Coforge outshines in Q2 as IT rivals navigate haze

India's seventh-largest IT outsourcer ended the September quarter with $462 million in revenue, up 4.5% sequentially and 26.6% on an annual basis.

With this, Noida-based Coforge, which jumped three places in Indian IT’s pecking order within a year, also exceeded analysts’ expectations. According to a Bloomberg poll of 26 analysts, Coforge was expected to report $461.6 billion in revenue for the second quarter.

Among the companies earning $1-5 billion in annual revenue, ninth-largest Persistent Systems Ltd reported $406.2 million, up 4.23% from the preceding three months, whereas sixth-largest LTIMindtree Ltd reported $1.18 billion in revenue, up 2.3% sequentially. Twelfth-largest L&T Technology Services Ltd grew the slowest last quarter, reporting a 0.5% increase in revenue to $337 million. Only four of the eight mid-caps have declared earnings so far.

In stark contrast to peers, the Coforge management was optimistic about the demand environment.

“We continue to believe that demand, especially with the advent of AI, has mutated, but the addressable demand continues to grow at a solid clip," said chief executive Sudhir Singh, during the company’s post-earnings analyst call on Friday.

However, a smaller peer had a different perspective.

"As far as the demand environment is concerned and the bigger macro is concerned, the macro remains interesting and it keeps on going through its own challenges. You may have heard the multiple news that keeps on coming up weeks and quarters in the US. So, I wouldn't say that the environment is changing that much, but I think the people are getting used to working in that environment," said Sandeep Kalra, chief executive officer (CEO) of Persistent Systems during the company's post-earnings analyst call on 14 October.

Still, Coforge's commentary is also in contrast to the country’s five largest IT outsourcers, who are still uncertain about the macroeconomic environment. None of the top five expect a clear-cut demand revival during the second half of the year, after visa and tariff-related uncertainties in the US coupled with geopolitical challenges have prompted clients to pull back their tech spending.

The uncertainty is reflected in their quarterly performance. The country’s five largest IT outsourcers Tata Consultancy Services Ltd, Infosys Ltd, HCL Technologies Ltd, Wipro Ltd, and Tech Mahindra Ltd, ended last quarter with $7.47 billion, $5.08 billion, $3.64 billion, $2.6 billion, and $1.59 billion in revenue, up 0.61%, 2.73%, 2.79%, 0.65%, and 1.41% sequentially, respectively.

While banks helped the top five in posting modest revenue growth in a hazy demand environment, for now, almost a third of Coforge's incremental revenue of $20 million came from travel and hospitality firms, which makes up almost a fourth of the business. Meanwhile, $128 million came from banks, which makes up more than a quarter of the company’s revenue.

Notably, the jump in revenue from clients in travel and hospitality came from a mega deal it bagged in March. Coforge won a 13-year contract valued at $1.56 billion with Sabre, a Texas-based travel technology company. As part of the deal, Coforge is expected to handle the software product delivery for Sabre and will also execute artificial intelligence-led tasks for the company.

This was in line with the management’s commentary last quarter when it suggested that the deal would ramp up in the second quarter. It held a similar view this time around as well.

The management sounded confident on a better second half, which it attributed to a strong order book. “We continue to maintain that the full fiscal will be a robust growth fiscal for us, and H2 (second half) will also be robust growth half for us," said Singh.

He added that AI was leading to a period of confusion but considered it a tailwind for the company.

“This is a landscape characterized by technological confusion and nascent protocols. For the next 18 to 24 months, the market will be flooded with competing (AI) standards and tools. In this immature ecosystem, our clients need assistance across two different axes. One, they need assistance to help drive a deep understanding of their industry problems and processes. And two, they need assistance with driving a deep understanding of how AI works and critically, how it does not work," said Singh.

The management added that the company’s large deals increased because of automation tools.

“We believe that AI is a clear tailwind for firms that understand the domain and also have an appreciation for how to apply the relevant AI-specific technology. There can be no better example of this than the fact that the velocity of our large deals, despite the macros, continues to increase very, very appreciably. As I had noted earlier, at the end of the first two quarters, the first half of this year, we've already logged in 10 large deals. If you were to contrast that, we had a number of only 14 for all of last year," said Singh.

Another bright spot in the company’s report card was its operating margins. Coforge reported operating margins of 14%, up 260 basis points sequentially because of lower interest costs and absence of one-time expenses. One basis point is a hundredth of a percentage point.

Even the free cash flow, or the cash left after operating expenses and capital expenditure, provided some relief to shareholders as the company had spent more money than it earned through its operations last quarter. Free cash flow totalled $37.5 million in the quarter.

The company added 709 people in the quarter to end with 34,896 employees. On the other hand, LTIMindtree, Persistent Systems and LTTS added 2,558 employees, 884 employees, and 52 employees to end with 86,447 people, 26,224 people, and 23,678 people, respectively.