Expanding Into Cloud Services And New Geographies May Mitigate Future Uncertainties From Sector Exposure

Key Takeaways

• Diversification and strategic expansion into new geographies indicate a sustainable and accelerated growth trajectory across multiple business verticals.
  
• Cross-selling success and large deal wins boost potential for sustained revenue and margin improvements in key sectors.
  
• Cessation of revenue guidance, sector exposure, and cost pressures may introduce uncertainty, impacting investor confidence, margins, and long-term revenue stability.

Catalysts

Provides information technology (IT) and IT enabled services in India, the Americas, Europe, the Middle East and Africa, India, and the Asia Pacific.

• The integration of Cigniti has resulted in significant synergies, leading to substantial growth in both revenue and EBITDA, with the expectation of further margin expansion beyond 18% by Quarter 4, positively impacting earnings.
  
• The company's diversified and robust growth across all verticals and geographies, rather than relying on one area, suggests a sustainable revenue trajectory in the coming quarters.
  
• The continuous clocking of more than $300 million per quarter in order intake, with a record intake of $516 million this quarter, and an increase in the next 12 months signed order book by 40%, indicates future revenue growth.
  
• The establishment of a strategic focus on newer geographies and expansion into product engineering and cloud services creates additional growth vectors, potentially leading to accelerated revenue and earnings growth.
  
• The ongoing success in cross-selling across Cigniti’s client base and the firm’s ability to win large deals in various sectors, such as banking, insurance, and travel, enhances the potential for sustained revenue and net margin improvements.

Coforge Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Coforge's revenue will grow by 18.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.9% today to 10.8% in 3 years time.
• Analysts expect earnings to reach ₹18.1 billion (and earnings per share of ₹258.99) by about December 2027, up from ₹8.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹13.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 45.4x on those 2027 earnings, down from 75.3x today. This future PE is greater than the current PE for the IN IT industry at 45.0x.
• Analysts expect the number of shares outstanding to grow by 1.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.57%, as per the Simply Wall St company report.

Coforge Future Earnings Per Share Growth

Risks

• The cessation of annual revenue guidance by Coforge may introduce uncertainty regarding future financial visibility and predictability, potentially affecting investor confidence and impacting revenue projections.
  
• Acquisition and integration-related expenses have had an impact of 2.3% on profitability so far, with additional amortization expenses of $10.7 million per year expected over the next three years, potentially affecting net margins and earnings.
  
• The company's continued significant headcount increases might pressure operating margins if the expected demand does not materialize as anticipated, potentially leading to higher operational costs.
  
• The exposure to banking, financial services, and insurance sectors, which together account for over 53% of the revenue mix, may pose a risk due to potential macroeconomic uncertainties affecting these sectors, which could impact revenue stability.
  
• While large deal activity seems strong, reliance on upfront investments and initial net new business from GCC (Global Capability Centers) setups could lead to revenue volatility if some of these engagements transition more quickly to client-owned operations, impacting ongoing revenue streams.

Valuation

• The analysts have a consensus price target of ₹7907.31 for Coforge based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹10000.0, and the most bearish reporting a price target of just ₹4960.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹167.4 billion, earnings will come to ₹18.1 billion, and it would be trading on a PE ratio of 45.4x, assuming you use a discount rate of 14.6%.
• Given the current share price of ₹8996.2, the analyst's price target of ₹7907.31 is 13.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.