Coforge Ltd

NSE:COFORGE

Earnings Call Analysis

Coforge Reports Strong Growth and Solid EBITDA Margins

Coforge delivered a strong quarter with revenues of $369.4 million, reflecting a sequential growth of 26.8% in U.S. dollar terms. Both organic and Cigniti businesses grew, with respective increases of 6.3% and 6.1%. EBITDA rose to $58.4 million, achieving a margin of 15.8%, up 55 basis points year-over-year. Looking ahead, Coforge anticipates reaching an 18% EBITDA margin for Cigniti by fiscal year-end. The signed order book increased by 40% year-over-year to $1.31 billion, indicating robust demand across all verticals, setting a solid foundation for sustained growth.

Strong Revenue Growth

Coforge reported robust revenue of USD 369.4 million for the quarter, marking a significant sequential growth of 26.3% in constant currency terms and an impressive 26.8% in U.S. dollars. This growth is not concentrated in one specific area; rather, all business verticals are expanding, which suggests a sustainable growth trajectory for the company.

Diverse Performance Across Verticals

Revenue contributions were well diversified: the banking and financial services segment grew 5.2%, accounting for 31.3% of total revenue; the insurance sector expanded by 8.9%, providing 21.8%; the travel vertical increased by 6.2%, contributing 18%; and the government sector outside India saw 6.7% growth, representing 7.8% of revenues. This balanced performance across sectors signals a stable demand landscape.

Improved Margins and EBITDA

Coforge achieved an EBITDA of USD 58.4 million for the quarter, up 17.6% sequentially and 37.6% year-over-year. The EBITDA margin stood at 15.8%, reflecting an increase of 55 basis points compared to the same quarter last year. For the first half of FY '25, the EBITDA margin improved to 16.4%, which is 125 basis points higher than the previous year.

Promising Order Intake and Backlog

The company's order intake has been robust, with USD 516 million this quarter, including USD 67 million from the recently acquired Cigniti business. Coforge's twelve-month signed order book now stands at USD 1.31 billion, an increase of 40% year-over-year, indicating a healthy pipeline and strong future revenue prospects.

Successful Integration of Cigniti

Coforge's acquisition of Cigniti is showing strong synergies. The organic business of Coforge has grown 6.3% sequentially, while Cigniti has similarly performed at 6.1% growth. The integration has led to an improvement in Cigniti's EBITDA margin to 16.2%, up 360 basis points over the previous quarter, with a target to exceed 18% by the end of this financial year.

Positive Outlook and Growth Projections

Coforge’s management maintains a positive outlook, emphasizing plans to reach a run-rate of USD 2 billion in revenue. This target is underpinned by a strong pipeline for significant deals and continued strength in various verticals. The company’s discipline in capital and resource management is expected to drive operational efficiency and profitability moving forward.

Operational Efficiency and Cash Flow Improvement

Coforge has managed to generate operating cash flow of USD 39.3 million for the first half of FY '25, a substantial improvement compared to a cash burn of USD 0.5 million in the same period last year. This positive trend signals robust cash management and improved financial health.

Employee Growth and Utilization Rates

The total employee headcount increased by 5,871 during the quarter, with Cigniti contributing significantly to this number. Continuous hiring aligns with the company’s growth strategies, although current utilization rates are at a manageable 82%, allowing room for further talent absorption and capability expansion.

Caution on Furloughs and Market Dynamics

Management expressed that they expect normal trends regarding furloughs as they enter the third quarter, similar to historical patterns. This highlights potential seasonal impacts; however, the company remains equipped to navigate this through its diversified vertical strength.

Conclusion

With solid revenue growth, strong EBITDA performance, and a diverse vertical contribution, Coforge is positioned for continued scalability and has an optimistic outlook regarding its integration of Cigniti. Investors should watch closely for developments in the upcoming quarter that could further enhance the company’s growth narrative.

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Coforge Limited Q2 FY 2025 Earnings Conference Call. [Operator Instructions] And this conference is being recorded.

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

Before we begin, please note that some of the statements made in today's discussions relating to the future should be construed as forward-looking statements and may involve risks and uncertainties. Please refer to the disclaimer to this effect in the company's Q2 FY 2025 earnings press release.

With that, I now hand the call over to Mr. Sudhir Singh. Over to you, sir.

[Sudhir Singh, executive]

Thank you, Inba. Ladies and gentlemen, thank you very much for joining us today as we share our Quarter 2 fiscal year '25 performance and the business outlook going forward.

Quarter 2 has been an exceptionally good quarter for the firm. And not only has the quarter been an exceptionally good quarter, it has also been a quarter that has validated the 3 key assertions that we made at the beginning of this fiscal year.

You will recall that at that time, our 3 assertions were seen as unconventional and met with some degree of concern. You will also recall that those 3 assertions, which now stand vindicated were: one, we had shared then that given the incredibly detailed due diligence we had done, we believed that the Cigniti business was foundationally a healthy one, and that growth of both businesses would accelerate remarkably and immediately on account of synergies once we brought them together. That was assertion one.

Assertion 2 that we had made was we had shared that even though we were stopping the practice of annual revenue guidance, the health and outlook of our organic Coforge business, and by organic, I mean, all Coforge businesses, excluding Cigniti, was very robust. We were not, repeat, not undertaking an acquisition because our organic business was stressed. We had emphasized then that we were undertaking a material acquisition because our organic business was in the pink of health.

And assertion 3 that we made at the beginning of this fiscal year was, we were, at that time, you will recall, the first management team in the industry to state that we saw a definite and a positive turnaround in the demand environment based not on analysis from any analyst, but based on the buildup of our [ indents. ]

Ladies and gentlemen, as you reflect on those 3 assertions made at the beginning of the fiscal year by us, please contrast them with our Quarter 2 performance that I shall now read out.

In Quarter 2, the Coforge organic business has grown 6.3% sequentially in U.S. dollar terms. While the stand-alone Cigniti business has grown equally strongly by 6.1% sequentially in U.S. dollar terms. With both businesses registering exceptional growth, the firm grew sequentially in Quarter 2 by 26.8%. That's sequentially in U.S. dollar terms.

We crossed the $1 billion run rate only 7 quarters back. And today, 7 quarters later, we are now operating at a run rate of almost USD 1.5 billion.

What makes this synergy-driven performance even more remarkable is the current expansion in EBITDA. The Coforge organic business has increased its reported EBITDA by 125 bps in H1 over H1 of last year. At the same time, please note, the Cigniti business has seen its EBITDA jump by 360 bps sequentially to 16.2% in 1 quarter alone. We expected Cigniti to hit a 16.5% EBITDA target by Quarter 4, but we now believe that we will hit more than an 18% EBITDA target for the stand-alone Cigniti business by Quarter 4 this year.

Ladies and gentlemen, with that preamble, I shall now talk you through the quarterly performance and our assessment of the outlook. Beginning with the revenue analysis. I'm pleased to report that during the quarter, the firm registered a revenue of USD 369.4 million. This represents a sequential revenue growth of 26.3% in CC terms, 26.8% in U.S. dollar terms and 27.5% in Indian rupee terms, respectively.

Equally importantly, the growth has been evenly spread across verticals, indicating that the growth trajectory of Coforge is likely to sustain. It is not a lopsided growth that Coforge is experiencing focused on either a particular vertical or a particular geography. All verticals, all geographies are growing robustly.

During the quarter, our banking and financial services vertical grew 5.2% sequentially and contributed 31.3% to our revenue mix. The insurance vertical grew 8.9%. That's 8.9% sequentially and contributed 21.8% to the revenue mix. The travel vertical grew 6.2% sequentially and contributed 18% to the total revenue. The government vertical outside India grew 6.7% sequentially and contributed 7.8% of the revenue mix.

With that, I shall now move on to the margins and the operating profit discussion. During the quarter, we delivered an EBITDA of USD 58.4 million, registering a sequential growth of 17.6% and an year-on-year growth of 37.6%. This reflects an EBITDA margin of 15.8% for this quarter, which is higher by 55 bps over the same quarter last year. You will recall that wage hikes at Coforge were undertaken in Quarter 2 beginning.

For the half year ending September 2024, EBITDA margin stands at 16.4%, higher by 125 bps over H1 last year.

Moving on to order intake. Over the last 10 quarters, we have been clocking an order intake of more than $300 million per quarter, every quarter. In the current quarter, the firm saw an order intake of USD 516 million, which includes $67 million from Cigniti.

The next 12 months signed order book has moved from $1.07 billion in the previous quarter. It has jumped to $1.3 billion (sic) [ $1.31 billion ] in the current quarter. This represents a 40% increase in the next 12 months signed order book over last year same quarter.

The large deal velocity and signing continues unabated and the velocity seems to be picking up. During the quarter, we signed 3 large deals: 1 in Continental Europe, 1 in North America, and 1 in the U.K.

Moving on to people metrics. On the people front, the addition of Cigniti has added 4,430 people to our head count. Excluding Cigniti, the organic Coforge business added 1,441 people, which represents a 5.4% increase sequentially in the net head count. This increase of 5.4% in net head count of the organic Coforge business follows the increase of net head count by 7.5% in the last quarter.

Our total head count for the quarter stands at 32,483, reflecting a net addition of 5,871 employees during the quarter. Attrition continued to be stable and the last 12-month attrition during the quarter stood at 11.4%, including the Cigniti attrition, which is at 11.7%.

With that, I shall now request John Speight, Customer Success Officer Coforge to walk us through capability and delivery highlights. John, it's all yours.

[John Speight, executive]

Thank you, Sudhir. I shall now touch upon the highlights of the quarter related to our delivery operations.

In the banking sector, we continue to grow our strategic partnership with a leading U.K. bank with signing a new 3-year deal for legacy modernization to optimize costs and improve their customer satisfaction. We also successfully completed a comprehensive assessment of the wholesale division of the Tier 1 global bank evaluating their maturity around resiliency, engineering and agile organization structures. Planning is now on the work -- on the next phase.

In the insurance sector, we signed a 3-year deal for a global insurer to implement an end-to-end Gen AI solution to transform automation across their enterprise. For a leading U.S. product provider, we successfully completed the setup of a 500 strong GCC. This is expected to grow to more than 1,000 in the next 3 years. We also secured a major 3-year deal with a Tier 1 insurance major to be their grow and run partner.

In the travel sector, a 3-year renewal at a major Australian airline will see us continue to provide end-to-end managed services, delivering enhancements across business intelligence, infrastructure and applications.

In the retail sector, we secured a major 3-year managed service deal with a top Australian supermarket chain to automate quality engineering services across their e-commerce and mobile channels.

The government sector continues to see strong growth. In the U.K., we have entered a 5-year strategic partnership with a key regulator to deliver CRM solutions that manage partnerships and system records. We also closed a multiyear deal for a leading health service provider to provide an integrated contact center and CRM solution that supports the delivery of urgent patient care to citizens. While in Australia, we are implementing a new low-code platform to streamline their processes for a large state government department.

Moving on to partnerships. We are partnering with ERM and Salesforce on an innovative sustainability solution called, the Environmental and Net Zero offering or ENZO. Launched officially in August, it is a full BPaaS offering that helps organizations to meet their Scope 1, Scope 2 and Scope 3 accounting and reporting obligations under the Paris Climate Agreement.

Our strong alliances have continued to develop, starting with a renewed designation as a Microsoft Azure Expert Managed Service partner, giving us top-tier Microsoft partner status, one of only 127 worldwide. Meanwhile, we are really pleased to announce that Pega has promoted us to their top-tier partnership within their Global Elite program.

We have developed new migration accelerators to support legacy transformation across key platforms. Our accelerators have the capability to automate over 60% of the migration, delivering savings in both cost and time to value.

We continue to achieve notable industry recognitions during the quarter. Designated by Everest as Leader in Low-code Application Development Services PEAK Matrix, leader in the Digital Transformation Services for Mid-market Enterprises PEAK Matrix and major contender in 5 other categories.

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. The organic EBITDA margin for the quarter stood at 16.6%, reflecting decline of 126 bps over previous quarter. All wage hikes were rolled out effectively July 1 in the current quarter. Please note that in the prior years, the impact of wage hike has been 250 bps to 270 bps.

You would also recall that in the beginning of the year, we had not given revenue guidance, but we have guided for gross margin improvement of 50 bps and reported EBITDA being flat for FY '25. We are pleased to report that end of H1 FY '25, our organic gross margin is 32.2%, up 64 bps. EBITDA is 16.4%, up 125 bps. Organic EBIT is up -- is at 12.9%, up 114 bps.

In H1 FY '25, we had acquisition and integration-related expenses, which had an impact of 2.3% on our profitability. This will get normalized in coming quarters. The depreciation of the consolidated financial statements reflects impact of amortization of intangibles, such as customer relationships and non-compete that got created on account of purchase price allocation because of Cigniti acquisition.

The amortization impact for next 3 years will be $10.7 million per year. The current quarter had an impact of INR 22 crores on account of this amortization.

We also guided for 16% EBITDA margin for Cigniti for the current financial year post reacquiring the firm. Current quarter witnessed increase in EBITDA margin to 16.2%, which was 360 bps over previous quarter. And we are now targeting to improve this to 18% by end of the financial year.

We have received SEBI approval on the open offer and the open offer is expected to get concluded by mid-September. The open offer for the tendering of shares will start in next 2, 3 days from now.

At the end of Quarter 2, we have cash balance of $217 million, which includes $137 million in the monitoring account from QIP proceeds. Net of that, we have $80 million of cash in the balance sheet, and we have a debt on account of working capital of $86 million.

OCF, excluding payment on account of transaction-related expenses for H1 stands at $39.3 million as against the cash burn of $500,000, a $0.5 million in the same period over last year. In Q4 FY '24, we had mentioned that we are working towards normalizing the operating cash flow through the year and this improvement in OCF in Quarter 1 and now in Quarter 2 is a result of the same.

ESOPs have been granted to the leadership team towards the end of quarter -- towards the end of September. And hence, from next quarter onwards, the ESOP cost is expected to go up in the range of 180 to 200 bps per quarter for next 2 quarters. This includes ESOP issued to Cigniti leadership as well and we have used our existing pool for the same.

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

[Sudhir Singh, executive]

Thank you, Saurabh. And just a quick correction, as Saurabh said, we have received the SEBI approval on the open offer, and it is expected to be closed by mid-November, not mid-September as we called out. So that's only 2 or 3 weeks from now.

Summing up and outlook, let me start off the outlook commentary with a broader statement of intent. The growth story of Coforge is now 29 quarters old. This is a time-tested team that is hungrier today -- more hungry today than it was more than 7 years back when we first came together.

Sustained and very robust growth at Coforge over the last 7 years has been driven by an intense execution-oriented culture that is uniquely our own. It is underpinned by a deep-rooted personal pride and an ambition to create a platform that will be the collective legacy of each one of us at Coforge. The last 7 years have seen spectacular growth. The next 7 years will be better.

With that, moving on to the outlook: a 27% sequential dollar growth with the organic business having grown 6.3% sequentially; a concurrent and material expansion of 145 bps in H1 in EBITDA; the second consecutive quarter of significant net head count addition; a large deals pipeline that is looking very robust; and finally, an ever strengthening next 12-month signed order book, which now is 40% higher Y-o-Y gives us confidence that the coming quarter and quarters to come shall see robust and sustained growth.

The growth and the margin expansion at Cigniti are a preview, as Saurabh said, of sustained growth and further increases in margin to follow. We have operationally fully integrated the Cigniti team, and the synergies have exceeded even our expectations. As noted, we expect Cigniti stand-alone EBITDA to go up to 18% plus over the next 2 quarters alone.

Overall, our confidence in the commitment that we offered at the beginning of the year to deliver robust and sustained growth is ironclad. Our medium-term guidance of not just hitting the $2 billion mark but also delivering a concurrent material expansion in EBITDA is intact.

Team Coforge just turned in execution of the highest order over the last 7-plus years. We look forward with confidence and eagerness in the next 7 years.

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

[Operator]

[Operator Instructions] We take the first question from Sulabh Govila from Morgan Stanley. Mr. Sulabh Govila, [Operator Instructions]

[Sulabh Govila, analyst]

Congrats on a good quarter. So Sudhir, you mentioned on the outlook near term as well as going forward. So I just wanted to double click on that. In the next quarter, particularly, what are you hearing on furloughs from the quarter and the expectation for the same versus, let's say, last year?

And then with respect to verticals, last quarter, we had specifically called out BFS to grow, let's say, in double digit for the year. Is there any incremental positive change in other verticals also that you've heard during the quarter?

[Sudhir Singh, executive]

Let's me take -- Thanks, Sulabh. As far as furloughs are concerned, we expect furloughs to be in line with the normal trend in Quarter 3. So we do expect furloughs to happen. We don't expect them to be on the higher or the lower side than they are in normal year. And we baked that into our projections.

As far as verticals are concerned, as you've noted, BFS has grown 5.2% sequentially. Insurance, you would have noted, has grown almost 9% sequentially, and travel has grown more than 6%, government also has grown more than 6%. So BFS, we had said that we will deliver double-digit growth. I suspect that is assured given this quarter's performance.

We had also said that we expect growth to happen in a tough macroeconomic environment because all verticals are firing, and all verticals will deliver growth that will largely be in the same ballpark. We maintain that assertion going forward as well, Sulabh.

[Sulabh Govila, analyst]

Understood, Sudhir. The second question I had was on Cigniti. Is the go-to-market and cross-sell plan already in motion there? And if you could highlight any updates on the same?

[Sudhir Singh, executive]

Go-to-market plan is firmly in place. At the end of the last quarter, we had talked about the fact that the go-to-market engine is -- was -- had already been -- was already being headed at that point in time by a Coforge leader who had moved in and had been working with the Cigniti team since 2.5 quarters.

She is now in charge. She is the one who's been driving it for the full year. And the results of her and her team's efforts, not just in terms of driving growth but in terms of working together as a composite team, part of the broader Coforge fabric, I suspect, are evident for everyone to look at.

Cross-sell is moving exceptionally well. So when I talked about the margins having exceeded our expectations, the only thing that's exceeded even margins on the expectation side has been the eagerness with which a team that was largely selling only 1 service line has embraced the other 10 that they can now sell.

[Sulabh Govila, analyst]

Understood. And then if a third question I may ask related to the bookkeeping question. Saurabh, below EBITDA, this one-off on transaction-related expenses as well as past liabilities from Cigniti. Just wanted to understand whether they will recur from 3Q or they're done?

[Saurabh Goel, executive]

So see, we don't expect any past liability to now come in because we have done our purchase price allocation, and we have otherwise almost taken care of any expected exposures that were there. So we don't expect anything around past liabilities to come in, number one.

Number two, on the integration-related expenses or the merger-related expenses, now you look at last quarter, it was a significant number. It's come down to $2-odd million. I think it will be [ sub $1 million ] dollars in 1 or 2 quarters and then it will die off.

[Operator]

We'll take our next question from Abhishek Pathak of Motilal Oswal. [Operator Instructions]

[Abhishek Pathak, analyst]

Yes. Congrats on a great quarter. So I think as Sudhir mentioned, I guess, the Cigniti revenue growth was probably a bigger surprise than the margin beat. My question -- the first question is, considering the demand is now certainly recovering across the board, does it now become easier to sort of cross-sell service lines and services to Cigniti clients in this environment? And if yes, does it significantly sort of change or rather upgrade our expectations from Cigniti versus what we acquired, maybe 6, 7 months back. That's one.

And secondly, on the head count bit, I guess, you've been hiring quite strongly over the past couple of quarters. And the utilization levels are now at 82%. I guess, a lot of your peers are operating at 85%. So is it tempting to sort of just sort of sweat the asset a bit more and go to 85% and manage margins or even exceed over there? Or do you think the demand is recovering sort of so much that you still want to hire and still sort of buildup that muscle on the head count side?

[Sudhir Singh, executive]

Abhishek, thanks for both the patience. As far as Cigniti is concerned, the cross-sell of services was something that we were absolutely assured about because we had spent a lot of time with the sales team of Cigniti, every level of the sales team. And it's not the demand environment recovery that is largely driving the cross-sell effectiveness. It's just the fact that, that team was primed and it was hungry, and our horizontal business units were primed.

As I said in my commentary, our organic business was in the pink of health when we did this material acquisition. There's a great synergy in terms of our horizontal business units working hand in glove with the Cigniti integrated business unit market-facing unit. And that is what is driving the very strong cross-sell, which gives us -- which always gave us a lot of confidence, but hopefully gives everybody on the call also the same confidence that we've always carried around Cigniti. That's answer one.

Answer two, as far as head count is concerned, our utilization numbers, 82% that you called are utilization numbers that, in our case, include trainees. At this point in time, we think the demand environment -- I wouldn't classify it as demand environment. We believe that our pipeline is very strong. We don't want to sweat the asset anymore. We want to keep utilization at where it is to make sure that the demand gets addressed, and the growth that we see in front of ourselves is not missed.

[Abhishek Pathak, analyst]

Very, very clear, Sudhir. And on the -- and if I can just squeeze in one more on the Cigniti margins. So the 3 tiers expansion is incredibly heartening. Now going forward, are there -- is there any more low-hanging fruit that you will quite easily pluck and the margins may expand to your guided range? Or do you think it requires further -- it requires more discipline going forward on Cigniti?

[Sudhir Singh, executive]

There are still -- it's only 1 quarter. There are still low-hanging fruits. We've given -- we've shared an estimate of 18% over the next 2 quarters. Most of that should come through addressing the low-hanging fruit. Structural improvements beyond that, again, are possible, but we'll talk about those next [ year. ]

[Operator]

Our next question is from Debashish Mazumdar from Svan Investments.

[Debashish Mazumdar, analyst]

Sudhir, John, Saurabh, excellent set of numbers. So I have 3 set of questions. First on macro, second on organic Coforge and third on Cigniti. So the first one is for Sudhir, obviously, Sudhir, if I remember correctly, 1 year back, you were the first person to call out that the macro recovery, what others are building and it is not going to come so easily. So do you think we have crossed that level and while recovery has kind of started coming back, especially in your set of clients and sectors?

[Sudhir Singh, executive]

Debashish, thanks for the question. You're absolutely right. Last June, when the general impression was that the second half of the calendar year last year would be great. You're right. We, as a management team had said that there was going to be no demand recovery. And I think we were -- we did turn out to be right.

In March this year -- March, April this year, we had made another assertion. And again, that was contrary to the prevailing commentary from our peers that the demand environment has seen a definite and positive turn. We believe that is in play, and that demand environment will continue to underpin our growth going forward.

[Debashish Mazumdar, analyst]

Okay. Understood. The second question is related to the Coforge organic business. And congrats again for a good comeback quarter with a blown up kind of CC growth. The question that I have is, if I see the vertical-wise growth and geography-wise growth, it seems to be extremely broad-based. So is it like that this 5% kind of number is sustainable for next 2 to 3 quarters because it has not come from any single customer or single vertical? And do you see that this recovery per path is going to continue for at least for the next 3, 4 quarters?

[Sudhir Singh, executive]

Debashish, thanks for the question. As you're aware, we've stopped giving a formal guidance on numbers, but what we can assure you is that the broad-based growth is going to continue. One of the reasons why we did the Cigniti acquisition when we did was because at that point in time, looking ahead, we were incredibly confident about the broad-based nature and the robust nature of growth ahead of us. That's why we did it.

Growth going forward, as you've noted, business-wise, geography-wise, service line-wise will continue to be broad-based. It will also, I want to emphasize, be robust. At the beginning of the year, we said our growth will be sustained, robust and profitable. I can assure you, at the midpoint of the year, going forward the growth will be robust. It will be sustained and it will be profitable.

[Debashish Mazumdar, analyst]

Sure. Sure. Good to hear that. Just a related question to that. If I see our hiring data. So in most of our peers, either revenue growth has come in, in that case, hiring doesn't come or vice versa. In our case, we are seeing that both revenue growth and hiring going hand-in-hand with a very tight utilization level of 80% to 82% and a tight attrition of 10%, 11%.

So what I'm trying to understand is have we cracked a very good model kind of hiring and growth goes hand-in-hand and it doesn't create any impact on our utilization in a single quarter, we don't go into lopsided hiring. We have moved into just-in-time hiring. So just wanted to get some thoughts on the strategy there.

[Sudhir Singh, executive]

Debashish, it's more to do with the execution than with the strategy. When we say that Coforge has an intense execution orientation, what we mean by that is that every -- I mean, every team member is into the details. We believe the fact that we've been able to hire, that we've been able to, one, forecast and recognize that there was a reversal in the demand cycle basis, our own indents that were flowing in.

The fact that we were confident in our assumption to be able to hire a quarter in advance is a reflection of the execution intensity and the ability of our people supply chain leaders to be able to fulfill what our sales leaders were able to sense looking at raw intent data that was coming in.

[Saurabh Goel, executive]

And I think just to add to that, when we do a pipeline reviews because when you start hiring in advance, the indents get raised almost 120 to 130 days in advance of the hiring because it's a 1 to 2 months of interview and 90 days of joining period. When we look at our pipeline and our ability to ascertain the deal closure timing, and triangulate that with the hiring intent is something which is leading to this tight operations that we are managing.

So it's a function of estimating when you will close the deal, and that can only happen if you are, in the words you understand, the stage of the deal at which it is in, along with then make sure that you start ramping up keeping that in mind. So it's a function of both of the -- both supply chain and the front end, working very, very closely together along with the delivery organization.

[John Speight, executive]

One extra point here is the fact that it's all underpinned by the incredible client centricity. We're very, very, very close to our customers. So we understand exactly their businesses and what their expectations are in advance.

[Debashish Mazumdar, analyst]

Sure. Sure. Very clear. One last question on Cigniti. In case -- when we were acquiring Cigniti, we were very clear that there are 2, 3 large clients, which we were targeting to do cross-sell and there are a few micro markets which we were target to do cross-sell. So do you think that we are getting success, obviously, numbers showing some amount of improvement for sure. Do you see we are getting success in those strategies of cross-selling to existing larger clients of Cigniti than getting into those micro markets?

[Sudhir Singh, executive]

We clearly are, Debashish. Last week, we finished a 4-day workshop, and we looked at every aspect of sales execution. We are getting success slightly ahead of what our expectations, which were already high worth when it comes to cross-sell. And we feel very assured about the prospects going forward as well.

[Debashish Mazumdar, analyst]

So just to harp on this point. So in this quarter, growth in Cigniti numbers, we are getting growth from selling higher Cigniti business to the existing clients in a more efficient way? Or it is like selling more Coforge capabilities to the existing clients of Cigniti?

[Sudhir Singh, executive]

In this quarter, the growth has largely come from selling Cigniti-only revenues. The pipeline on cross-sell, it has built up is building up, and I suspect we will start seeing the first effects of that from Quarter 3 onwards.

[Operator]

Our next question is from Vibhor Singhal from Nuvama.

[Vibhor Singhal, analyst]

Congrats, Sudhir and team yet again for a very strong performance. Sudhir, my question -- my first question was on the travel vertical. This vertical had a pretty weak FY '24. And not just for us, in fact, for the entire industry. What is the outlook on this vertical? How are we seeing this? The growth has been quite strong this quarter for sure. So are things turning around? Are airlines, hospitality and other parts of it looking to increase that expense? And any other large deal pipeline that -- or deals that you might have signed or you might be looking to sign in coming quarters would be helpful.

[Sudhir Singh, executive]

Vibhor, thanks for the question. The large deal pipeline for the travel vertical is looking extremely promising. We are seeing deals spanning spend areas of IT modernization and mainframe offload, that's one area. We are seeing significant India GCC ramp-up led deals in travel. That's the second area.

We are seeing e-commerce and NDC for airlines, led deals, which is the third area. And then we are seeing guest experience and personalization for hospitality as the fourth area. So travel, the pipeline is robust. The large deal pipeline is very promising at this point in time.

[Vibhor Singhal, analyst]

And what marks this change in the outlook for the vertical? From the commentary that we're hearing from peers, I believe in the airlines, people are -- companies are still really under the pressure of delayed delivery from Boeing, and that is why many of their programs have been pushed out and hence, the tech spends have been kind of muted. Any color on that? What has changed? And what is the view on the airline specifically?

[Sudhir Singh, executive]

So our travel exposure, Vibhor, is centered around airlines, airports and travel tech. Travel tech is doing exceptionally well from a spend perspective. Travel tech firms are truly in a massive spend phase right now. Airlines saw a significant correction -- positive correction about 4 to 6 quarters back. Spends there have now stabilized, but our farming efforts and very active displacement of competition efforts are working well for us.

[Vibhor Singhal, analyst]

Got it. That was really helpful. My second question, Sudhir, is on the overall banking segment. So, of course -- excluding insurance this year, of course, had a rough solid quarter this year. On the banking vertical, what is the -- what are we looking at in terms of, let's say, new growth areas over and above our existing capabilities? How does Cigniti add -- I mean, I'm sure Cigniti has more presence in the other verticals that we are looking too far. But any contribution from Cigniti? But if not, how is the overall outlook on banking, specifically on any other sub verticals that we might be looking to spawn?

[Sudhir Singh, executive]

So Cigniti, Vibhor, the largest vertical that they have is banking, and therefore, to that extent, the ability to cross-sell horizontal businesses in that functional space has gone up. Specifically to banking, the segment overall, as all of us know, continues to have macroeconomic uncertainties. And those are stemming largely from geopolitical events, high inflation, compliance-related complexities and so on and so forth.

Now looking ahead, while the uncertainty in the sector is expected to continue, we do find, in our case, with our clients, that they are boosting investment in IT and cloud and data areas in particular. There's also significant interest in this space in Gen AI. And at least anecdotally, we are exploring ways to reduce cost or to improve customer experience by incorporating Gen AI.

One other area I do want to call out before we close this is the other -- one other priority area for investment that we are seeing is in financial crime prevention. That's 1 space. We are seeing compliance to Digital Operational Resilience Act in the European Union, and John can talk more to that. And we are seeing investment in systems to support open banking initiatives, which is a third space that is coming up. So financial crime, Digital Operational Resilience Act in Europe and investment in systems to support open banking initiatives.

John, would you like to add to that?

[John Speight, executive]

Thank you, Sudhir. I'd say not too much because you've covered significantly most of the points that I actually was going to raise. The only thing I'd add is to stress the open banking space, obviously, in the U.S. now that is ramping up. That's, I think, a key area. Compliance, you've mentioned ongoing.

I think legacy modernization, you'll see increasingly becoming more and more key and the role Gen AI is actually having in driving that legacy modernization agenda. I think that's about it, Sudhir.

[Sudhir Singh, executive]

Yes. And Vibhor, one thing that we never talked about, is the fact that we had a very significant exposure to the mortgage industry. But we never use that significant exposure to the mortgage industry as a reason for slowing down on the banking side.

With a decrease in interest rates that's now happening, the mortgage sector also, we believe, is going to have a gradual resurgence. And hopefully, that will boost loan origination and processing volumes, and it should have a positive uptick on our technology spend there.

[Vibhor Singhal, analyst]

Got it. Got it. And since you've touched up on the cord, any color as to how much mortgage could be in terms of revenue size or percentage of revenue?

[Sudhir Singh, executive]

I don't think we call out at a subsegment level, Vibhor. We just call out at a segment level. So subsegment revenue mix is not something that we opt.

[Vibhor Singhal, analyst]

Sure. Not a problem. I have just have some bookkeeping questions for Saurabh, trivial but necessary nonetheless. Saurabh, you mentioned the new ESOP scheme has been approved and the cost for that will come in from Q3?

[Saurabh Goel, executive]

Yes.

[Vibhor Singhal, analyst]

And that would be -- how much basis point that you mentioned? I'm sorry I missed that part.

[Saurabh Goel, executive]

So roughly 180 to 200 bps. So we had called out in the beginning of the year that ESOP cost will be roughly 180 bps for the year. And that was the basis the assumption that the ESOP grants would have been given in the quarter 1 itself. But now because the grants have been given in the current -- in Q3 -- almost beginning of Q3, we expect that cost to be in the range of 180 to 200 bps, more towards 200 bps. And it's -- for first 2 quarters, which is Q3 and Q4, then we get into Q1 of next year, 60, 70 bps of the old planned cost will go away. So that's certainly...

[Sudhir Singh, executive]

Yes.

[Vibhor Singhal, analyst]

So next quarter, we are looking at a 180 to 200 basis point headwind from -- on a Q-on-Q basis?

[Saurabh Goel, executive]

On a Q-on-Q basis. Incremental impact will be 120 bps, not 200 bps. 80 -- 70, 80 bps is already sitting in the P&L. What I'm talking about is the incremental. Yes, yes, yes. The incremental impact will be 120 bps. The total ESOP is...

[Vibhor Singhal, analyst]

Or it is...

[Saurabh Goel, executive]

Yes, yes, yes.

[Vibhor Singhal, analyst]

Okay. Got it. Got it. So 70, 80 basis point is already there in the P&L?

[Saurabh Goel, executive]

Exactly.

[Vibhor Singhal, analyst]

Incremental to that will be 120 basis points next quarter. And in Q1, another 60 basis points will go away, which is of the current ESOP scheme.

[Saurabh Goel, executive]

Which is the current cost will go away. You're right.

[Vibhor Singhal, analyst]

So minus 120 in this quarter -- in Q3, same in Q4 and then plus 60 in Q1 to spread out the maths.

[Saurabh Goel, executive]

Yes.

[Vibhor Singhal, analyst]

Got it. Got it. And also, there was this INR 14.4 crores consulting expense in Cigniti this quarter. Last quarter, of course, we had some expenses. So I'm assuming these are related to the merger and integration. Are these expenses now done? Or do you expect some -- most of them to come in Q3 and Q4?

[Saurabh Goel, executive]

So the expenses in Cigniti were not on account of merger. The expenses on Cigniti, you will see that there was a INR 14 crore hit in Cigniti, wherein consolidated, it flew down only to INR 9 crores because some expenses were already part of purchase price allocation and hence, it didn't impact my consolidation. And then this INR 8 crores of past liability was identified on account of historical taxes and all. So all of those are now behind us.

We don't expect at least any past liability in Cigniti to come and hit the consolidated financial statements going forward. The integration expenses, the merger expenses would be [ sub $1 million ] or so for next couple of quarters, and then it will go away.

[Vibhor Singhal, analyst]

Got it. Got it. And just last question on the open offer. As per -- if I read the timing of the open offer, we are looking to close in terms of post tendering and everything by November -- mid-November and the entire process expected to close by December 7, if I read the schedule correctly.

[Saurabh Goel, executive]

Yes. So that's -- December 7 is the last date, which is the most stretched date which can happen. But we expect the whole thing to get closed at least by mid-November. The tendering and everything will get closed. The payment to the shareholders would have happened by mid-November.

[Operator]

We take the next question from Manik Taneja of Axis Capital.

[Manik Taneja, analyst]

So Sudhir, extremely strong performance once again. Just wanted to pick your thoughts on a very interesting statement that you made at the outset saying that the next 7 years look much more exciting for the leadership team. If you could give us some -- while you've talked about the $2 billion revenue growth target, but if you could help us understand if you're looking at further acceleration in terms of growth given the platform that we've created now? That's question number one.

The second question was with regards to basically more of a bookkeeping question. In terms of what is yielding the cash generation for us through recent years, despite the fact that we continue to do extremely well from a growth standpoint? Those are my two questions.

[Sudhir Singh, executive]

Saurabh, would you like to go with cash generation, I'll take the acceleration after that.

[Saurabh Goel, executive]

Yes. So historically, we have been around 67% of EBITDA of OCF being generated as -- for a financial year. And the challenge that we had was that always quarter 1, quarter 2, we used to burn cash because of bonuses getting paid for the whole financial year in quarter 1 or quarter 2, increments happening and some vendor payments coming in. So current year, at least the normalization of cash has happened. And sitting today, H1, we are looking at almost $40 million of cash being generated.

If you're looking at the cash flow of the statutory statement, a lot of that is also to do with acquisition-related expenses that have got paid out. But otherwise, from an operating cash flow perspective, H1, we have generated $39 million in the current financial year as compared to a cash burn of $0.5 million in same period last year.

We expect that for now around 67% to 70% of EBITDA is the OCF we would like to operate on. And Manik, a lot of large deals today that also come in. They come in with upfront investments in the account, either on account of transition or transformation, wherein the recovery starts happening over a period of time.

So using our cash to make sure that when we sign large deals, we are making those upfront investments in the account. And that is why we are making sure that we at least operate at 65% to 70% OCF. We look at our DSO, which is debtors to sales outstanding. They continue to be healthy at 60. You look at our unbilled, they continue to be healthy at 14-odd days. And hence, DSO for build and unbilled is both 74 days. So it's not that I have a receivable problem.

[Sudhir Singh, executive]

Moving on to the other question that you had, Manik, about the confidence in the next 7 years, that confidence is near absolute as far as we, as the collective leadership of the firm are concerned. The confidence comes from 2 or 3 different things. Coforge today is a very -- is a far more diversified organization than it was 7 years back. Seven years back when we got together, almost 40% of our revenue used to come from airlines and airports only. And 5 years back, we were possibly more impacted than any other firm because when COVID came, 30% of our revenue used to come from airlines and airports. So the firm is one, not just bigger, but it's diversified significantly.

Second, as we look at the future, our growth vectors over the last 7 years have primarily been industry-led. Where we stand with the leaders we have, the untold story of Coforge over the last 2, 2.5 years has been the behind the curtains work that has been done in terms of leadership capability, partnership and alliance build in product engineering, in cloud services, in data services and experience-based technologies. They are now fast becoming additional vectors for growth.

The third thing that gives us a lot of comfort is the fact that what we internally call big bets, geo-based big bets, the newer geos that we've gone in widely, but with tremendous intent are playing for us. So it's a mix of, one, a diversified industry mix; two, a very strengthened horizontal capability mix; and three, an expanded geo mix that gives us confidence.

And as I had said in the closing comments as well, we believe if we can accelerate growth further, over the next 7 to 10 years, wherever we land up and hopefully, it will be in an incredible place. We would all, as a collective leadership, have created something that we can regard as our collective personal legacy, and that is what drives us going forward.

[Manik Taneja, analyst]

Sudhir, also wanted to get your thoughts around some of the recent deals. We've seen an increasing share of GCC rollout led deals in the industry, including for you. If you could help us understand what's driving that? And do you see that as a risk from a medium-term standpoint, given the call option that customers would have?

[Sudhir Singh, executive]

We -- you're right, Manik, and we concur with you. We also see very strong activity in the GCC space. We believe that unlike the earlier cycles where GCCs used to get set up and there used to be a boom and bust cycle over 3 to 5 years. This seems to be a more concerted push and a more personal agenda-driven push.

In most cases, GCCs are being helmed or are being driven by Indian origin leaders who have gone up the ranks and that number has swelled? So we see this as something that's likely to sustain. And we have built up the process of supporting GCC build, the process of creating virtual GCCs within our premises, and the process of supporting both micro and mega GCCs as part of our sales plan going forward.

[Operator]

[Operator Instructions] We take the next question from the line of Abhishek Bhandari of Nomura. Mr. Bhandari?

[Abhishek Bhandari, analyst]

My questions have been answered.

[Operator]

We take our next question from the line of Kawaljeet Saluja of Kotak Securities.

[Kawaljeet Saluja, analyst]

Sudhir, exceptional quarter, congratulations. A couple of questions, Sudhir. First is that your deal pipeline and deal wins have been exceptionally strong, which I don't think mirrors across the industry. But nonetheless, would love to get your views on whether it's the environment or something has changed in Coforge's portfolio? That's the first question.

The second question relates to the earlier question asked by Manik on GCCs. I mean, how would you characterize the durability of revenues of GCCs. And how are the nature and shape of engagements defrayed?

And the third question I have is for Saurabh. Saurabh, the gap in the Ind AS margins and the fact sheet margins have expanded quite a bit in the current quarter, what would you [indiscernible] the same to?

[Sudhir Singh, executive]

Saurabh, do you want to lead with question #3 and then I take 1 and 2?

[Saurabh Goel, executive]

Yes. So 2 things, Kawaljeet, from that. So if we look at our segment report, okay, which is, again, the audited statement. You look at the EBITDA margin reported there, which is 14.9%. And that is -- that does not include that EBITDA margin of 14.9%. Does not include in the onetime transaction-related expenses of INR 20-odd crores plus the hit that we had taken on account of Cigniti prior year expenses that had come and hit us in the current quarter to the extent of INR 8-odd crores.

If we just add that back, 14.9% EBITDA margin in the result sheet, which is a signed audited result sheet, as part of the segmental information, we'll go up to 15.8-odd percent, which is also reported in the management fact sheet of 15.8%. So that's how -- that's the gap between the 14.9%, which is there in the signed segmental results and the fact sheet because there are 2 items, which are not included in the concurrent going forward EBITDA margins or the recurring EBITDA margins.

[Sudhir Singh, executive]

Coming back to question number 1 and 2, Kawaljeet. The first question that you had shared was around the deal pipeline and what's driving it. We think it's more a mix of the -- it's more a function of the mix having evolved. To give you an example of the 3 large deals that we've signed in the current quarter. One of them is in the health care space, at the intersection of the health care and the government space.

Now health care as a vertical was never really material for us. We started talking about building it up about 2.5 years back. And the fact that we've signed this deal last quarter, 1 of the large deals we talked about was from the retail vertical. So part of it is coming in, one, from an expansion in the credibility that we built across newer verticals that we did not have credibility or capability at scale earlier.

The second set of deals and why they're expanding, and hopefully, we'll have a lot more to report are coming in largely from product engineering. Product engineering for us -- and we call it engineering internally, for us, is one of the largest or I suspect the largest [ HPO ] at the current point in time. And engineering, a lot of the credibility that is coming from the AdvantageGo platform that exists, the MonaLisa platform that exists, the SATS platform that we created on a turnkey basis, the work that we've done with platform players in asset wealth management and travel tech is allowing us to create large deals at scale. That's the second thing that's helping us pick up.

And the third thing that's allowing us to widen the funnel and increase the velocity is the geographical expansion, Kawaljeet, this quarter. One of the 3 deals I talked of one earlier, is from Continental Europe. Now Continental Europe, again, you know this very well, was not a very happy hunting ground for us in the past. But what we've done over the last 3 years quietly, but in a very sustained manner, building up a sales presence is there under the leadership of John who's on the call, is what has led to that deal closure as well. So that's our assessment of why the deal pipeline is not just sustained but is expanding.

Number two, Kawaljeet, as far as GCCs are concerned. The core mandates when we do get them, the initial mandate on GCC is always a time-bound mandate. For example, we secured a mandate to set up a GCC where the initial mandate was 500 people. That was supposed to be a BOT operation. And it was expected to be revenue that would be then -- it would fall over a cliff after 3 years, after we handed over operations.

But 9 months into that transaction, with that client, that 500 people business is running. It has another 2 years to run. The number that we have been able to inject into the rest of the client is another 700. So we're operating at 1,200.

I can't give you a very clear answer there. A core element of the revenue stream that's coming in will have a cliff. I don't know what to call it. A cliff vesting or a cliff fall at some stage. But if we continue to deliver, we are finding that we are able to expand into ancillary spaces. That's how I would characterize the answers, Kawaljeet.

[Operator]

We take a next question from Ravi Menon of Macquarie.

[Ravi Menon, analyst]

Congrats on really good revenue numbers. Two questions. One, it looks like you've integrated Cigniti, even though you still have only 27.98% stake. I guess, this is because you now have control of the company. Is that right?

[Sudhir Singh, executive]

That's right. We have Board control. That's why we've integrated the firm, and we've consolidated results.

[Ravi Menon, analyst]

Second is the deal wins of $516 million. It's the third best in any quarter so far. Could you talk a bit about how much of a proportion of this are renewals and what's really net new?

[Sudhir Singh, executive]

Let me just reflect very quickly. The health care/public sector intersection was net new, the one I talked about. The Continental Europe deal was net new, which I talked about. And the U.S. deal was EN, but most of it was new revenue. So largely new revenue. Two of them are actually NN, and one of them is EN with the accent being on the N and not the E.

[Ravi Menon, analyst]

And any of the ECC deals, do they have any buy -- build, operate, transfer sort of structure?

[Sudhir Singh, executive]

Yes, some of them, as I said, in response to Kawaljeet's questions, do.

[Operator]

Ladies and gentlemen, that was the last question. I now hand over the call to Mr. Sudhir Singh for closing comments. Over to you, sir.

[Sudhir Singh, executive]

Thank you, Inba. Ladies and gentlemen, thank you very much for your time. We've always said this, and we've always meant it. The questions you ask us, the insights that you provide or the questions provide are a very valuable guide and a milepost for us. We look forward to further interactions, both in investor calls and investor meetings. Thank you very, very much for your time and your attention. Thank you.

[Operator]

Thank you. 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 all for your participation.