Coforge Limited

Coforge reported a sequential revenue growth of 4.4% in constant currency (CC) terms for Q3 FY26, contributing to an impressive year-to-date (YTD) dollar revenue growth of 32.8%. This performance was underpinned by strong large deal velocity, with six large deals signed in the seasonally weak quarter. Management expressed confidence in achieving a very successful FY26 and an exceptional FY27, citing a next 12-month signed order book that is 30% higher year-on-year, standing at $1.72 billion.

The reported EBIT margin for Q3 FY26 was 13.4%, a 60 basis points (bps) sequential decline, primarily due to wage hikes which impacted margins by 150 bps. However, this was partially offset by ongoing margin initiatives and lower ESOP costs. Excluding hedge losses, the underlying EBIT for the firm was 14.4%. The company aims to register a 15% EBIT in Q4, which would lead to meeting its 14% EBIT guidance for the full FY26, demonstrating effective cost management despite inflationary pressures.

The acquisition of Encora is highlighted as a defining moment, establishing a scaled AI-led engineering, data services, and cloud services capability. This is expected to accelerate Coforge's industry-leading growth. The firm is finalizing a $550 million, 3-year term loan for Encora, with regulatory approvals anticipated by March-April 2026, ensuring no EPS dilution in FY27 for the combined entity. Coforge is actively infusing AI into every engagement, moving towards hybrid delivery models and outcome-based commercial structures, with platforms like ForgeX and CodeInsightAI deployed across 54 clients.

Q3 FY26 saw a total order intake of $593 million, nearly reaching the $600 million mark. The company's top 5 and top 10 clients grew by 51% and 47% YTD respectively in dollar terms, contributing 21.0% and 30.7% to Q3 revenue. Verticals like Healthcare and Hi-Tech, contributing 10.5% of total revenue, nearly doubled year-on-year. Banking is expected to be the fastest-growing core vertical next year, while Travel and Insurance are also projected for robust growth, with Banking and Travel expected to outpace Insurance.

Coforge demonstrated strong cash flow generation, with Free Cash Flow (FCF) for the quarter reaching $45.7 million. This translated to an FCF to normalized PAT ratio of 110%, significantly exceeding the company's sustained guidance of 70% to 80%. The working capital cycle remained efficient at 49 days, a slight increase from 48 days in the previous quarter, with billed DSO at 67 days, unbilled at 28 days, and contract assets at 14 days.

The total headcount at the end of Q3 stood at 35,341, with a net addition of 445 people during the quarter. Utilization was 81.8% and is expected to sharply increase in Q4. The company maintained one of the lowest attrition rates in the industry, with LTM attrition falling further to 10.9%. Management noted that headcount growth lagging revenue growth is partly due to outcome-based contracts and strategic induction of freshers, which helps manage the average revenue per employee (ARC).