Coforge – Q3 FY2026 Earnings Call Note-Revenue at INR 4,188 crore (about $478 million) up 5.1%

Coforge Q3 FY26 Earnings: Strong Growth Holds Firm Despite Margin Dip, Encora Deal Fuels Optimism

Coforge turned in a solid December quarter, posting 4.4% sequential constant-currency revenue growth in a usually quiet third period for the industry. Year-to-date dollar revenue climbed 32.8%, backed by six large deal wins and healthy expansion in key accounts. Management stuck to its full-year 14% EBIT margin target, with Q4 expected to hit 15% after a seasonal wage-hit quarter. The big story remains the $2.35 billion Encora acquisition, which executives called a “defining moment” for building AI, cloud, and engineering scale. Free cash flow conversion reached 110% of normalized profit after tax, well above the usual range. Overall tone stayed upbeat, with CEO Sudhir Singh describing FY27 as potentially “exceptional” even as some verticals showed softer year-over-year trends.

The results underline Coforge’s ability to keep momentum in a market shifting toward proof-of-impact AI work rather than pilots. Deal velocity and order book growth point to sustained strength, though near-term margin pressure from wages, hedges, and acquisition costs bears watching.

Key Financial Highlights

• Revenue came in at INR 4,188 crore (about $478 million), up 5.1% quarter-on-quarter in rupee terms, 4.4% in constant currency, and 3.5% in dollars.
• Year-on-year revenue rose 28.5% in rupees and 21.5% in constant currency.
• Year-to-date dollar revenue growth stood at 32.8%.
• EBIT margin landed at 13.4%, up 191 basis points year-on-year but down 60 basis points sequentially.
• Underlying EBIT, stripping out hedge losses, reached 14.4%.
• Exceptional items totaled INR 147 crore, including INR 118 crore from new labor codes, INR 13.5 crore tied to Encora deal costs, and INR 16.2 crore in legal expenses from a past cybersecurity matter (partly expected to reverse via insurance).
• Profit after tax, excluding exceptionals, rose sharply year-on-year (around 71% in some reports), with EPS at ₹10.9 for the quarter.
• Free cash flow hit $45.7 million, delivering 110% conversion to normalized PAT, far ahead of the guided 70-80% range.
• Capital expenditure stayed light at $3 million.

Margins took a hit from annual wage hikes (about 150 bps impact) and higher hedge losses (INR 434 million vs INR 307 million prior quarter). Management offset much of this through ongoing efficiency steps and lower ESOP costs.

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Operational and Segment Breakdown

Growth stayed broad-based. Healthcare and high-tech verticals, now 10.5% of revenue, nearly doubled year-to-date. Travel jumped 66% year-to-date, BFSI grew 21%, government (ex-India) rose 20%, and retail/manufacturing/other buckets gained 23%.

Top accounts performed well: top-5 clients grew 51% year-to-date in dollars, top-10 rose 47%. These groups made up 21% and 30.7% of Q3 revenue.

Order intake reached $593 million, close to $600 million. The next-12-month executable order book hit a record $1.72 billion, up 30% year-on-year.

Headcount stood at 35,341, with net addition of 445 people. Utilization was 81.8% (expected to rise in Q4), and trailing-12-month attrition fell to 10.9%, among the industry’s lowest.

Simon Pearson highlighted AI platform progress, including FORGEX deployments at airlines, banks, insurers, and investment firms. New assets like Integration Studio and Extenda AI joined the portfolio, now active across 54 clients. Code Insight AI, a GenAI legacy modernization tool on Microsoft Azure, gained traction in travel, insurance, and banking.

Wins included cash-flow forecasting agents for a major European bank, conversational analytics cutting turnaround by over 60%, surety claims platforms, large policy migrations, and SAP upgrades.

Management Commentary and Strategic Direction

Sudhir Singh stressed a market “inflection point” where clients demand real business outcomes from AI, not just strategies.

“The age of AI experimentation is over. What we’re witnessing is a market inflection point.”

He positioned Coforge, especially post-Encora, as ready to deliver integrated modernization plus AI at enterprise scale.

“The acquisition of Encora is a defining moment for our organization. It establishes a scaled AI-led engineering, data services, and cloud services-based capability moat for the firm.”

Simon Pearson pointed to agentic AI delivering speed, resilience, and automation across industries.

CFO Saurabh Goel addressed margin noise calmly, noting offsets from initiatives and confidence in hitting guided levels.

The tone felt confident, focused on execution strength, deal wins, and strategic positioning in AI-driven transformation.

Guidance and Outlook

No new formal revenue guidance, but management reiterated 14% EBIT for FY26, with Q4 planned at 15%.

They expect FY27 to be “exceptional,” citing large-deal momentum (16 in first three quarters of FY26 vs 14 full prior year), 30% higher order book, and Encora synergies.

Acquisition expenses ($10-15 million range) will hit Q4 and Q1 FY27, but no EPS dilution expected in FY27 for the combined business. Term loan of $550 million secured; no QIP needed.

Positives to Watch

• Large-deal engine firing: Six in Q3 (seasonally slow), 16 in nine months, strong pipeline.
• Order book at record levels: $1.72 billion executable next-12-months, up 30% year-on-year.
• Key accounts firing: Top-10 up 47% year-to-date, concentrated growth adds stability.
• Cash generation strong: 110% FCF conversion shows discipline.
• AI differentiation building: FORGEX, Code Insight, new assets deployed at scale.
• Encora as growth accelerator: Adds engineering depth, near-shore LATAM, healthcare/high-tech scale, expected to lift FY27 trajectory.

Risks and Concerns

• Margin near-term pressure: Wage hikes, hedge losses, and acquisition/integration costs could weigh on Q4 and early FY27.
• BFSI softness: Some year-over-year moderation; analysts asked if transitional leadership played a role (management did not directly confirm but noted macro discretionary demand remains healthy).
• Exceptional items drag: Labor code costs, legal provisions, cybersecurity-related expenses.
• Integration execution: Large Encora deal brings regulatory, cultural, and cost risks during merger.
• Currency and hedge volatility: Ongoing hedge losses affected reported numbers.

Capital Allocation

Coforge financed Encora via $1.89 billion share swap (preferential allotment, ~20-21% stake to Encora shareholders post-deal) and $550 million three-year term loan to retire Encora debt. No QIP required, preserving EPS path.

Capex remained low ($3 million). Board recommended ₹4 interim dividend.

Broader Challenges

Currency headwinds persist via hedges. Macro environment still ties to discretionary budgets in some pockets, though management sees AI shift overriding that for capable players. Competition in AI/engineering services heats up, but Coforge claims edge through industry depth plus delivery maturity.

Analyst Q&A Insights

Vertical softness in BFSI and insurance on year-over-year basis, possibly due to leadership transition? Expect reversal soon given macro discretionary strength?

Management acknowledged varied vertical trends but highlighted BFS growth at 21% year-to-date and large deals from banking/insurance in Q3. They pointed to sustained demand in financial services without directly addressing leadership impact. Tone suggested confidence in recovery.

How is pricing evolving with AI tools changing delivery?

Executives noted AI assets (FORGEX, agents) speed engineering and reduce costs, allowing better value delivery. Pricing reflects outcome-based models and efficiency gains rather than traditional rate cards. Implied shift toward higher-value engagements.

Encora integration timeline, expenses, and revenue impact?

Deal progressing smoothly; regulatory approvals expected March-April 2026. $10-15 million in transaction/integration costs over next two quarters. Management avoided specific revenue add but stressed cross-sell potential and no FY27 EPS dilution.

Key Takeaway

Coforge continues to outperform on growth and deals in a tough IT services landscape, with 32.8% year-to-date dollar expansion and a swelling order book. Margins face short-term noise, but the path to 14% FY26 EBIT looks intact, and Encora positions the firm strongly for an AI-led future. If execution holds, FY27 could mark a step-up in scale and performance. Investors get a company firing on most cylinders, with the big acquisition adding both promise and integration work ahead.