Coforge reports solid Q2 earnings but the stock is priced for perfection

Ebitda margins (ex-RSU) rose 250 basis points (bps) sequentially to exceed the consensus estimate of 18.6%. One basis point is one hundredth of a percentile. In a post earnings conference call, the company’s management said, that margin growth was driven by a number of initiatives including higher offshore revenue, better utilization, flattening of the pyramid due to hiring at the bottom of the pyramid, and operating leverage. Going forward, the company’s management expects margins to improve for the rest of the financial year as well. Management said it is confident of delivering an EBITDA margin of 19% in FY22, with a sequential expansion of over 100bps in 3Q, followed by further expansion in Q4FY22.

Management further highlighted that it has an organic order volume of $285 million excluding SLK Global and an executable order book of $688 million over the next 12 months. Management said three major deals were signed in Q2FY22 with two deals exceeding $50 million. Coforge added 11 new customers during the quarter; Six in the US and five in the EMEA region.

“Strong deal wins, a strong deal pipeline, and good consistency in big deal wins (two-three big deals every quarter) are encouraging. The recent rally in the stock indicates industry-leading growth and rising margins, which are already priced in. The current valuation has been decided,” analysts at Motilal Oswal Financial Services Ltd said in a report.

As far as the stock’s performance is concerned, the company’s shares have gained nearly 127% in the past one year, comfortably outperforming the benchmark index Nifty IT Index, which has gained 65% in the same period.