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Home >Markets >Mark To Market >Street cheers Coforge’s strong Q4, but its rich valuations spoil the party

MUMBAI : Mid-tier IT services provider Coforge Ltd reported bumper earnings in the March quarter. Strong beat on revenue growth and a robust deal pipeline got a thumbs-up from the Street. Consequently, the stock hit a new 52-week high of Rs3544 on Friday.

In US dollar terms, its consolidated revenue grew 7.1% sequentially to $172.1 million in the March quarter. In constant currency terms, revenue grew 5.1% over the preceding quarter. Coforge exceeded analysts’ revenue growth expectations aided by the strong performance in its Europe business during the quarter.

Its operation performance was also ahead of estimates. Ebit margins at 13.3%, saw a modest 30 basis point (bps) sequential improvement aided by stronger revenues and offshore shift. Ebit is short for earnings before interest and tax. One basis point is one hundredth of a percentage point. This was despite the company giving most of its employees one-time bonuses and hiring aggressively.

Further, it saw order wins of $201 million for the quarter compared with $192 million in December quarter. The company’s total executable order book now stands at $520 million, up 11% year-on-year.

Going ahead, its management has guided for around 17% organic revenue growth in constant currency terms for FY22. This guidance comes on the back of its strong deal pipeline and expected rebound in the travel vertical. The management said it is seeing signs of recovery in this segment, with two large wins reported in Q4FY21. As for margins, it foresees an improvement of 100bps in FY22.

While all this is a positive, the sharp rally in the stock and its expensive valuations make analysts uncomfortable. “The stock currently trades at 26.2 times FY23E EPS, a 60% premium to its five-year price-to-earnings of 16 times. This fairly factors in strong growth delivery from Coforge," said a Motilal Oswal Financial Services Ltd report dated 7 May. EPS is short for earnings per share.

Sharing a similar concern, analysts at Dolat Capital Market India Pvt. Ltd said, despite the spectacular performance its current valuation well captures the rewards, but not the risks.

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