direct cost grew 4.5% YoY with a Q3 seasonality spike, driven by third-party components in large SI deals where revenue and cost are recognized on delivery; this cost is expected to come down from Q4 or Q1 onwards.
• Hedging strategy under review: Management is revisiting its hedging strategy and may stop taking cash flow hedges, which would move hedge gains/losses to other income so they no longer impact EBITDA or operational EBIT; an update is expected next quarter.
• FY27 margin confidence: A wage hike has just been announced and will not be done for at least the next four quarters, giving management strong confidence in further margin increase in FY27 over FY26.

Saurabh Goel: "We are also now revisiting the hedging strategy wherein we will stop taking the cash flow hedges, which will then allow us to at least take the hedge gains or losses as part of the other income so that it does not impact our EBITDA or operational EBIT performance."

AI & Agentic Delivery: From Experimentation to Impact

• Market thesis: "The age of AI experimentation is over"; clients now demand proof of business impact, measurable KPI improvements, and clear paths to operational transformation, requiring partners who can modernize foundations while implementing AI as one integrated transformation.
• ForgeX platform in production: Delivered on strategic engagements including a European G-SIB bank (autonomous agents for cashflow forecasting), a global airline (AI-led SDLC), a US financial services firm (20+ domain-specific agents), an Australasian insurance broker (agentic-AI legacy modernization), and an investment management firm (intelligent agents for testing/defect analysis).
• New AI assets: Integration Studio and XtenderAI added to the portfolio this quarter; total AI assets now deployed at scale across 54 clients.
• CodeInsightAI: Gen-AI powered legacy modernization toolkit now available in the Microsoft Marketplace and deployment-ready in Azure, in use across Travel, Insurance, and Banking.
• Risk-reward commercial models: Coforge is contractually underwriting outcomes, tying fees to clients' achieved results, reflecting confidence in delivery execution.

Sudhir Singh: "The age of AI experimentation is over. What we are witnessing is a market inflection point."

Delivery Excellence & Operational Metrics

• Revenue per employee crossing thresholds: Outcome-based contracts have driven realizable revenue per employee past \$71,000 per annum, with higher margins due to risk taken; this creates a structural gap between revenue growth (25%) and headcount growth (8-9%).
• Utilization poised to rise: Utilization at 81.8% is expected to sharply increase in Q4; it has been kept lower due to continued fresher induction, which helps bring down ARC.
• Attrition under control: Attrition fell to 10.9%, with net headcount addition of 445.
• Working capital discipline: Overall working capital cycle at 48-49 days; sustained FCF guidance of around 70% to 80% of PAT.
• Exceptional items: INR 147 crores booked, including INR 118 crores for the New Labour Code, INR 13.5 crores for Encora acquisition expenses, and INR 16.2 crores for legal expenses related to the August 2023 cybersecurity incident (partly recoverable via insurance).

Cigniti Merger & Corporate Developments

• Merger timeline: Shareholder approval received; second motion application to NCLT filed in December; NCLT hearing in March; approval expected by March-end or latest before Q4 results, with merger consummation by the time FY26 financials are reported.
• EPS accretion expected: Post-approval, EPS is expected to go up because minority interest will get added back to profits, an impact far greater than the increase in the number of shares.
• Sales investment: Salespeople cost grew 25% YoY vs 23% revenue growth, a function of absolute investment in sales headcount rather than commission; G&A cost has declined.

Guidance & Commitments

Key Metrics