Coforge Ltd

NSE:COFORGE

Earnings Call Analysis

Strong Q1 performance and optimistic outlook

Coforge Limited kicked off fiscal year '25 with a promising start, showing a sequential revenue growth of 3.7% and a year-on-year EBITDA expansion of 210 basis points. The acquisition of a significant stake in Cigniti Technologies, poised for robust growth, further boosts confidence. With a remarkable headcount increase and a 19.3% year-on-year rise in booked orders, the company expects continued strong performance throughout the year. CEO Sudhir Singh highlighted strategic client partnerships and initiatives in AI deployment as key drivers for future success.

Strong Start to Fiscal Year

The company began the fiscal year 2025 on a positive note, establishing a solid foundation for robust growth in the coming quarters. Notable achievements included 3.7% sequential constant currency (CC) growth excluding India, a 210 basis points year-over-year expansion in EBITDA, and a significant improvement in operating cash flow to $23.2 million from a negative $20.5 million in Q1 FY '24【4:0†source】【4:4†source】.

Headcount and Productivity Improvements

A noteworthy aspect of the quarter was a record net headcount addition of 1,886 employees, which is more than the net headcount addition for the entire previous fiscal year. This included onboarding 250 graduate engineer trainees. Despite this increase, manpower costs were controlled, suggesting that much of the hiring occurred later in the quarter【4:0†source】【4:4†source】.

Order Book and Financial Performance

The order executable for the next 12 months increased by 19.3% year-over-year, with an order intake of $314 million. This marks the 10th consecutive quarter with an order intake exceeding $300 million. Additionally, adjusted EBITDA margins for Q1 improved by 50 basis points compared to the same period last year, with a reported EBITDA margin increase of 210 basis points【4:0†source】【4:4†source】.

Sector Highlights

The banking and financial services (BFS) sector exhibited a 10.4% year-over-year growth, contributing 31.8% to the revenue mix. Insurance and travel verticals grew by 2.5% and 5.4% year-over-year, respectively. However, revenue from India declined by 30% quarter-over-quarter, representing 3.8% of overall global revenue【4:0†source】【4:4†source】.

Cigniti Acquisition Integration

The company acquired a significant stake in Cigniti Technologies and assumed board control in early July. During Q1, Cigniti reported a 2.4% sequential growth in US dollar terms, a 16.7% sequential increase in EBITDA, and a 10% sequential increase in profit after tax (PAT). The company anticipates significant revenue and margin expansion for Cigniti in Q2【4:0†source】【4:4†source】.

AI and Digital Transformation Initiatives

The company has been actively pursuing AI and digital transformation projects, such as automating hedge fund reporting for a client and optimizing insurance underwriting processes through a new copilot offering on Microsoft marketplace. These initiatives are expected to play a crucial role in future growth【4:0†source】【4:4†source】.

Guidance and Future Outlook

Management remains confident in achieving robust and profitable growth in the coming quarters. The company aims for an adjusted EBITDA margin expansion of 50 basis points for the fiscal year. Additionally, improvements in demand outlook across various sectors, particularly BFS, insurance, and travel, lend further confidence to future performance【4:0†source】【4:4†source】.

Earnings Call Transcript 2025-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Coforge Limited Q1 FY '25 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

I now hand the conference over to Mr. Vikas Jadhav, Vice President, Investor Relations at Coforge Limited. Thank you, and over to you, sir.

[Vikas Jadhav, executive]

Thanks, Imba. Good morning to everyone. You will have received our Q1 FY '25 results. They are also available on the Investors section of our website.

So we have with us today our CEO, Mr. Sudhir Singh; our Chief Customer Success Officer, Mr. John Speight; and CFO, Mr. Saurabh Goel. We'll begin the call with opening remarks from the management team. And post that, we'll open the floor for the questions.

Before we begin, please note that some of the statements made in today's discussion relating to the future should be constituted as forward-looking statements and may involve risks and uncertainties. Please refer to the disclaimer to this effect in our Q1 FY '25 earnings press release.

With that, I would now like to hand over the call to our CEO, Mr. Sudhir Singh. Over to you, Sudhir.

[Sudhir Singh, executive]

Thank you, Vikas, and a very good morning, and good evening to all of you across the world, ladies and gentlemen. Thank you for joining us today as we share our Quarter 1 fiscal year '25 performance and the business outlook.

Quarter 1 has been a very eventful quarter for the firm. I'm pleased to report that we have begun the fiscal year on a positive note setting in place a very firm foundation for robust growth in the remaining quarters of the year.

A 3.7% sequential CC growth excluding India, with a concurrent expansion in EBITDA by 210 bps Y-o-Y in the same quarter. Our record headcount quarterly increase of 1,886, a very significantly improved operating cash flow of $23.2 million for Quarter 1 and ever strengthening order executable next 12-month booked orders, which now is 19.3% higher Y-o-Y gives us confidence that the quarters to come shall see robust and profitable growth.

With regard to the acquisition of Cigniti Technologies, I'm very pleased to report that we have already secured a 28% stake and we shall secure 51% to 54% ownership of Cigniti during Quarter 2 itself.

On the 5th of July, we have assumed Board and thereby operational control of Cigniti Technologies. Q2 results of Cigniti shall be delivered under the watch of the reconstituted team that is now running that business as we speak.

Cigniti incidentally announced their Q1 results yesterday where they declared a 2.4% sequential U.S. dollar growth, a 16.7% sequential increase in their EBITDA and a 10% sequential increase in their PAT. We expect that the Cigniti business shall show even greater momentum going forward. And we believe that a reflection of that performance will be their likely performance in Quarter 2 itself where not only revenue, but also margin expansion is expected to be very significant.

With a cash of USD 15 million in the balance sheet, the Cigniti business is healthy and poised for significant growth in the quarters and years to come.

On a different note, we are now increasingly partnering with our clients to implement real life AI programs going beyond just proof of concepts. One example, for an investment management firm, we are leveraging GenAI to automate generation of hedge fund reporting, reducing the time required for that process from weeks to hours.

During the quarter, we also made available on the Microsoft marketplace, our copilot offering to optimize the insurance underwriting process.

Finally, before I get into granular details, I would like to call out that starting this quarter, as promised, we have started reporting government excluding India as a new vertical, and we have also started including OCF, operating cash flow, in the fact sheet.

With that preamble, I shall now talk you through the quarterly performance and our assessment of the outlook. Starting off with the revenue analysis. I'm pleased to report that during Quarter 1 fiscal year '25, the firm registered a sequential revenue growth of 1.6% in CC terms, 1.6% in U.S. dollar terms and 1.8% in Indian rupee terms, respectively. It is important to note that Coforge's global revenues from all markets outside India grew 3.7% in CC terms during the quarter.

India in Quarter 1 declined 30% Q-o-Q and contributed only 3.8% to our overall global revenue. During the quarter in reported terms, our banking financial services vertical grew 10.4% Y-o-Y and contributed 31.8% to the revenue mix. The insurance vertical registered a 2.5% Y-o-Y growth, contributed 21.4% to the revenue mix. The travel vertical grew 5.4% Y-o-Y and contributed 18.1% to the total revenue.

The fourth vertical, the new vertical, government excluding India, grew 10.5% Y-o-Y and contributed 7.8% of the revenue mix. Other emerging verticals portfolio saw a growth of 12.4% Y-o-Y in Q1, and they contributed 21% to the total revenue mix.

With that, I shall now move on to the margins and operating profits discussion. During the quarter, we delivered an EBITDA of USD 49.6 million, registering a year-on-year growth of 22.2%. This reflects an EBITDA margin of 17% for this quarter versus 14.9% in the same quarter last year. This is a sizable increase, you will note, of 210 bps Y-o-Y at the reported EBITDA level.

Our PAT adjusted for Cigniti-related transaction expenses has increased by 26.9% Y-o-Y in U.S. dollar terms, and that reflects a 148 bps improvement in PAT on a Y-o-Y basis.

Moving on to the order intake for the quarter. Very pleased to report an order intake of $314 million. This is the 10th consecutive quarter where the firm has reported an order intake of more than USD 300 million.

We have signed 2 large deals in this quarter. One of these was in the banking sector, with one of the largest banks in the world, and this was all centered around data and analytics. And the other one was with one of the leading airlines of the world.

Our order executable book, which reflects the total value of locked orders over the next 12 months continues to improve and stands at USD 1,070 million and it is now up 19.3% year-on-year. We also signed 10 new logos during the quarter.

On the people front, and I believe this is important, at the end of the quarter, our head count stood at 26,612, and we saw a net headcount addition of 1,886 people in this quarter itself. Utilization, including trainees, during the quarter stood at 81.6% compared to 81.7% in Quarter 4. As I've noted earlier, the net headcount addition in Quarter 1 for Coforge is more than the net headcount addition over the previous 4 quarters in fiscal year '24. Last 12-month attrition during the quarter stood at 11.4%.

With that, I shall now request John Speight, Customer Success Officer Coforge, to walk us through capability and delivery highlights. Over to you, John.

[John Speight, executive]

Thank you, Sudhir. I shall now touch upon the highlights for the quarter related to our delivery operations. In the banking and financial services sector, we've emerged as a strategic partner for a leading investment solutions provider with a 5-year vendor consolidation deal.

We also signed an enterprise network deal with a global wholesale bank and closed a 3-year operations deal for a U.S. regional bank to provide voice and back-office support.

The insurance sector has seen increased activity this quarter, securing a $20 million project to transform the core platform of a major insurance company. We also signed a multiyear managed service agreement with a leading mutual insurance company, along with a further deal with a prominent specialty insurance provider, strengthening our expertise in supporting insurance growth.

In the travel sector, we secured a key deal with a major U.S.-based freight transportation company, implementing our PRISM engine to automate their freight rating processes. Meanwhile, in the retail sector, we have been awarded a strategic 3-year managed deal to drive operational efficiency and customer experience for a retail giant.

We also finalized a major multiyear deal to streamline the supply chain systems for a major food distribution organization. Our government business, excluding India, continues to grow. One of the recent wins here was a 3-year managed program to design, implement and support a mission-critical system for a U.K. regulator.

Our AI capabilities continue to grow at speed with new solutions being released to the market on a regular basis. The latest example available on the Microsoft marketplace was our copilot offering to optimize the insurance underwriting process mentioned by Sudhir earlier.

We created and deployed RASA, a rapid audio speech analysis, a system that uses GenAI to analyze agent interactions with both voice and chat for feedback, that identifies areas needing improvement, providing insights on possible issues based on customer sentiment.

We have continued to develop QE 360, our platform that enables test life cycle automation through AI to disrupt the testing landscape. Features include AI-based test case generation, low-code, no-code automation creation, AI-based test data management generation, automation self-healing and AI-based visual testing.

We've also developed and deployed AI ticket manager, our service desk solution that uses GenAI to eliminate L1 activities and significantly reduces L2 tasks by analyzing, categorizing tickets and creating self-help to end users.

To support our AI agenda, we have added 50 AI specialists to our team this quarter. We've also accelerated the upskilling of our 25,000 employees through our AI Spark training program.

We have also cemented a partnership with Kofax to train a large team, creating an enterprise content management center of excellence for a large U.S.-based technology service customer setting the stage for future collaborations and a joint go-to-market strategy.

We received notable industry recognitions this quarter, including the Intelligent Automation Award by Pega, the Worldwide Emerging Industry Partner of the Year award by ServiceNow, and European Partner of the Year award by MuleSoft. The latter for the 10th consecutive year running.

We've been recognized in the 2024 U.K. IT sourcing study by Whitelane Research as an Exceptional Performer in application services, digital transformation and cloud and infrastructure services. And finally, for the fourth consecutive year, Coforge was certified as a Great Place to Work.

With that, I would like to pass over to our CFO, Saurabh Goel.

[Saurabh Goel, executive]

Thank you, John. Let me take you through some of the financial highlights for the quarter. As you are aware in the past, our cash flow generation has been skewed towards H2 with the majority of cash being generated in H2. We guided towards normalizing the OCF through the year with multiple steps taken towards strengthening the balance sheet, our Q1 FY '25 saw a good cash flow generation of $23.2 million versus negative $20.5 million in Q1 FY '24. Accordingly, the OCF to EBITDA ratio stood at 47% in Q1 FY '25.

In Q1, we also repaid the nonconvertible bonds of $41 million, which were bearing a high interest cost. This will help in reducing the interest burden from Q2 onwards. We also believe that by end of this fiscal, we should be in a position of being a net cash company.

We had also guided for improvement in adjusted EBITDA margins for FY '25 by 50 bps and flat reported EBITDA margins in the beginning of the financial year. At the end of Q1, we are up 189 bps from an adjusted EBITDA margin standpoint and 210 bps up in reported EBITDA margin standpoint.

We have also started reporting the OCF in fact sheet from this quarter results apart from the government vertical, excluding India, as mentioned by Sudhir.

On the nonoperating side of cash, you would have noticed a significant increase in cash and cash equivalents by $266 million quarter-on-quarter. This is primarily on account of the QIP proceeds.

We have been broadly as per plan towards the closure of Cigniti's acquisition with 28% stake and the Board control of Cigniti on July 5, 2024. We now await SEBI's approval for the open offer. We expect to close the open offer in Q2, post which we would initiate the merger process post approval from the Board of both the companies. and this would take about 9 to 12 months from the initiation of merger. The effective date of merger is being contemplated as April 1, 2025.

Coming to Cigniti's numbers. Cigniti reported Quarter 1 financial '25 revenues at of $56.2 million, which was up 2.4% sequentially in dollar terms. Q1 adjusted margin was at 12.6% versus 11% reported in Q4 FY '24, an expansion of 160 bps quarter-on-quarter.

Adjusted EBITDA had onetime expense, which included provision on account of receivable towards government incentive of INR 3,004 million. TDS on ESOP for prior years amounting to INR 55 million, and long-term service bonus to few employees of INR 35 million.

PAT adjusted for onetime transactional expenses stood at $4.9 million versus $4.4 million in Quarter 4. Cash and cash equivalents for the quarter stood at $51.7 million. Coforge will consolidate financials of Cigniti from Q2 onwards.

With that, I will hand over the call back to Sudhir for his comments on outlook.

[Sudhir Singh, executive]

Thank you, Saurabh. A 3.7% sequential CC growth, excluding India, with a concurrent expansion in EBITDA by 210 bps year-on-year in the same quarter, which was Quarter 1. A record headcount quarterly growth of 1,886, a very significantly improved operating cash flow of $23.2 million that Saurabh talked about and the ever-strengthening order executable, which now is 19.3% higher Y-o-Y gives us confidence that the quarters to come shall see robust and profitable growth.

On the margin front, we believe that by the end of the first half of the year, we shall be operating at a 50 bps higher margin than the first half of last year, and that shall set us up firmly on the path to meeting our guidance of 50 bps adjusted EBITDA expansion in this fiscal over last year.

With the Cigniti business leadership now operating under our operational control and with all due diligence behind us, we remain committed to delivering robust growth across both organizations, both in the short and the long term.

With that, ladies, gentlemen, I conclude my prepared remarks, and I look forward to hearing your comments and addressing your questions. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Kawaljeet Saluja from Kotak Securities.

[Kawaljeet Saluja, analyst]

Congrats Sudhir and team for great quarter. A couple of questions. One is that was there a wage revision in the current quarter, and if not, then what would the profitability performance have been on a Y-o-Y comparison if the wage effect was effective from 1st of April?

[Sudhir Singh, executive]

Thank you for the question, Kawaljeet. Wage effect, wage increase in our case has happened effective the 1st of July. If it had happened effective 1st of April, we believe margins would have been depressed by 130 to 150 bps. Broad assumption would be 140 bps.

[Kawaljeet Saluja, analyst]

Okay. Got that. The second thing, Sudhir, is that while of course, the overall confidence on growth is encouraging, right? I was surprised to see a weakness in the financial services vertical and in a segment of the market, which has shown some level of buoyancy, what would you attribute that to?

And Final question -- sorry, actually, just let me complete a final question. The final question that you've spoken a lot about growth, excluding the India government business. Isn't that an annual seasonal factor wherein the fourth quarter, the government business picks up and there's a decline in 1Q. So should you basically really look at performance excluding the India government business from a 1Q standpoint? Yes, those are my questions.

[Sudhir Singh, executive]

Sure. Let me take both of the questions in order Kawaljeet. BFS, we believe it's a temporary blip, and that's a normalization that's happened because last quarter, our BFS business had grown sequentially 6.4%. It is still Y-o-Y 10.4% higher. We continue to believe that the BFS business for us is going to continue to drive robust growth.

And as we've indicated in the past, we would be disappointed if it doesn't register at least double-digit growth in this fiscal as well. So that's how I would characterize it. But temporary normalization for a business that's really been on steroids for the last 2 years from our point of view.

Second, as far as growth is concerned, for us, Kawaljeet, we don't really see India seeing a spike. India has always been at only about 4% of our revenues globally. The last 2 quarters were an aberration where it went all the way up to 5.3%. This quarter, it's come down to 3.8%. So we don't see the seasonality in India on an ongoing basis.

Last year was a bit of an aberration. Where we are right now 3.8%, we would expect India to continue to operate at 4% to 4.5% only going forward as well.

[Kawaljeet Saluja, analyst]

Okay. And just a final question, Sudhir. When you think about where you were 3 months back versus where you're sitting today, do you see a marked difference in your growth outlook? And if yes, can you just walk us through what has changed in the last 3 months for that higher confidence in growth.

[Sudhir Singh, executive]

Sure. The first thing, Kawaljeet, is that on the margins, we see the demand outlook across financial services, particularly even though it doesn't reflect in this quarter performance as having materially improved. We see the outlook for the aviation, travel aviation sector is continuing to be extremely strong right now, and we are seeing a rebound in our insurance business.

When you look at our numbers, you will find that all the 4 verticals seem to be delivering good broad-based growth on a go-forward basis.

The second thing that gives us confidence is the fact that our next 12-month order book is increasing. It's now USD 1,070 million, as I called out. More importantly, it's 19.3% higher than where that number was at the same time last year. And Y-o-Y numbers have for the last 2 quarters been increasing in line with the slightly improved macros that at least we see around the edges.

The third thing, and I think this is the best reflection of where our confidence stems from is the headcount addition. Out of the 1,886 net headcount increase, only 250 are graduate engineer trainee from colleges. The rest, are folks have been brought on board, and we will see upsides on the revenue front in the quarters to come because of the very strong headcount addition that I talked about.

[Operator]

We'll take a next question from the line of Manik Taneja from Axis Capital.

[Manik Taneja, analyst]

Congratulations, Sudhir, for strong performance. Just wanted to get your sense with regards to the headcount addition that we've seen in the current quarter. While the headcount addition is very impressive, the increase in manpower cost is much lower. So was this headcount addition skewed towards the later part of the quarter? That's question #1.

And if you can also talk about the significant step-up in on-site hiring and the increase in on-site mix that we've seen in the current quarter.

And the third question once again related to the wage hikes. If you could help us understand what drove our decision towards the deferred wage hikes by a quarter? And how are we thinking about our plans to essentially manage our average resource cost, which was suggested to be a significant margin lever over the foreseeable future?

[Sudhir Singh, executive]

So thank you for the questions, Manik. Headcount addition, 1,886. 250 of those are graduate engineer trainees who will take between 4 to 8 months to become billable. 45% of the 1,886 were BPO resources where the revenue productivity ends up being lower than where it is. And yes, the last piece around that is most of the headcount addition was towards the second half of the quarter.

Even in cases where they have been assigned to projects, there is -- as all of us know, a normal onboarding and a transition lag to billing that is in place. So that's how the 1,886 headcount addition played out.

The other question that you had was around wage hikes. Wage hikes, we've been extremely fair with the employees over the years. Last year, we were possibly the only firm that did do a wage hike on the 1st of April. And did a very material wage hike, which was reflected in the margin impact in Q1 last year.

This year, the call that we've taken around wage hike was in line with what we've seen across the industry, and in line with the fact that our ARC over the last 2.5 years has gone up almost 40% and needed a correction. That was the business call that led to that decision.

Did I answer both your questions, Manik or did I miss any one of them?

[Manik Taneja, analyst]

So these are -- just to essentially get sense on how should we be thinking about this ARC cost on a go-forward basis, given the on-site step-up in terms of hiring and the relatively subdued [ fresh ] order intake in the quarter.

[Sudhir Singh, executive]

Yes. The on-site increase has been a marginal increase, Manik. So I don't expect that to improve AR to adversely affect ARC in any manner. The program that we have in place to put a strong check on ARC is firmly in place and will continue to deliver. We will also announce in the rest of this week the name of the leader who's come in and is running global delivery for us and the principal mandate, not the principal, but the most immediate mandate I've handed over to him as a global delivery head is to make sure that he works with Saurabh and his team to continue to keep a very sharp eye out on ARC, to make sure that at a minimum we deliver on our margin commitment and hopefully do slightly better than that by the time this fiscal year ends.

[Manik Taneja, analyst]

And then last one before I get back into the queue, if you could talk about the weakness that we've seen in terms of revenue growth within our top customers this quarter because it appears that the growth is supported outside of top 10 customers this quarter.

[Sudhir Singh, executive]

Yes. Actually, Manik, the weakness was only in the top 5. Top 6 to 10 have actually done very well. Our top 5 have a preponderant number of banking clients. As I said earlier, in response to Kawaljeet's question, banking has seen a normalization after, I believe, about 12 or 13 quarters of extremely significant growth. Quarter 2, we would expect banking and these accounts from the banking sector to bounce back.

[Operator]

We'll take our next question from the line of the Vibhor Singhal from Nuvama Equities.

[Vibhor Singhal, analyst]

Congrats, Sudhir and Saurabh for a solid quarter. So Sudhir 2 questions from my side. I mean, last year, we did phenomenally well in terms of the overall revenue growth rate. Despite the fact, I think we faced challenges in the top clients in almost all of our verticals. Be it travel, banking, insurance. What is the outlook on the top clients in those specific verticals for this year?

You did mention that, of course, this quarter, the banking sector saw some bit of a normalization but how is the pickup in those specific lines in the insurance, the top 2 travel accounts and, of course, banking as well. Do we expect them to have bottomed out and pick up the growth momentum and hence, the growth to be driven in the next few quarters by the top 5 and the top 10 accounts? Or do you think it's going to take some time to basically pick up momentum given where they are at this point of time?

And then I have a second question.

[Sudhir Singh, executive]

Vibhor, we expect the momentum to be back starting Quarter 2 itself. It might pick up further in the subsequent quarters. But Quarter 2 should see this metric getting corrected. The intent always is to make sure that growth comes not from the top 5, top 10 and so on and the subsequent accounts. So we would expect with the normalization in this quarter around large banking clients getting corrected, these numbers to start falling back in the normal pattern from Quarter 2 itself.

[Vibhor Singhal, analyst]

Got it. Got it. And then if I can just put -- secondly, if I can just pick up your brain on the travel vertical. Banking, of course, you've mentioned, and I think a lot of the other players in the industry are also commenting on pickup in U.S. BFS. But how is the travel segment looking like? Because I think after the initial, let's say, pick up in spending post COVID, most of the travel clients had kind of held back their tech spends because they were getting organic growth in which ways because of the surge in travel across the world.

Has that spend revived? Are there -- are we looking at some any closures in the near future? And how do you see this vertical panning over out, given it didn't do exceptionally well last year? How do you see it doing this year?

[Sudhir Singh, executive]

I see travel doing better than last year for us. We look at travel as a composite of 3 different subsegments. The first one for us, of course, is airlines. And for airlines as a whole, when we look at IATA data also, they are still looking at a 10.7% year-on-year increase in passenger demand for the whole aviation industry.

And in this particular segment, we are clearly seeing a technology rehaul across airlines that is going on, especially after the Southwest fiasco that had happened December '22. And we continue to see both big data and biometrics, again, being areas where there's significant demand coming in.

Interestingly, I do want to point out, Vibhor, that now we work with 5 out of the top 10 airlines in the world. So this sector, to that extent, the fact that it's seen a 10.7% Y-o-Y increase in passenger demand as per IATA, the outlook is good, and we feel good about it.

The second sector that we operate in is hospitality, and that is continuing to thrive with the increase in demand that we've seen leading to implementation of solutions that are supporting frictionless stays, and there's a lot of AI-driven personalization also we are seeing.

The third subsegment is logistics. And in that subsegment, we anticipate no growth in 2024, and the focus there remains on supply chain resilience more than anything else and on cost containment through AI and automation.

John, would you like to add something else to this?

[John Speight, executive]

Sorry, just get myself off mute. Not too much, Sudhir. I think you covered most things well there. I think in the hospitality side and airports, I think we will start -- we will continue to see significant growth. And obviously, there's quite a lot of work we're seeing coming up on the legacy modernization and transformation. Obviously, a lot of it being driven by AI and the way it's being now used to fast track the migrations. But I do see that growth continuing, certainly in the markets I'm working in.

[Vibhor Singhal, analyst]

Sure. That was all. Sudhir, if I could just dwell a bit further on this. Sorry to harp on it, but it's a very interesting conversation that I think we're having on that front. I think a couple of industry experts have kind of hinted that in the -- specifically in the airline industry, the kind of passenger traffic growth that we are seeing, of course, that is leading to very good cash flows for the airlines, which should eventually turn out into high tech spends.

But given the already level of automation, I mean, the contactless bag at check-in and all those things that the airlines have done the scope, let's say, or the intent of further, let's say, improvement or tech spends had basically temporarily, if I may say, come down for the airlines. Would you agree with that? Did we also see that to some extent last year? And do you see that changing a lot? Or do you think it's -- I mean it's not the case and the tech spend -- and intent of the high tech spend continues in the airlines.

[Sudhir Singh, executive]

Sorry, John, did you want to say something? I should...

[John Speight, executive]

I was going to say that based on our finding so far, the spend is continuing. A lot of effort is going into the -- a lot of the operational back end processes as well as the front-end customer experience. Also, there is an increasing amount of work going on the e-commerce, the loyalty schemes as well surrounding the core airline businesses.

[Sudhir Singh, executive]

Also, if I may, you're absolutely right, John. And if I can also give you some anecdotal references there, Vibhor. We work with the 2 largest GDSs in the world. We also work with possibly one of the oldest PSS and order management services organizations in the world. In the -- I mean I know John would have gone and met them, but I met the CTO of one of the GDSs and the CEO of the other firm that I talked about. And in both instances, this could be specific to these organizations. The outlook as they see it around their tech spend remains resilient.

[Vibhor Singhal, analyst]

Got it. Got it. If I can just squeeze one question for Saurabh. Saurabh, could you just help us elaborate what were the exceptional items for Cigniti in this quarter? And what is the core margins for the business that we are looking going ahead on a quarterly basis?

[Saurabh Goel, executive]

So Vibhor, in the current quarter, so there were 3 line items wherein the exceptional expenses came in. And one of that was already part of the contingent liability that they reported. So it was government incentive around CIS, and it was INR 3,004 million. So that was one.

And then the other one was TDS on ESOP expenses pertaining to prior period of 2017, '18, wherein there was some demand that came in, in the current quarter. Again, it was a known issue, but long pertaining issue, and it has been settled, which is INR 55 million. And then in previous quarter in Q4, there was long service bonus that was given to employees.

A couple of employees were left out a few of them, and they've also been given that long service bonus in the current quarter, and hence, it's close to INR 45 million. Now putting all of this together, right now, the adjusted EBITDA margin for the quarter was 12.6%. The wage hikes for larger part of the delivery organization up to Band 4 has already been given.

And we are looking at substantial margin expansion in quarters to come. I think between Quarter 2 to Quarter 4, we are looking at 16% plus EBITDA margin going forward.

[Vibhor Singhal, analyst]

You're not expecting any more exceptional items, I would say.

[Saurabh Goel, executive]

We are not expecting any more exceptional items, which will impact consolidation because there are certain settlements that have to happen, but that will be taken care as part of PPA already. So it will not impact the consolidation. So whatever [indiscernible] already been baked in, in PPA. Even this CIS was part of my PPA, but because this came in and got settled in Quarter 1 itself. And hence, we took a hit and it will get adjusted in P&L.

[Operator]

Our next question is from the line of Dipesh Mehta from Emkay Global.

[Dipesh Mehta, analyst]

I have two questions. First about the margin, can you help us understand margin decline quarter-on-quarter, what factors led to our margin decline because wage hike was not there and now rest of the metrics seems to be fairly stable. So if you can help us understand what factor led to Q2 weakness in margins.

Second question is about insurance. I think you indicated about recovery in insurance, and we are, I think, hearing for some time. But if I look underlying growth momentum perspective, it is not showing any material change. So if you can give some comment around, even deal intake wise we have seen some momentum in the prior quarter. So if you can give what is working in insurance and what is yet not played out? Also if you can give some sense about how to expect trajectory of growth.

[Sudhir Singh, executive]

Saurabh, can you take margins and then I'll take insurance?

[Saurabh Goel, executive]

Yes. So Dipesh, a couple of things. One, we book the visa cost in Quarter 1 of every financial year. So every financial year, you will see that we would have a margin dip of roughly 350 bps between Q4 and Q1. 250 -- 220 to 250 would be on account of wage hikes and 100 bps would be on account of visa cost and plus some renewals that will happen on Microsoft licenses, true-ups and all of those.

So in the current quarter, we had -- we didn't have wage hikes. In Quarter 2, we expect wage hikes to be much lower than what they have been in the past, point #1.

Number 2, there was visa costs that came in, in the current quarter. plus there was increase in on-site headcount increase in on-site ramp-up that had happened because of which the margins were lower. So these were primarily 2 reasons. And we are at 17.9% adjusted EBITDA in the current quarter. By end of H1, as Sudhir also mentioned in his remarks, we will be 50 bps higher versus the H1 previous year. which would mean that the drop in margins in Quarter 2 because of wage hikes will not be as significant as it has been in the past.

[Sudhir Singh, executive]

Coming on to the insurance question that you talked about, Dipesh. We had talked about a very significant deal in the last quarter. The ramp-up of that deal has proceeded. It's been one of the largest ramp ups that we've seen in insurance for a while. At the current point in time, insurance Y-o-Y growth for the firm is 2.5%.

We believe if current projections hold at the end of Q2, that number should be up materially.

[Operator]

We take our next question from the line of Ashwin Mehta of AMBIT Capital.

[Ashwin Mehta, analyst]

Just one question to Saurabh. Saurabh, in terms of the transaction charges taken this quarter, does it cover both the QIP as well as the acquisition? And do we envisage any further transaction charges going forward?

[Saurabh Goel, executive]

Current quarter almost covers pretty much anything and everything that was done on the transaction. So very minimal expenses on the merger would come in, I think, but we're pretty much done.

[Ashwin Mehta, analyst]

Okay. Fair enough. And in terms of the margin impacts for the next quarter, just wanted to -- is it more like 130 to 150 bps in the next quarter because of wage hikes?

[Saurabh Goel, executive]

Yes. On account of wage hikes, but there will be some efficiencies. And hence, I think the guidance is that we will be from an H1 to H1 perspective will be 50 bps higher.

[Operator]

Our next question is from the line of Ravi Menon from Macquarie.

[Ravi Menon, analyst]

Congrats on really strong growth in Americas. I want to understand why are we seeing that? And also in Europe, why is there a decline now? You had several quarters, I think, about 8, 9 quarters of good growth there. And finally, that's down a bit. So -- and on BFS, you spoke about how some of this decline is just a blip and will return to growth. But could you give us some more detail about what sort of programs have come to an end? And have you -- are you seeing a spend start in a different spot or with a different set of clients?

[Sudhir Singh, executive]

U.S. and Europe, Ravi, is again tied to banking. The e-banking clients where we've seen the temporary blip in Q1 are largely Europe-based, and that would explain the Europe performance.

As far as BFS is concerned, we expect the growth to come back from the same clients. There's just been in some ways a normalization, a bit of a pause that comes in, in between program transitions. But we are not seeing any change in the nature of spending and we are not looking at newer clients to drive growth from because the relationships are unstable or the spends have dried up.

That's not the case. A lot of the 1,886 people that we brought on board, a significant number of them have either already been aligned to some of these banking clients or will be aligned almost in the coming weeks. That's how we're seeing banking and insurance and Europe, I beg your pardon.

[Ravi Menon, analyst]

And strong ramp-up in BPO, is this travel? Or is this related to the mortgage business picking up? Could you talk a bit about that?

[Sudhir Singh, executive]

It's right across, Ravi. The SLK acquisition that we had done 3 years back in order to set up a BPO business, it's now 3 years and the cross-sell has proven to be very effective.

Growth interestingly in this quarter came from a retail client, which is one of the emerging verticals that we talk about in the BPO space. When we acquired that asset, it was an asset focused on doing process services for banking, but we've been able to radiate very successfully into insurance, into travel and now into retail.

[Ravi Menon, analyst]

And on this airline customer that you acquired, is this something that is the major customer opportunity that you were hoping to get in or that is outside the -- it's still to be done?

[Sudhir Singh, executive]

No, these are -- none of what I called about as a customer was anything to do with Cigniti because we will only talk about Cigniti clients starting Q2. The airline customer that was a long-term Asia Pacific-based airline client of Coforge and the large deal was signed with them.

[Operator]

Our next question is from the line of Abhishek Kumar from JM Financial.

[Abhishek Kumar, analyst]

My first question is on order book growth. Sudhir, we have seen last few quarters, the gap between executable order book growth and the revenue growth has widened. Is it because the smaller deals, which are won and consumed during the years have dried up? And if that is the case, what gives us the confidence that the growth in executable order book would necessarily translate into better revenue growth for us.

[Sudhir Singh, executive]

Saurabh, would you like to take that?

[Saurabh Goel, executive]

Yes. So Abhishek, point #1, the growth in executable order book is in line with the kind of deals that we are seeing. And at least when we look at this number, and we compare it to the billing or the revenue recognition that happens from this order book over the next few quarters, it is -- it has been in line and we haven't seen any leakage or shrinkage on this number.

I think the only difference has been between the growth that we have reported versus this number because this is from the executable order book to the reported revenue number, as you always mentioned, there are waterfalls of 3 parts. One is the renewal that would come in through the year.

Second part is the existing accounts wherein we will sell new opportunities and new business. And the third bit is the new customers starting to ramp up. So it is either the new business and the existing accounts or the new business with new customers wherein the slowness comes in, that is what is impacting the difference between the growth in executable order book and the revenue number that we report. So it's not that the shrinkage is happening in the executable that we have right now.

[Abhishek Kumar, analyst]

Sure. That's helpful. My second question is on testing. I think in our prepared remarks also, we mentioned a lot of GenAI-led automation. And we also hear from some of your peers that testing is one area, which is ripe for disruption because of GenAI-related efficiency gains. Now in that context, how do we look at Cigniti's portfolio? Do you think there is a risk because of AI, et cetera, in terms of volume depletion?

[Sudhir Singh, executive]

I think we've answered this question repeatedly over the last 3 months since we announced the acquisition. We clearly don't see a risk, and the proof lies in reporting and in the numbers. We've shared Q1 numbers. We've given you -- I think we've been very, very clear that the fact that this asset under our watch has been acquired not for testing revenues or testing expertise, where we already had $100 million service line. But for helping set up a health care, a retail and a high-tech vertical. That plan is absolutely on track.

We believe, and we say this emphatically, that Coforge will be one of the fastest-growing firms but Cigniti will grow faster in the quarters and possibly the next few years than even Coforge. So yes, if it is non -- if it is functional testing, clearly, GenAI is going to come, disrupt and take away revenues, but there are also opportunities around testing in an AI-infused environment that we see.

In any event, we haven't done the acquisition because we wanted testing expertise. We didn't and we don't. We have done it to stand 3 new verticals. And given everything that we've seen with the team, given that now we have operational control over that entity, given that the sales head is now a leader. She has moved from Coforge to Cigniti, given that I have best estimates for the next 3 quarters from her, given that Saurabh has margin estimates and he talked about a very big jump in margins, we feel rock solid about the acquisition that we've done.

And we believe not just Quarter 2 but Quarter 3, Quarter 4 and next year will prove that this is going to be a high-growth, high-margin asset under our watch.

Saurabh, would you like to add something to it? Or John, would you like to add anything to it?

[Saurabh Goel, executive]

No, Sudhir, I think you have covered it all. But yes, I would want to reiterate margin piece, Sudhir at least for the business because as we see -- as we stand today, and the progression that we're seeing in Q2, Q3, Q4 margins for the acquired business, 16% is what we have guided, 14% is what they delivered last year. 12.6% is what they have seen current quarter and I think 16% is bare minimum, what we will do. The endeavor will be to exceed that number.

[Operator]

[Operator Instructions] We'll take our next question from the line of Ashis Dash from Mirae Asset Capital.

[Ashis Dash, analyst]

Saurabh, I have a question for you. If you look at the segmental margin, the EMEA segmental margin has declined and sits lowest in last several quarters. Could you just explain me like what is the reason for that.

[Saurabh Goel, executive]

Yes. So segmental margins, #1, also has the cost on account of transaction-related expenses, which have got allocated to them. So if you compare margins, segmental margins versus previous quarters. So all that cost has got allocated when we arrived at the segmental margin. So that's point #1. So it won't be an apple-to-apple comparison. So that's #1.

Number two, the softness in the BFS vertical has led to a little softness in margins in that region. But otherwise, it's not that the margin for the segments have substantially gone down. It's because of the allocation of transaction-related expenses.

[Ashis Dash, analyst]

Okay. Okay. And the next question is on the ESOP expenses. This quarter, it's on the load side. And earlier, it was mentioned that it would increase. So what would be the ESOP expenses going ahead in the remaining quarters?

[Saurabh Goel, executive]

Look, Ashis, see ESOP expense is also a function of grants being issued to the leadership team. So we expect the grants to be issued in the current quarter. And we had guided for 160, 170 bps from a full year perspective as ESOP expenses, and we stick to that guidance.

[Ashis Dash, analyst]

Okay. And one question for Sudhir. So Sudhir, you are giving -- right now, you're giving the guidance for travel insurance and banking. So why don't you resume your growth guidance for the year FY '25?

[Sudhir Singh, executive]

No, Ashis. We've taken a very conscious call. We will not -- we have not given a guidance for this year, and we will not be giving a guidance going forward as well. And there is no other mid-cap firm in our industry that gives a guidance and we are aligning with that process.

[Operator]

Our next question is from the line of Debashish Mazumdar from Svan Investments.

[Debashish Mazumdar, analyst]

Good set of numbers. So 2 questions I have. Sudhir, if I remember, last year, you very clearly called out that H2, there is not any recovery that you were seeing where others were bullish. So the macro perspective, do you think that we are bottoming out and things have started turning back. So that is the first question.

And the second question is, I'm not asking for a quantitative revenue numbers, but earlier, you used to call out a relation between your order book and your revenue growth. So currently, we are around 19% order book growth. So is there any material relation that you can bring it out between the revenue and order book?

[Sudhir Singh, executive]

Sure, Debashish. We believe that the demand has not just bottomed out, but that it is picking up. There was an [ H2 ] phase when demand was falling, which is where I think we met more than a year back. There was a bottoming out. And now while we don't see a very rapid increase, but there is clearly a rebound on the demand front. It is tepid, but it is definite.

As far as order book is concerned, revenue, the order book, you will notice on a Y-o-Y basis for the last 2 quarters has been reversing. Net of India, even this quarter, the revenue growth has been sequentially 3.7%, which is higher than the 2% to 3% band that we were normally operating in.

So that -- at this point in time, while we have some more key deal metrics that we are tracking. From an external perspective, what we would like to call out is on a Y-o-Y basis, order book is improving, therefore, logically, in a very gradual manner, sequential growth on a Y-o-Y basis should also start seeing an improvement from where it is.

[Saurabh Goel, executive]

And the other thing, to add to that, I think the headcount addition is another metric, along with the order book increase, which gives confidence.

[Debashish Mazumdar, analyst]

Yes, absolutely. Absolutely. Yes. So one last question on this headcount itself. This addition of head count, especially in SNM. Is it more to do with cross-sell Cigniti capabilities? Or it is like our organic business has so much of potential that we are hiring this much of number?

[Saurabh Goel, executive]

This is organic...

[Sudhir Singh, executive]

This is our [indiscernible] business. There's nothing to do with Cigniti here. This is all Coforge, and this is all organic.

[Operator]

We'll take our next question from the line of Shradha Agrawal from AMSEC.

[Shradha Agrawal, analyst]

Congrats Sudhir, on a good quarter. Just one question from my end. How should we look at the depreciation and amortization cost after we consolidate Cigniti into our financials?

[Sudhir Singh, executive]

Saurabh, would you like to take that?

[Saurabh Goel, executive]

Yes. So Shradha, we would be expecting -- so again, the purchase price allocation is yet not complete because we'll have to true it up depending upon the June financials. But we are looking at a pickup of $8.5 million to $9 million in the amortization on account of purchase price consideration from Quarter 2 onwards on an annualized basis.

[Operator]

We'll take our next question from the line of Chirag Kachhadiya from Ashika Institutional Equities.

[Chirag Kachhadiya, analyst]

I have just one question. Within BFSI, amongst top 5 clients, which areas facing the normalization of growth practice wise, if you can share.

[Sudhir Singh, executive]

No, I mean this is a -- as I said, it's just a temporary blip. Overall financial services industry, particularly as inflation levels in most developed markets are stabilizing towards the target levels given that interest rates appear to be reaching a plateau.

The growth in spending isn't, as I said, at -- on the margins seems to be seeing a rebound. So this is a temporary blip for a business, which has possibly been the fastest. And I'm not 100% sure if it's true, but possibly the fastest-growing banking business across the industry globally.

It's a 1 quarter phenomenon. We should be back on the growth path in Quarter 2. So I won't call out anything that's a big concern. There is obviously, right now, a notable emphasis on upgrading core platforms to facilitate digital transformation imperatives. There are funds that are flowing in there.

Retail corporate banking [indiscernible] in trend in the focus on enriching digital channels. So there is funds coming in there as well. But overall, just a temporary blip as we called out earlier.

[Operator]

That was the last question. I now hand over to Mr. Sudhir Singh, CEO of Coforge Limited for closing comments.

[Sudhir Singh, executive]

Ladies, gentlemen, thank you very, very much for your time and for your interest. As always, these were incisive probing questions that also educate us around the nuances around our business, and we really appreciate your time around this. We look forward to seeing you 3 months from now in the next quarterly call.

Stay safe. And thank you once again.

[Operator]

Thank you, members of the management. Ladies and gentlemen, on behalf of Coforge Limited, that concludes today's conference. Thank you for joining us. You may now click on the leave icon to exit the meeting. Thank you for your participation.