Shares of tier-2 information technology (IT) services company Coforge surged nearly 10% to around ₹1,677 on Tuesday after the company posted a better-than-expected margin for the June quarter (Q1FY27), and strong growth visibility supported by a record order book, paving the way for earnings estimate upgrades.
Coforge’s results included contributions from Encora Holdings, which added $100.7 million of revenue in its first two months since consolidation in May. Coforge also discontinued a $15 million low-margin India Government portfolio in Q1FY27 and saw a $4 million revenue impact from the divestment of a data-center asset.
Excluding divested businesses, organic revenue in constant currency (CC) grew 5.2% sequentially. Stripping out the impact of acquisitions as well, organic CC revenue rose 1.1%, beating the company's flat growth guidance, thanks to healthy performance in most verticals and geographies.
The executable order book grew 44% year-on-year and 27% sequentially to a record $2.23 billion, aiding revenue growth visibility. Fresh order intakes improved 6.5% sequentially to $691 million in Q1FY27, supported by four large deal wins across North America, Europe and Latin America.
The repeat business ratio was steady at 95.7%, reducing revenue volatility while allowing Coforge to deepen existing relationships. The top 10 clients grew 18.7% year-on-year and contributed 26.1% of Q1 revenue. Clients generating more than $20 million in annual revenue rose to 18 from 11 a year ago. Coforge is upbeat on demand prospects with a strong large-deal pipeline despite a challenging global macroeconomic climate.
The combined earnings before interest and taxes (Ebit) margin stood at 16%, up 414 basis points year-on-year and beating consensus estimates by 129 basis points, though it slipped on a sequential basis. Nevertheless, the performance topped the company's full-year guidance of 15.5%, supported by an organic Ebit margin of 16.7%.
Harnessing AI at scale
According to management, this margin expansion reflects the impact of AI infusion at scale in client delivery and internal operations. But Encora’s integration has increased acquisition-related amortization and leverage for Coforge. It has raised $550 million debt at 4.6% interest to fund the transaction, with interest payments starting in Q3FY27 and continuing through Q1FY30. This, coupled with higher interest costs, could hamper profitability and cash flows.
For FY27, management guided Ebit margins at 16.5% on a standalone basis and 15.5% on a consolidated basis, with free cash flow to profit after tax conversion expected to cross 100%.
”Free cash flow conversion improved sharply to 95.3% from negative levels a year ago, addressing a key investor concern around seasonality,” said IDBI Capital in its report.
The stock remains well below its 52-week high of ₹1,989.70 in December. It currently trades at 24 times estimated FY28 earnings, a discount compared to peer Persistent Systems, which trades at a price-to-earnings multiple of 31, according to Bloomberg data.