Coforge

Coforge reported an exceptional Q2 FY26, achieving 5.9% sequential constant currency growth and a 14% EBIT margin, marking a 251 bps QoQ and 240 bps YoY increase. The firm's sustained growth story is now in its ninth year, driven by robust execution across key operating metrics. Total order intake for the quarter was $514 million, contributing to a record $1.63 billion in the next 12-month signed order book, which is 26.7% higher year-on-year. This performance reflects robust health and strong execution intensity.

Coforge is actively transforming its core business by embedding AI into its delivery models, leveraging proprietary IP such as Code Insight AI, BlueSwan, and ForgeX. These platforms facilitate enhanced software reverse engineering, integrated automation, and rapid transformation, infusing generative AI and intelligent automation into delivery. The company emphasizes AI engineering as crucial for moving clients beyond simple pilot projects to true integrated enterprise adoption, delivering solutions that drive genuine profitable outcomes by combining deep industry knowledge with technical counsel.

The travel vertical led growth with 6.4% sequential dollar growth, while other verticals including healthcare, retail, high-tech, and manufacturing grew 5.9%. Insurance and BFS verticals grew 1.8% and 4% sequentially, respectively. Management noted positive demand trends in banking, driven by lower interest rates and regulatory shifts, and in insurance, with P&C growing at 4.5% annually and L&A at 5% annually. This indicates a solid and improving demand outlook across core verticals.

Coforge's newer verticals, healthcare and public sector outside India, are demonstrating strong growth. The healthcare vertical is projected to achieve a book of business of almost $100 million by the end of FY26, while the public sector outside India is expected to reach a $200 million run rate in the coming quarters. To enhance transparency, Coforge plans to carve out and report these verticals separately in Q1 FY2027, once they attain a critical mass of at least $100 million.

The Cigniti acquisition, initially met with skepticism, is now considered one of Coforge's best strategic decisions. NCLT approval has been received, with the merger expected to be completed by December/January, effective April 1, 2025. The integration has been 'fantastic,' with the largest deal currently pursued originating from Cigniti's client portfolio, and two of its top three clients already signing large deals with Coforge. The acquisition has also brought in key leadership talent, strengthening Coforge's capabilities and cross-selling opportunities.

Coforge achieved a 14% EBIT margin in Q2 and aims to maintain this as a minimum threshold, prioritizing growth and reinvestment over further margin expansion. Free cash flow increased to $37.1 million, resulting in an 86% FCF to PAT ratio, with a sustained target of 70-80% going forward^⏳. Management clarified that the increase in DSO was primarily due to currency movements and 30% YoY growth, rather than operational issues, and that the effective tax rate is expected to stabilize at 23.5-24% on a sustained basis.