Coforge Share Price Down by 7% After Q4 Results, Brokerages Downgrade Rating

Following the announcement of its Q4 results, IT services company Coforge’s shares began trading nearly 10% down on May 3. By 9:20 am IST, the shares had fallen further, trading 7% lower at ₹4,637.95 on the Bombay Stock Exchange. Coforge's subdued performance in the first quarter of 2024 also prompted multiple brokerages to lower their ratings on the company's stock and reduce their price targets, anticipating a decline of as much as 14%.

Previously considered a top performer, the IT stock has seen a 20% decline in investor value in 2024 (year-to-date), in stark contrast to the benchmark Sensex, which has increased by 3% over the same period. Over the past year, Coforge shares have delivered a 22% return, mirroring the performance of the Sensex.

Although Coforge's revenue for the fourth quarter met expectations, it fell short in some of its profit margins. Following the quarterly results, the company said, “Q4 set us up strongly to deliver robust growth in FY25 with expanded margins.”

Coforge also disclosed its purchase of a 54% stake in Cigniti, a move expected to enhance its footprint in the retail, high-tech, and healthcare sectors. This acquisition is projected to not only help the company achieve a growth target of $2 billion by FY27 but also to improve operating margins by 150-200 basis points by the same fiscal year. Despite these benefits, the acquisition led InCred to reduce its estimates for Coforge's earnings per share compound annual growth rate by 6% for FY24-26, due to the added capabilities and diversification in geography and industry verticals.

Jefferies has downgraded its rating on the stock to "underperform" and lowered the target price to ₹4,290 per share following Q4 results that fell short of expectations due to lower-than-anticipated margins. The brokerage also expressed concern over the lack of growth guidance for FY25 from the company, suggesting a significant level of uncertainty.

Regarding the acquisition of Cigniti, Jefferies pointed out that this major addition introduces a greater risk of execution, necessitating a de-rating of the stock. Additionally, the anticipated qualified institutional placement (QIP) is expected to exert further pressure on the stock. Consequently, Jefferies has reduced its growth forecasts for the company by 11-16%.

InCred has also lowered its rating on the stock to 'reduce' and reduced the target price to ₹4,431. The brokerage attributes this decision to the acquisition of Cigniti, which it says leads to a 6% reduction in the earnings per share (EPS) compound annual growth rate (CAGR) for FY24-26.

Despite the acquisition enhancing capabilities, expanding geographic reach, and diversifying industry verticals, InCred notes in its brokerage report that the dilution resulting from the acquisition outweighs the potential benefits of integration.

Citi has maintained a sell rating on the stock, reducing its target price to ₹4,550 due to revenues and margins falling short of its expectations. The brokerage highlighted certain focus areas from Coforge, noting that while the executable order book increased by 17.3% in Q4FY24, it marked a slowdown from the 20.7% growth observed in Q4FY23.

Despite this, revenue rose 13% year-over-year in constant currency terms in FY24, which Citi points out has a decent correlation with revenue growth. Additionally, the company's workforce has expanded by 6.5% year-over-year, and a $250 million qualified institutional placement (QIP) is anticipated. Citi has also reduced its FY25 and FY26 forecasts by 5%, positioning these estimates 15% below the consensus EPS for FY25. Importantly, these adjustments have not yet taken into account the impacts of the Cigniti acquisition.      
 

Emkay has kept its "reduce" rating on the stock, lowering the price target to ₹5,200 from ₹6,050. According to the brokerage, despite the recent decline in the stock's price, the valuation remains high.

In related developments, the board of the company has recently sanctioned a corporate guarantee amounting to ₹2,605 crore for Coforge Pte Ltd, its fully-owned subsidiary. This guarantee is intended to secure a financial facility from the Hongkong and Shanghai Banking Corporation.