Company Name – Coforge Limited (Coforge)
Current Share Price – INR 4,250 (March 2, 2023)
Market Cap – INR 25,956 cr
1. What is interesting about the stock?
The history of the private sector IT industry in India dates back to the 1980s. In the early years, the industry was primarily focused on providing software development and maintenance services to clients in the United States and Europe.
One of the earliest players in the Indian IT industry was Tata Consultancy Services (TCS), which was founded in 1968. However, it was not until the 1980s that TCS and other Indian IT companies started to gain momentum in the global market.
The liberalization of the Indian economy in the 1990s further boosted the growth of the IT industry. The government removed many of the restrictions on foreign investment and allowed private companies to enter several sectors, including IT.
By the 2000s, India had become a global hub for IT services, with companies such as Infosys, Wipro, and HCL Technologies emerging as major players in the industry. These companies offered a range of services, including software development, maintenance, and support, as well as business process outsourcing (BPO) services.
Today, India's private sector IT industry is one of the largest in the world, with revenues of over USD 190 billion in 2020. The industry continues to evolve, with companies increasingly focused on emerging technologies such as artificial intelligence, machine learning, and blockchain.
NIIT Limited was founded in 1981 by Rajendra S. Pawar and Vijay K. Thadani, who saw the potential for IT training in India on the back of IT industry growth. NIIT's early focus was on providing computer training to students and professionals in India. The company established its first computer center in Delhi in 1982 and expanded rapidly over the next few years, opening centers in other cities across India.
Coforge Limited (formerly NIIT Technologies Limited) is a global IT services company headquartered in Noida, India. The Company was founded in 1992 as a division of NIIT Limited.
Coforge initially focused on providing software development and maintenance services to clients in India and the United States. The Company quickly established a reputation for delivering high-quality, cost-effective solutions, and began to expand its operations in other countries.
In 2004, Coforge became a separate legal entity and was listed on the Indian stock exchanges. The Company continued to grow rapidly, expanding its service offerings to include consulting, application development, infrastructure management, and business process outsourcing (BPO) services.
In 2019, Coforge underwent a major rebranding effort and changed its name from NIIT Technologies to Coforge Limited. The new name reflects the company's focus on delivering innovative and transformative solutions to its clients.
The Company’s primary operation is in four industries, Banking and Financial Services, Insurance, Travel and Transportation, and the newly introduced Healthcare Industry. A majority stake in the company was bought over by Baring Private Equity Asia in April 2019. BPEA currently owns nearly 40% of the company.
Insurance - Insurance is a major vertical of the business, contributing 28% to the overall revenues of the company. The company services three sub-segments: life & annuities, property & casualty, and specialty insurance
BFS - Banking and Financial Services is another major vertical of the company. This vertical also contributes 28% to the overall revenues of the company. Many significant financial organizations such as asset & wealth management companies, and retail and corporate banks are the company’s customers.
Travel and Transportation - Travel and Transportation make up 18% of the company’s overall revenues. Many airlines, airports, surface transport companies, and hospitality groups are the company’s clients.
Others - This is an emerging vertical for the company and includes healthcare, Government outside India, hi-tech, and manufacturing. The company aims to improve its offerings to these segments by using the cloud, data services, and AI technologies.
Revenue break-up in Q3FY23 was:
Why invest in Coforge?
Management Experience and Domain expertise: Coforge has deep expertise in a range of industries, including banking and financial services, insurance, travel and transportation, and healthcare. The company's consultants and subject matter experts have extensive experience in these industries, which enables them to provide insights and solutions that are tailored to the specific needs of each client.
Innovation: Company is committed to innovation and invests heavily in emerging technologies such as artificial intelligence, machine learning, and blockchain. The company has a dedicated innovation lab that focuses on developing new solutions that can help clients stay ahead of the competition.
Global delivery model: Coforge has a global delivery model that enables it to deliver high-quality services to clients around the world. The Company has a presence in over 30 countries and has delivery centers in India, Europe, Asia Pacific, and the United States.
Strong partnerships: Coforge has strong partnerships with leading technology vendors such as Microsoft, Oracle, and SAP. These partnerships enable the company to leverage the latest technologies and platforms to deliver innovative solutions to its clients.
2. Key Historical Financials
Company revenue and profit have been growing 18% and 20% on a CAGR basis respectively in the last 5 years.
Revenue increased by 38% in FY22 and is showing strong growth in FY23. Management expects to maintain revenue growth of at least 15% in FY24
EBITDA margin is stable at around 17-18%
Cash Flow conversion (CFO/EBITDA) came down from 98% in FY21 to 70% in FY22 due jump in receivables
ROCE and ROE were healthy in FY22 at 32% and 28% respectively
3. What is my view on company valuation?
The Company is trading at a P/E of ~33x as against the median P/E (5-year) of 19x. The sectoral median is also ~25x currently. As the sector witnesses maturing and moderation of growth rates from highs due to the digitization of businesses on the back of Covid-19, it is likely to correct in terms of median P/E also. However, Coforge is better placed than others in the mid-tier segment and hence, would be at a premium to the sector. However, long-term investors should wait to enter it near its median P/E.
4. What are the risks to the investment analysis?
Risks to the analysis are:
The promoter entity of the business is BPEA (Baring’s Private Equity Asia) which owns 40% of the Company, having reduced it from 70% in the last 2 years. As it will keep selling its stake, there would be an overhang in the Company’s share availability keeping a check on its price.
The global IT industry has intense competition. The company not only faces competition from local but also global IT players. The company could be hurt if a giant decides to compete with it.
The IT industry is evolving at a rapid rate. The Company must constantly invest in training and R&D to stay relevant and avoid obsolescence.
The Company exports ~90% of its services, and therefore, its financial numbers are influenced by currency movement, both beneficially and adversely as per the direction taken by the Indian Rupee.
About the Author
I have over 18 years of experience in private equity and public markets. I am an engineer by background and MBA from a premier institute in India.
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.