Coforge Ltd

NSE:COFORGE

Earnings Call Transcript 2023-Q4

[Operator]

[Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ankur Agrawal, Head, Investor Relations and M&A at Coforge Limited. Thank you, and over to you, sir.

[Ankur Agrawal, executive]

Thank you, Aman. A very warm welcome to all of you, and thank you for joining us today for our Coforge earnings conference call. As you are aware, we announced our Q4 and full year FY 2023's results today. They've already been filed with the stock exchanges, and they are also available on the Investor section of our website. I have with me today, our CEO, Mr. Sudhir Singh; our Chief Customer Success Officer, Mr. John Speight; our CFO, Mr. Ajay Kalra; and our Deputy CFO, Mr. Saurabh Goel. As always, we'll start with the opening remarks from the management team. And post that, we will open the floor for your comments and questions.

With that, I would now like to hand it over to our CEO, Mr. Sudhir Singh. Sudhir, all yours.

[Sudhir Singh, executive]

Thank you very much, Ankur, and a very good morning, very good evening to all of you across the world, ladies and gentlemen. Thank you very, very much for joining us.

I'm pleased to share that despite the uncertain macros, quarter 4 has been a successful quarter for the firm. Our growth in quarter 4 has not just been robust. It has equally importantly been broad-based across our verticals, across our service lines, across regions and across client size-based cohorts. We remain steadfast in our belief that organizations and teams that extended execution are always the best placed to face and negotiate headwinds like the ones that the industry faces today.

We remain focused on execution, and we remain committed to driving robust, sustained and profitable growth despite the ambient challenges in fiscal year '24 as well. I'm also pleased to share that fiscal year '23 was a milestone year for the firm, and we crossed the USD 1 billion mark. We believe that we shall look back at fiscal year '23 as not just a year where we crossed the USD 1 billion mark, but also equally importantly, as a year where we laid the foundation for an accelerated growth journey towards the next revenue milestone of USD 2 billion through the very significant investments to enhance the firm's capabilities that we did make in fiscal year '23.

Our employees continue to be the architects of our growth journey and their commitment reflected over the years is one of the -- in one of the highest employee retention and the lowest employee attrition rates that Coforge prides itself on has driven us and will continue to drive us in the future as well. To mark the USD 1 billion revenue milestone, the firm will, starting tomorrow, gift all active employees with an Apple iPad. With that quick context, let me start with an overview of our performance in quarter 4 fiscal year '23.

Starting off with revenue analysis. I am pleased to report that during the quarter, the firm registered a sequential revenue growth of 4.7% in constant currency terms, 5% in U.S. dollar terms and 5.6% in Indian rupee terms. The growth, particularly important in an environment like this was broad-based. The BFS vertical grew 4.5% quarter-on-quarter in CC terms. The insurance vertical grew 5% quarter-on-quarter in CC terms. The travel vertical grew 2.54% quarter-on-quarter in CC terms and the other verticals together grew 6.4% quarter-on-quarter in CC terms, clearly, not base growth. Our top 5 clients and our top 10 clients grew 23.9% and 26.6% year-on-year, respectively, and they contributed 23% and 35.5%, respectively, to our overall quarter 4 revenue.

As I've remarked in earlier calls, we derive a lot of our confidence in driving surprise-free sustained growth from our lack of overdependence on a single or a group of client relationships. Our strong sequential revenue growth performance comes despite headwinds in the BFS sector, particularly in our mortgages portfolio. Overall, as a firm, we see the growth of the firm during the quarter as a reflection of the very strong execution engine that the firm has built, the deep client relationships that remain resilient and our ability, even in an environment like this to continue to identify, to chase and to close large deals.

I shall now move on to the margins and the operating profits commentary. Our quarter 4 gross margin sequentially increased by 71 bps, following an earlier sequential increase of 133 bps in quarter 3. The gross margin for quarter 4 was 34.1%. Our quarter 4 adjusted EBITDA margin sequentially increased by 109 bps and was at 19.6% for the quarter. Our ability to not just hold the line but to expand gross margin and EBITDA margin sequentially once again reflects the strong execution ethos of the organization.

The increase in adjusted EBITDA was driven by a material increase in utilization by a continued increase in offshoring revenue percentage and the relative absence of furloughs that we encountered in quarter 3. The consolidated profit after tax for the quarter, excluding one-off charges stood at INR 2,327 million, the reported PAT for the quarter was INR 1,148 million.

The quarter saw 2 one-off expenses. The first is on account of expenses linked to the USD 1 billion milestone celebrations, primarily the gift of an Apple iPad to each one of our 21,000-plus employees to mark the occasion. The second is on account of provisions done against ADR expenses so far.

Moving on to the annual performance, and I'll start once again with the revenue analysis. We registered a consolidated revenue of USD 1,001.7 million, crossed the billion and we have clocked a growth of 22.4% in CC terms for the year. In U.S. dollar terms, that translates to 15.6% and in Indian rupee terms to 24.6%. You will recall that at the beginning of fiscal year '23, we had provided a revenue growth guidance of around 20% CC growth for FY '23. We have subsequently revised it upwards in quarter 3 to at least 22% CC growth.

Our revenue performance for the year is in line with our track record of meeting and exceeding the revenue guidance every year for the last 6 years. Vertical wise performance for the year was as follows: BFS grew 47%, travel grew 21.5%, Insurance declined 3.7% and the other segment grew 23.1% in CC terms. Geographically, for us, Americas grew 16.3%. EMEA grew 37%, and the rest of the world grew 7% in CC terms during the year.

Annual performance, margins, operating profits, the commentary being as follows: we are pleased to report that in fiscal year '23, our gross margin increased by 55 bps to 32.5%. The increase has allowed us to significantly expand our investments in sales and capability build throughout the year. The adjusted EBITDA margin for the year stood at 18.3%. It is important -- I think very important to note that during fiscal year '23, we incurred a hedge loss of INR 239 million versus a hedge gain of INR 224 million in fiscal year '22. And just that adverse swing on the hedge gain loss has led to a negative impact of about 60 bps on the EBITDA margin.

Commentary around the order intake. One of the highlights of our quarter 4 performance was the continued clocking of large deals and a very high level of order intake despite the strong prevailing headwinds across our industry. The total order intake for the quarter was USD 301 million. This is the fifth consecutive quarter where we have clocked an order intake of more than USD 300 million. With our performance in Q4, we closed fiscal year '23 with the highest ever recorded yearly order intake of USD 1.3 billion. Equally important, particularly at a point like this and a time like this, during the quarter, we signed 2 large deals. They came from the BFS and from the travel sector, respectively.

From an annual perspective, fiscal year '23 was a landmark year in that we signed 11 large deals through the year, of which 2 were over USD 50 million TCV and 5 were over USD 30 million TCV. Our deal pipeline continues to be both robust and resilient as exemplified by our quarter 4 performance. We expect this deal momentum to continue in quarter 1 fiscal year '24 as well. The executable order book, which reflects the total value of locked-in orders over the next 12 months stands at a record USD 869 million. This number was USD 720 million a year back.

The confidence that you will see in our revenue forecast guidance for fiscal year '24 in this commentary data also stems from the next 12 months committed order book, which continues to be unimpaired. Ten new logos were signed during the quarter, taking the total count to 44 for the full financial year. Finally, as I round up the section, I wish to note that during the quarter, we also signed up as a preferred technology partner with one of the largest retailers in the world. Now this is not a large deal. But our partnership status now and the size of the wallet that we will address at this retailer is what makes this a material even for us.

People front, good metrics again. Our total headcount at the end of quarter 4 fiscal year '23 stood at 23,224, and we saw a net addition of 719 which is an increase of 3.2% net to our headcount during the quarter. Now this net headcount increase has come despite a very significant expansion in utilization by 120 bps. Utilization during the quarter stood at 81.5%. Our LTM attrition for the quarter fell further and again and is now at 14.1%. We remain -- and we've talked about this in the past, we remain one of the lowest, if not the lowest attrition firms across the industry.

With those comments, I will now hand over the call to John Speight, Chief Customer Success Officer for providing insights into our operations and our capability creation initiatives. John, all yours.

[John Speight, executive]

Thank you, Sudhir. I will now touch upon the highlights of the quarter related to our delivery operations. In the insurance sector, Coforge continues to grow its Duck Creek business all on the back of successful implementations and upgrades across the U.S. and Europe. A real positive move in this quarter has been the successful expansion into new areas, Australia and New Zealand. For a leading U.S. life and annuity insurance carrier, we successfully completed a major enterprise-wide business transformation program to sit with other processes, drive operational efficiencies. Therefore, delivering significant cost savings for them. We also helped the top 100 U.S. carrier successfully complete a multiyear tax compliance program enhancing their legacy policy admin systems to ensure their life insurance products were compliant with the latest IRS regulations.

Our AdvantageGo business successfully launched its new ecosystem leading with our proprietary underwriting workbench that connects the best-of-breed data providers to provide real-time exposure insights to underwriters. In our TTH business, we successfully enabled a leading airlines major transformation journey, involving one of the largest and most complex migrations of airline passenger service systems.

We leveraged our travel domain capabilities, our global immediate certified engineering team, our proven agile delivery frameworks and more than 12,000 business test case automations to execute on the migration successfully and on plan.

Moving to our BFS business. Our Tier 1 bank recently appointed us as their strategic data and analytics partner to help them accelerate their cloud adoption, analytics and visualization initiatives across the bank. We are leveraging our strong partnerships with AWS, Snowflake, Databricks, Microsoft to help drive their transformation programs by delivering best-in-class solutions. Pega continues to be a strength of Coforge. Recently, we closed a major 18-month program of work for another global bank in which we are combining Pega, data, quality engineering capabilities to help drive their digital transformation agenda. We're also seeing sustained growth in our sales force business, underpinned by our new industry-specific solutions.

For example, we've recently rolled out our Broker 360 management solution for insurance customers built on Salesforce Service Cloud and Experience Cloud, this solution provides our customers with a complete view of the activities performed by their agents and brokers. The growth was recognized by ISG with Coforge named as a Leader in the Salesforce application managed services and as a rising star in Salesforce mid-market implementation services.

We continue to explore and invest in our center of excellence. In collaboration with our technology partners, we have developed expertise that enables the creation of digital humans. We're now working with our customers to help them integrate digital humans along with AI and chatbots to create lifelike customer experiences within the metaverse. Our continued focus on metaverse and web-free technologies was recently recognized by HMS when they awarded us enterprise innovative status in their 2023 Horizon's report for Metaverse Service Providers.

Recognizing the importance of cybersecurity, we have invested to extend our services in this area, adding threat intelligent services to our extensive portfolio. We can now leverage our advanced capabilities in areas such as dark web and deep web market monitoring, brand protection and cyber threat intelligence to help secure the safety and privacy of information assets.

To conclude, I will update you on our constant endeavor to upskill employees globally. We continue to invest in technical and domain training and certification programs. Our focus continues to be on core engineering skills, such as AWS, Pega, Appian, Azure, [indiscernible] GCP, ISTQB. However, we have now also extended our learning programs to train teams in areas such as how to navigate leadership transitions and how to build digital excellence.

With that, I conclude the update on our delivery operations. And I would now like to hand over to Ajay for further details on the financials. Over to you, Ajay.

[Ajay Kalra, executive]

Thank you, John. Let me briefly touch upon the key balance sheet items and tax metrics. Our cash and cash -- and bank balances at the end of financial year '23 stood at $73.4 million compared to previous quarter of $22.4 million net of working capital [ declines ]. The capital expenditure during the quarter was USD 4.3 million. The days sales outstanding were 61 days in Q4 versus 73 days in Q3 in INR terms. In U.S. dollar terms, the DSO were 59 days for quarter 4 compared to 68 days in quarter 3. The effective tax rate for quarter 4 financial year '23, excluding the one-off charges, Sudhir, mentioned, was at 18.3% and for the full year financial year, it was 20.4%. The operating cash flow for the full year '23 was about 68% of the reported EBITDA.

As you are aware, Coforge had filed an ADR for which we had incurred an expense of INR 523 million over the last 18 months. These expenses were reflected as recoverable from the selling shareholders in our balance sheet. As the market conditions continue to be unfavorable for the ADR issue, basis accounting prudence, a provision of INR 523 million for these expenses has been made in Q4 FY '23. We will continue to watch market conditions to see if a favorable window opens for the ADR.

Additionally, the Board has approved an amount of USD 11.5 million towards gift to all the employees and celebrations across all locations for achieving USD 1 billion milestone, an amount of USD 9.8 million towards gift has been incurred in quarter 4 financial year '23 and the balance celebration amount will be incurred in quarter 1 financial year '24. With that, I will hand over the call back to Sudhir for his comments on outlook.

[Sudhir Singh, executive]

Thank you very much, Ajay. And as I mentioned exactly a year back, ladies and gentlemen, in our then quarterly conference call, we have started planning towards our next revenue milestone of USD 2 billion. And fiscal year '23, the year that close was all about proactively putting the right building blocks in place for that goal and beyond. During the year, we have significantly invested in and bolstered the front-end leadership teams, our capabilities and the execution machinery across the organization.

During the year, we also initiated a new organization structure to position us well for this journey to the USD 2 billion revenue milestone. The new org structure focuses on scaling existing key accounts to USD 100 million and $50 million each, leveraging a broader ecosystem of alliances and deal advisers charging up the revenue hunting engine and creating differentiated service offerings.

The core verticals will work as global integrated business units and the service lines have been reclassified into 6 global horizontal business units, which will be market facing and actively contribute to revenue growth. The new org structure has already been rolled out effective first of April 2023. This new structure that has now settled with teams that are now clearly prime, the continued large deal wins, the strong executable order book, a resilient deal pipeline, anticipated broad-based growth across our core businesses gives us confidence that we should continue to drive robust, sustained and profitable growth in fiscal year '24 as well.

For fiscal year '24, our revenue growth guidance is 13% to 16% growth in constant currency terms. On the profitability front, we expect our gross margin to increase by about 50 bps in fiscal year '24 over fiscal year '23 and adjusted EBITDA margin to remain at similar levels as fiscal year '23.

With that, ladies and gentlemen, I conclude our prepared remarks. And all of us, open the floor to all of you for your comments and your questions. Thank you.

[Operator]

[Operator Instructions] First question is from the line of Vibhor Singhal from Nuvama Equities.

[Vibhor Singhal, analyst]

And congrats on a very strong performance yet again. It seems we are accustomed to getting surprised by the company every quarter. So basically, if I could just start, the visibility that you have for the guidance for effect resource, we ended the year with an order backlog -- 12-month executed out of backlog, which is up 21% on a Y-on-Y basis. And we are guiding to basically revenue growth of 13% to 16%. Just wanted to take your take on what is the visibility that you have, let's say, towards the top end of the guidance even that we are ending the year at such a strong growth in the executable order book. So does that mean that you might expect some slowdown on a Y-o-Y basis? It's not necessarily a decline, but maybe a disposition on a Y-on-Y basis to be order is in the first half of the year? Or do you think the demand environment remains strong enough for us to be able to do the guidance and, of course, take it as we see it during the course of the year?

[Sudhir Singh, executive]

Well, Vibhor, mathematically, we need to clock roughly around 3% sequential growth every quarter over 4 quarters on an average to hit 15%. If you look at our track record around execution, the guidance that we've given at the beginning of the year over the last 3 years, we've been able to revise at both those years upwards and then exceeded by the time the year ends. So 13% to 16% clearly is something that we believe is in the realm of the possible. On the ramp that we have because of the quarter 4 growth, the fact that large deals pipeline continues to be resilient and large deals continue to be closed also gives us a lot of comfort.

The order executable number, which is the next 12-month orders booked at $869 million is more than -- is roughly about 20% more than where it was at the same time last year. So there's a lot of comfort that we derive from that as well. Largely, velocity has continued unimpaired. Order intake has been at more than $300-odd million for 5 quarters running. So we feel that the guidance that we're giving you is clearly in the realm of the possible. Our intent, as always, will be to try to hit the upper end, and hopefully, if all goes well try to exceed it also over time.

[Vibhor Singhal, analyst]

That's really helpful bringing that together. My second question was on the margin front. So I think this year also we saw a very good expansion in the gross margin front, but slightly lower in EBITDA. But of course, as you had mentioned that we are investing a lot in our sales capability. And for the next year also, you just guide to the sale in that we're looking to expand our gross margin per 50 basis points. But the overall EBITDA margins -- adjusted EBITDA margins might remain flat.

So I just wanted to understand, do you believe this higher than the last year kind of investment in sales and marketing will continue, and that will continue to have that gap between the gross margin expansion and the EBITDA margin expansion? And just a related bookkeeping question, if we could just maybe get a broad idea as to how much could be the gap between reported and adjusted EBITDA margins in FY '23?

[Sudhir Singh, executive]

So the second question is something that I'm going to reflect to Ajay, Vibhor. As far as the margin issue is concerned, a very key point to note also is that if you look at FY '23 performance of the firm, there's a 60 bps negative that has come just on account of the hedge gain loss, right? So the 18.3% that we reported for fiscal year '23 would have been 60 bps higher, had the hedge gain loss not played out the way it has.

Going into FY '24, we are confident of a continued expansion in gross margin from where we are right now, but we are equally committed to making sure that most, if not all of it, gets funneled into additional investments into capability build, into solution build, into sales enhancement. It's a tough macro. We do want to meet the guidance. We do want to exceed the guidance if it's possible. And the intent is going to be to keep pressing the pedal and make sure that the capabilities and the investments are helping us power growth at a time like this.

Ajay, would you like to take question #2, please?

[Ajay Kalra, executive]

Sure. The difference between the EBITDA and the adjusted EBITDA is primarily the cost of employee stock options. The current year options, the cost would be a good decline and would be around 60 bps for the next financial year. However, the options, which are given in the current year, they are not factored in there, and we will update that in our next earnings call.

[Vibhor Singhal, analyst]

So it's going to be out of 60 basis points, 50 basis points is for the earlier ones, plus on top of that, whatever the cost of [indiscernible] resource will be, that will be over and above that?

[Ajay Kalra, executive]

That is correct.

[Operator]

Next question is from the line of Abhishek Bhandari from Nomura.

[Abhishek Bhandari, analyst]

Sir, I had 2 questions. First is on the insurance vertical. Finally, we have started seeing some sequential growth momentum picking up. If you could help us understand how should we think about this vertical in FY '24, given that it has been a laggard and we have been trying to do some leadership changes. Are you seeing a sustained momentum of growth coming back here?

[Sudhir Singh, executive]

Abhishek, the answer is a clear, unqualified yes. It's been a 5% sequential growth. The way we look at our insurance businesses, our insurance business on the P&C side is largely focused on commercial specialty, small and medium players. That placed, the transformation spends are continuing and our partnerships are working very well. So there's a clear, continued growth vector that applies there. The second thing that's happened on the insurance side is our expansion into newer geos within the insurance vertical has played out very well. I talked about 10 new logos; 4 of them actually came from insurance across APAC, largely centered around Australia. So that element is working well.

On the L&A side, there is pressure when it comes to discretionary spending, but looking at our top 10 clients in that space, looking at a grounds-up view, we think growth there, again, is going to be resilient. So the answer -- the short answer to your question is, yes, we believe the turnaround that we've seen, actually, it's a fairly significant turnaround that we've seen on the insurance side will sustain. What I do also want to call out is, next year, this year, if you look at the dispersion across business units, it was very stark in our case. BFS was just on a tear. Insurance was pulling us down. Next year, the guidance that we've offered, we believe all the 3 core verticals will more or less be in line centered around that growth guidance number and deliver growth numbers that will be roughly similar. So insurance should turn in a performance where the growth should be indicatively around 15% for the year, as we see it.

[Abhishek Bhandari, analyst]

Got it. Sir, the second question is on your longer-term margin outlook. While for this year, your aim is to improve 50 bps on GM and refunnel that into sales and marketing. But eventually, where would you want to stabilize on the sales and marketing expenses? We are already closer to 14.5% kind of number. Do you think maintaining this kind of S&M is necessary for the growth to remain where it is or eventually, you can taper it off to more like a 12% to 13% number what we have seen in the past.

[Sudhir Singh, executive]

So Abhishek, was 6 years back, the SG&A of the firm was roughly around 19%. We brought it down very drastically through COVID all the way down to 12.5%. We're now at about 14-odd percent. The way we look at adjusted EBITDA versus S&M investments is the plan that we had internally around hitting a $2 billion mark, envisages that at $2 billion revenue, the firm will have an adjusted EBITDA that is at least 150 bps higher than where we are. And on the outside, all the way up in a good scenario of 300 bps higher than where we are. So it's obviously going to be a pull and a push depending on the year. This year is a tough year. We want to keep pushing the pedal to make sure growth is maximized. And hopefully, some of the results of these investments will play out next year, possibly even this year in taking the revenue needle and the revenue growth rates much higher.

[Operator]

Next question is from the line of Sandeep Shah from Equirus Securities.

[Sandeep Shah, analyst]

Congrats on a very good execution. Sudhir, the first question is in terms of...

[Operator]

Sandeep, your voice is not clear. May I request you to use the handset, please?

[Sandeep Shah, analyst]

Sudhir, the first question, entering FY '24, do you believe most of the portfolio-specific issues are largely behind in terms of Coforge where you are now turning positive even on insurance? And second related question, are you witnessing any client-specific issues because of the increased macro pressure, especially with the exposure with some of the regional banks in some of your acquired subset, the SLK, in the mortgage business as [ overall ]?

[Sudhir Singh, executive]

Sandeep, thanks for the question. Portfolio specific, we believe, and I just answered the question, insurance is on a clear turnaround. Portfolio specific, we also believe that the dispersion across the business units in terms of growth is not going to be as far as we signed for fiscal year '23. And the growth, which is very important in a year like this, growth should be broad-based. I expect our core verticals to show broad-based growth. I expect our service lines to show broad-based growth. I expect growth across geos to be broad-based. And I expect client cohorts, I can't specifically call out 1 or 2 clients individually, but client cohorts, top 5, top 10, top 20, top 50, should all be resilient and should be more or less in line with the kind of guidance that we provided and the planning that we planned.

Client-specific regional banks, our exposure is minimal. The only material exposure that we have is to the relationship that we have with Fifth Third Bank. It is largely centered around operations, not technology. I am speaking to you after having hosted the COO and the CIO in Bangalore the day before. That's a relationship that is only likely to grow. I see absolutely no contraction. We see absolutely no contraction. So that's how I would characterize things as we see them today.

[Sandeep Shah, analyst]

Okay. Got it. And in terms of adjusted EBITDA margin, when we have given the guidance at the Q3 result, we were knowing about the forex hedge loss, which may be there for the 9 months plus prediction for the fourth quarter. Despite that, there is a miss on the guidance as a whole. And how do you see the forex hedge loss entering into FY '24 as a whole? It will continue to pain you on adjusted EBITDA margin? And also related question, when do you expect your investment into sales marketing capability building would be largely over? Because I think despite the robust industry-leading growth, I think the SG&A leverage is not turning out the way it should have been.

[Sudhir Singh, executive]

So I mean when we look at the numbers that we've delivered, 60 bps negative was on account of it. You're right, 9 months was baked in, but currency has been volatile for the year. Our exposure to Europe is far more than our peers. And you know this, almost 40% of our revenue this quarter has come from Europe-based lines. And that's been one plane. The second, of course, is gross margin has continued to climb very starkly because through the quarter I have decided that we will not invest anymore and meet the 18.5% guidance.

But we've taken a conscious call to make sure that we keep investing because FY '24 is going to be a year which we do not see necessarily as a doom and gloom year, normal commentary that we are hearing. We see clear opportunities in the terms. We see spaces like commercial specialty SMB. We see spaces like CTV in banking. We see spaces like airlines, airports, hospitality as places where demand is likely to be resilient and in some cases, growing actively. So the intent was to make sure that we continue spending. We're at about 14.5-odd percent on S&M. We would be absolutely okay with taking that number over time all the way up to 15% and capping it there. So that's how we see it over time.

In the current context, given the uncertainty in the macro, the primary imperative is to meet the guidance that we've offered, and a very strong incentive that all of us carries to try to exceed it also if it is possible. So that's how we're looking at it. That's why we invested, and that's why we took a very conscious call that we would continue investing even while gross margin was going on -- was going up and not just focus on meeting 18.5%.

[Sandeep Shah, analyst]

And the question on the forex hedge line explanation in the FY '24?

[Sudhir Singh, executive]

Ajay, would you like to take that?

[Ajay Kalra, executive]

If you see over the last 1 year, the movement -- currency movement and the hedges have been very, very sharp. And the INR has depreciated very sharply and which has actually led to the losses that were there in financial year '23. In financial year '24, if the currency stays where there is, obviously, the loss would be much lower, and it will be -- will not feel the pain. But if the currencies continues to decline in future, the losses could be higher. So it all depends upon how the currency movement happens in the future.

[Sandeep Shah, analyst]

Okay. Okay. And just a bookkeeping, sir, in terms of this ADR expenses, I think the process has been started more than a year back. So why the provision now? And you are saying when the ADR listing happens, it will be recovered from a selling shareholder?

[Ajay Kalra, executive]

Yes. So these expenses are for the ADR, and these were recoverable from the shareholders. So as we started doing the ADR, the expenses were accrued and were recorded as recoverable from the shareholders. However, given the situation and the market conditions we are in, and there is -- obviously, we are committed to the ADR, but there is a clear -- there is no clear visibility when that will happen. So from an accounting prudence perspective, we have taken a provision in this quarter. And this still remains recoverable from the shareholder. It's a provision. We have not written this off.

[Operator]

The next question is from the line of Shradha Agrawal from Amsec.

[Shradha Agrawal, analyst]

Congratulations on a good revenue execution. So just one question on the margin strength also. The margin miss in this quarter was entirely because of hedge losses? Or was there something else also that led to a margin hit against what was expected in -- because if I look at the hedge loss item, it was close to INR 13 crores last quarter versus INR 14.5 crores that we took this time around. So not much of a change on a Q-on-Q basis, but margin expectation was about 70 bps increase versus what we have delivered is just 110 bps improvement.

[Sudhir Singh, executive]

Well, you're right, Shradha, but margin did come in at north of about 19.5%, right? So there was really nothing that was terribly unexpected. We could always have -- and I said this in response to the earlier question, we could always have toned down our spending through the quarter to meet the EBITDA numbers, but we took a very conscious call to continue to spend, and we will continue to spend in quarter 1 as well.

As I said earlier, the deal pipelines are resilient. We expect quarter 1 also the deal pipeline to be resilient. So the last thing we want to do at a time like this when there is revenue pressure is to miss the revenue opportunity that exists out there in the market. Hence, we do have a conscious call to do it. There was nothing on the margin front that came as a material negative surprise to the management.

[Shradha Agrawal, analyst]

Because if I look at the tailwinds that would have worked for us in this quarter was across tendency to deliver an improvement in utilization and hedge loss not being materially different from what it was in last quarter. But still, our margin mix was close to 60 bps versus what we had guided to. So I was just looking at was there anything exceptional that went into beyond the hedge loss that we have been talking about?

[Sudhir Singh, executive]

No. More than 100 bps increase in margin is a fairly significant increase. 170, obviously, has always been a stretch, especially in a year like that. If you look at our margin in FY '23 versus FY '22 and you compare that performance with some of our peers, I think we've held up very, very strongly. Given the 40 bps decrease that you see on an annual basis, 60 of that was accounted for by a hedge gain/loss scenario.

Net of that, margins performance perspective on a yearly basis went up 20 bps in a very, very tough year. So that's how I would characterize it, Shradha. We remain confident around the margin guidance that we're giving for fiscal year '24. We will hold the line at the number that we have had on the adjusted EBITDA front, and we will continue to push to meet the revenue guidance and hopefully try to exceed it also.

[Shradha Agrawal, analyst]

Sure. And the next question is, we've had an impressive performance across client buckets. But if you look at the top 5 clients' performance, that's relatively, compared to other buckets, a bit soft. So is there any client-specific challenge? Or was it broad-based softness because relative to other buckets that you are relatively softer?

[Sudhir Singh, executive]

No. I think in this case, it's a classic case of success being its own enemy, right? If you do very well as a firm and then you start looking relatively, there's going to be a cohort that will underperform versus the others. There's absolutely no issue with clients. Client relationships are resilient, client relationships are strong, client relationships are strengthening. And if I look at my top 5 or top 10 clients, when we look internally at gross margins, we are actually seeing margins expanding there. So we feel very, very excited about this from a pipeline perspective, from a resiliency perspective, from an ability to cross-sell and improve our footprint perspective.

[Shradha Agrawal, analyst]

And sir, the last bit, the salary hike cycle remains as of 1Q. And what is the kind of margin drop that is expected in first quarter? And what is the quantum of hike that we are envisaging.

[Sudhir Singh, executive]

Salary hikes will happen as committed to our employees. It's not just an issue of giving them a pat and not giving them the hikes. That's not going to happen. That's absolutely nonnegotiable. Salary hikes on an average will be lower than the numbers that we've seen in terms of increments over the last quarters [indiscernible]. When the supply side was stressed, we went out, took a step higher than ordinary increments, and that's reflected in the very low attrition that we have. So from our vantage, salary hikes will be lower. The margin impact, however, will be more or less in line with the same kind of margin drops that we've seen in the past. Quarter 1 for us normally is about a 16.5% adjusted EBITDA quarter. Quarter 4 is somewhere around a 19.5% adjusted EBITDA quarter, and we expect the same seasonality to play out. So it should be more or less the same by quarter in FY '24 as it was in FY '23.

[Shradha Agrawal, analyst]

That's helpful. And one last question, if I can squeeze in. In BFS, do you see any delay in deconversion cycle or any impact from the pipeline buildup, given the macros that you are talking about?

[Sudhir Singh, executive]

BFS regard, we see a very significant deceleration next year in growth. This year, BFS for us has grown 47%. There's no scenario under which we expect it to register that kind of a growth in fiscal year '24. So the way we look at it is, BFS will more or less fall to the 15% to 16% kind of growth range, 13% to 16% or 15% to 16% kind of growth range from a 47% growth that we registered in FY '23 in that space. There is a clear slowing down. There is clear cost pressure, but BFS is playing out in interesting ways, right? When you look at us within BFS, we really play in only 4 areas. We play materially in asset and wealth management. We play in retail and commercial banking. We play in central banking and we play in fintech disruption.

Now in this space, run the bank is where most of the pressure is. That entire run the bank space, there is significant cost pressure to try to drive cost out through automation, through transforming the workforce, to manage services through its team offshoring. Change to bank, especially security, especially data, especially compliance is still resilient. So those are the areas from which we will still see, we believe, around 15% yearly growth, but the number will come down very drastically from the 47% that we saw. That's how we see it, and that's how I would answer you. Did I answer your question?

[Shradha Agrawal, analyst]

Yes, yes.

[Operator]

The next question is from the line of Ashwin Mehta from AMBIT Capital.

[Ashwin Mehta, analyst]

Most of my other questions have been answered. Just one clarification. I missed the point in terms of how much is the expense for iPad in the next quarter?

[Ajay Kalra, executive]

Ashwin, the impact of the gifts would be additionally -- iPads will be only a couple of hundred k, but there are other celebrations that have been planned and total expenses for the $1 billion celebration is $1.7 million in the next quarter.

[Operator]

The next question is from the line of Gaurav Rateria from Morgan Stanley.

[Gaurav Rateria, analyst]

So 2 questions. Firstly, what proportion of our business would be linked to cloud, whether it is migration or development work on the cloud? Secondly, a lot of people have talked about 2023 to be a year of cloud optimization. Are you seeing that in your own client base? And what is your expectation with respect to which service offering is going to see a slowdown, which service offering is going to be more resilient in the current macro context?

[Sudhir Singh, executive]

I'm sorry, can you build on what you mean by cloud optimization because we've been talking about cloud optimization for the last decade. So what do you mean by 2023 being a year of cloud optimization?

[Gaurav Rateria, analyst]

A lot of the surveys that is being done with the CIOs are talking about that people overcommitted to the cloud spend and 2023 is where they are trying to optimize and reduce it, and then it's a temporary issue. But wanted to hear it from you in terms of have you seen anything similar to that?

[Sudhir Singh, executive]

Well, I mean, Gaurav, let me take the second question first. What you're talking about is something that does impact hyperscalers, and I think that information is in the public realm, right? The hyperscalers have called down the revenue numbers, so clearly, the cloud migration activities. I'm not seeing a degradation, but they are clearly seeing a deceleration. So the numbers bear that, the data bears it and that obviously is the hard truth. Gains fade away from the numbers that the hyperscalers are laying out. So we do see that. But our play, and I suspect the play of most of the SIs like us is less around the migration piece. It's more around how do you enable operations on the cloud. It's more around how do you make sure that ROI on work that is done on the cloud is measurable, especially in an environment like this. And it's more around everything that you talk about in innovation terms, how does that get translated on the cloud.

From our vantage, the cloud service line is a material service line. We would not expect it to grow at a slower pace than the rest of the firm, but possibly at a slower pace than the pace that we recorded in fiscal year '23. So that's how we're seeing cloud spends translating into revenue from our point of view, playing out.

Did I answer your questions, both your questions?

[Gaurav Rateria, analyst]

Yes, that's very helpful. So any particular service offering that you're seeing like more impact under the current macro context in your portfolio than others? That would be helpful.

[Sudhir Singh, executive]

So I'll tell you the ones that we see actually expanding and the ones that are more impacted, and this is all relative, this is not absolute. So I don't expect any service offering to start de-growing. Service offerings where demand is very positive, still going. The first one is low code, no code, particularly no code, within low code, no code. The demand there is strong. It is solid. It is resilient. The second one in an environment like this is integration. So integration continues to be unimpeded. And the third one, I classify it as being data, especially more on the analytics side than on the tech data services side. Those 3 areas, clear bright spots. Product engineering, still a bright spot.

People are talking about transformation going away, but increasingly, what was the legacy ADM business is under pressure but product engineering, which fundamentally is all about full stack developers under a Scrum port-based models, continued demand despite slowing down. So those are the areas that we see, on a relative basis, we see demand outpacing the other service lines. Again, on a relative basis, tying this back to your earlier question, cloud on a relative basis, the demand has gone down compared to the other service lines. So cloud, clearly an area that is cloud, infra, clearly an area in most of the verticals with the exception of travel, is a space that is under stress. Travel, of course, as a vertical, continues to be buoyant, right? When I look at our travel client base, we see a more committed, a more confident spend on technology for the next 12 months because of a return to profitability because of the increased business demand, particularly airports and airlines. So there, even cloud is resilient. But for the others, I would stick with what I have just brought up.

[Operator]

Next question is from the line of Manik Taneja from Axis Capital.

[Manik Taneja, analyst]

I just wanted to get your thoughts around the fact that we've seen our offshore revenue mix increase materially over the course of last 3 years. How do you see this playing out over the next 12 to 24 months? And also, a related question to our segmental margin performance. What is driving the significant drop off in terms of our segmental margins in EMEA as well as America?

[Sudhir Singh, executive]

Sure. So I'll take question #1 around offshore and, Ajay, I request so for you to take question #2. Offshore, we're at about 51-odd percent right now, Manik. I believe from our size, all that the journey up to $2 billion, the cap will be about 54, 55. I don't expect us to be galloping towards that cap any time soon. If you look at us over last 8 quarters, you'll find that the rate of offshore revenue increase has been decelerating. Last quarter, again, is a clear pointer to it. So that's how we see it. Current 51%, we used to be at 36%, about 2, 2.5 years back. So we've obviously galloped our way to 51%. I see the pace of growth now decelerating and possibly inching towards a 53, 54, if all goes well. Segmental margins, Ajay, all yours.

[Ajay Kalra, executive]

Yes, so [ Saro ], would you like to take that question?

[Unknown Executive]

Okay. Thank you, Ajay. So I think the reason why we are looking at little stress in margins, a little drop in margins between EMEA and U.S, so there are 2 factors there. One, obviously, the growth that has come in, there are investments that have been done at the front end. So when we look at our margins for the geographies, it also includes the investment that has gone into S&M. So the large factor coming is actually the S&M investments and the capability investments that have been done at the front end.

[Operator]

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

[Abhishek Kumar, analyst]

See our guidance and order book conversion, it appears it is at the lower end of what we have achieved historically. But still, it needs $250 million to $300 million of additional revenues coming in through new deals, et cetera, through FY '24. Now in the current environment where most of our peers have been unforeseen [ the and ] downs or instances of vendor consolidation, et cetera, do you see any risk to the guidance that we have given? And have you seen in our client base any instances where we might have lost out in the consolidation scenario to larger peers?

[Sudhir Singh, executive]

I mean there's always risk, Abhishek. It's a question of whether that's a theoretical risk or a practical risk. Look at our track record, the guidance that we've given at the beginning of the year is the guidance on revenue that we've always met and actually exceed. And our record really over the years has been somewhere around quarter 2 or quarter 3, we go ahead, revise it, and revise it upwards and then close the year and close it ahead of the -- how the revised guidance that we provided. So I mean the question is, is there a risk to the guidance? I guess the honest answer to that is there's always a risk to any guidance. But practically, do we see a risk and how significant is the risk? We don't -- we feel pretty confident is how I would call it out on the numbers that we provided of meeting them. And as I've said repeatedly on the call, the intent will be to exceed them, and we'll see how the year pans out.

On a client basis, we have seen absolutely no instance with any material client where under a consolidation exercise, we got hedged away. It's a question that I received a lot. I understand there are some theoretical constructs out there, the large size players can come in and start displacing the midsized ones. We don't believe in it. We don't buy into it. We have not seen it and we will not allow it. If there's one thing we pride ourselves on, it is execution. Execution means being in the trenches with our clients and knowing what's going to happen to their business and what their decision pattern is in the quarters and the months to come. We like to think we've done an exceptional job over the last 6 years of doing that. And at this point in time, we've seen absolutely no displacement out. We anticipate, under any circumstance, absolutely no displacement out. So that's the answer to the question that you posed, Abhishek.

[Operator]

The next question is from the line of Abhishek Shindadkar from Incred Capital.

[Abhishek Shindadkar, analyst]

Congrats on a good quarter. I just wanted to understand the growth rates in the fresh order intake and the executable book. So last year, the executable book growth was lower than the fresh intake while this year, it is the other way around. So how should we read that from a perspective of the quality of book and the tenure of book. If you can explain that, that would be helpful.

[Sudhir Singh, executive]

You're very welcome, Abhishek, thanks for the question. I mean I can't pass through order intake versus executive numbers on the spot. But what I can tell you is, if you look at the last 6 years, obviously, and I'm not talking 1, 2 or 3 years, look at the last 6 years, if you look at the movement on order executable, which we call out every quarter, and you tag that with the actual revenue growth delivered over the next 12 quarters, it has been a very, very strong correlation. I did point out that we closed the quarter at -- with an order executable number of $869 million. That number is 20% higher than where the same number was at the same time last year. So we derive a lot of comfort from the order executable piece.

The other thing also that I very explicitly called out is even in a quarter like quarter 4, 2 large deals got signed, and we did call out at quarter 1 that we're already into, almost a month into, is a quarter where we expect the deal velocity, largely velocity to continue. So a lot of the confidence comes from that. Order executable has had a very strong correlation to actual revenue growth. And our intent will be to make sure that we don't lose that correlation in the year to come.

[Abhishek Shindadkar, analyst]

That's helpful. What I was trying to understand is that fresh order intake growth lower than the growth of executable order book over the next 12 months. Historically, I mean the assumption right now is that there are a lot of cost efficiency deals which are larger in tenure. So that should have been reflected in these growth rates also, while the near-term transformation deals or shorter-term projects are more subsiding what the thought was and general perception is. So should we read anything from these 2 growth numbers and kind of correlate to the mix of book, or maybe we are thinking too far?

[Sudhir Singh, executive]

[ Saro ], you were closer to these numbers than I am. Do you want to take a stab on the answer?

[Unknown Executive]

Yes. So I think last year, when we looked at order intake growth being higher than the executable, I mean we had a large deal coming in which was spanning over a 5-year period. So what is happening this year is I think most of the deals that have come in, they're around a 3-year period. So I think when you look at intake as a growth in the intake, it also is a function of 5-year versus 3-year deals getting signed. So that's one. But as Sudhir mentioned, when we derive comfort from the next year projections, that actually comes in from the 12-month executable because every deal we carve it and derive what will be the next 12 months or 24 months or 36 months revenue. So I think it's more about 1 or 2 large deals getting signed, which is longer-term period, and that's where the intake growth in a particular year would be reflected very, very high. But I think there is nothing more to read beyond that. But when we look at our projections, our immediate growth numbers for next 6 to 12 months, the comfort that we derive is more from a 12-month executable order book.

[Sudhir Singh, executive]

John, this question around client outlook and order is coming quite a bit. Do you want to provide some quick commentary on what you're seeing with the key accounts as the CSO?

[John Speight, executive]

Yes. I mean you actually colored on one of the points I was actually going to flag up. I see quite a benefit from our positioning. And the fact is that you mentioned the relation -- the deep relationship, the bottom-up approach. We're in the trenches. We've always prided ourselves on execution. And this has actually positioned ourselves very, very well where there are significant cost outs because they come to us with our technology capability to drive those cost takeouts. So I actually see it as a positive sign in those respects for us as an organization. That extends [indiscernible].

[Ankur Agrawal, executive]

That was the time we had for the last question, and we can take other questions off-line with everyone.

[Operator]

Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Sudhir Singh, CEO, Coforge Limited, for closing comments. Thank you, and over to you, sir.

[Sudhir Singh, executive]

Thank you very, very much. We mean this very sincerely, A lot of us -- actually all of us on the call are going to remember this day very, very fondly. It's the day we crossed $1 billion. And we think it's fantastic that we got to start the day out here in India with all of you, so early morning. Thank you very much for your time, for your interest, for your comments and for your insights. Look forward to seeing you next quarter. Bye bye.

[Operator]

Thank you very much. Ladies and gentlemen, on behalf of Coforge Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines. Thank you.