Coforge Limited delivered a mixed operational performance in Q3FY26, missing revenue and profitability estimates, yet reinforcing its long-term investment thesis through a sharply expanding order book, strong deal momentum, and disciplined capital allocation. While near-term margins absorbed pressures from wage hikes, hedge losses, and one-off charges, management’s confidence in FY27 execution remains intact. A growing presence in Banking, Healthcare, and Hi-Tech, combined with deeper AI integration and strategic acquisitions, positions Coforge for a renewed growth cycle. Axis Securities has retained its BUY recommendation with an unchanged target price of Rs 2,300, citing strong earnings visibility and superior execution capabilities.

Quarterly Performance: Growth Delivered, Expectations Missed

Coforge reported Q3FY26 revenue of Rs 4,188 Cr, marking 26.2% YoY growth and 5.1% QoQ expansion, supported by steady demand across BFSI, Healthcare, and Hi-Tech verticals. In constant currency terms, revenue rose 21.5% YoY, reflecting resilient client spending despite macro uncertainty.

However, the quarter fell short of estimates at the profitability level. EBIT stood at Rs 559 Cr, down marginally QoQ, while EBIT margin declined 71 bps sequentially to 13.4%, impacted by seasonal costs, wage hikes, and hedge-related losses.

Net profit declined 30.3% QoQ to Rs 297 Cr, largely due to exceptional expenses linked to the implementation of the new labour code and legal costs associated with the Encora acquisition.

Margins Under Pressure, But Structural Levers Remain Strong

Margin compression during the quarter was not structural in nature. Wage hikes accounted for nearly 150 bps of margin impact, while hedge losses shaved off an additional 90 bps. Excluding hedge-related effects, EBIT margin would have stood at a healthier 14.4%.

Management reiterated its full-year EBIT margin guidance of 14% for FY26, highlighting operational levers, cost optimisation, and pricing discipline as partial offsets to near-term pressures.

Free cash flow generation remained robust at $45.7 Mn, translating into 110% of normalised PAT, well above the company’s medium-term guidance of 70–80%.

Order Book Expansion Anchors Revenue Visibility

The most compelling highlight of the quarter was Coforge’s deal momentum. The company recorded total order intake of $593 Mn, including six large deals across North America, Europe, and APAC.

The executable order book for the next 12 months surged 30.4% YoY to $1.72 Bn, significantly enhancing medium-term revenue visibility and derisking growth assumptions.

Banking contributed two of the six large deals and is expected to re-emerge as the fastest-growing core vertical, while Healthcare and Hi-Tech revenues have nearly doubled on a YoY basis.

Vertical Momentum Shifts Signal FY27 Acceleration

Management indicated a visible shift in vertical momentum heading into FY27. Banking is poised to reclaim leadership among core verticals, aided by renewed technology spending and large transformation contracts.

Healthcare and Hi-Tech continue to deliver outsized growth, supported by cloud migration, digital engineering, and AI-led transformation programs. Insurance is also expected to post strong growth in FY27 as deal pipelines convert into execution.

The Sabre engagement remains a key strategic anchor, unlocking cross-sell opportunities, including a newly added $20 Mn airline client relationship.

AI-Led Platforms Strengthen Competitive Positioning

Coforge is accelerating its transition from pilot-led AI adoption to enterprise-scale execution. During the quarter, the company launched ForgeX, an integrated agentic AI engineering platform now deployed with a global airline and a US financial services client.

AI is being embedded deeply into execution workflows through proprietary platforms such as Code Insight AI, BlueSwan, and Quasar, enabling outcome-backed delivery and improved productivity.

This AI-first execution model enhances deal competitiveness while supporting margin sustainability over the medium term.

Strategic Acquisitions: Encora and Cigniti Integration on Track

On the inorganic front, Coforge confirmed it will not pursue a QIP to fund the Encora transaction. Instead, it is finalising a $550 Mn term loan with a three-year tenure at comfortable pricing to retire Encora’s existing debt.

Regulatory approvals are expected by March–April 2026, while the Cigniti Technologies merger has already received shareholder approval, with an effective date anticipated on 1 April 2025.

FY27 is expected to be a breakout year, driven by integration synergies, a 30% expansion in the signed order book, and easing supply-side pressures.

Key Financial Snapshot: Q3FY26 Performance

Valuation Reset Supports Upside Case

Axis Securities values Coforge at 37x FY27E earnings, marginally lower than its earlier multiple of 38x, to arrive at a target price of Rs 2,300 per share. At the current market price of Rs 1,642, this implies an upside of approximately 40%.

FY27E earnings are projected at Rs 62 per share, with ROE expected to improve to 25.7%, supported by operating leverage and integration benefits.

Investment View: BUY Maintained

Despite a soft operational quarter, Coforge’s long-term growth narrative remains intact. A sharply higher executable order book, strengthening vertical mix, disciplined capital allocation, and accelerating AI adoption underpin confidence in FY27 earnings momentum.

Axis Securities maintains its BUY rating, viewing near-term volatility as an opportunity to accumulate a structurally strong IT services franchise with superior execution credentials.

Key Risks to Monitor

• Slower-than-expected demand recovery in global IT spending
• Margin pressure from subcontracting costs and currency volatility
• Execution risks associated with large deal ramp-ups and acquisition integration