Prabhudas Lilladher (PL Capital) has maintained a BUY rating on Coforge, setting a revised target price of Rs 2,020, implying substantial upside from the current market price of Rs 1,169. Coforge has delivered a resilient Q4FY26 performance, marginally beating expectations on revenue while significantly outperforming on margins. The company’s strategic pivot toward AI-led transformation, coupled with strong deal momentum and successful integration of Encora, is setting the stage for sustained high-growth visibility. With a robust executable order book of US$1.75 billion and rising demand for modernization and agentic AI solutions, Coforge is transitioning into an AI-native IT services player. PL Capital’s upward revision in earnings estimates and margin outlook underscores confidence in structural profitability expansion, reinforcing a compelling long-term investment case.

Strong Q4 Execution: Margins Surprise on the Upside

Coforge reported a standout operational performance in Q4FY26, particularly on profitability metrics. Revenue grew 2.0% QoQ in constant currency terms to US$489 million, slightly ahead of estimates. However, the real surprise came from margins, where EBIT expanded sharply by 230 basis points QoQ to 16.6%, significantly above street expectations.

This margin expansion was driven by multiple levers:

SG&A efficiency gains (+100 bps)
Favorable currency movement (+80 bps)
Reduction in direct costs (+50 bps)
Lower marketing expenses and ESOP costs

On a full-year basis, EBIT margin expanded by 370 bps YoY to 14.4%, indicating a structurally improving cost base.

Segmental Dynamics: Broad-Based Growth with BFS Lag

Growth remained diversified across verticals, though BFS continued to underperform.

Healthcare: +15.5% QoQ
Travel, Transportation & Hospitality: +7.5% QoQ
Insurance: +5% QoQ
BFS: Modest +0.8% QoQ due to client-specific issues

The government segment posted a sharp 24.3% QoQ growth, albeit on a lower base. Geographically, growth was broad-based across Americas, EMEA, and Rest of World, signaling resilience despite macro headwinds.

Deal Wins and Order Book: Visibility Strengthens Significantly

Deal momentum remains a cornerstone of Coforge’s growth narrative.

Q4FY26 order intake: US$648 million (+9.3% QoQ)
FY26 total contract value (TCV): US$2.3 billion
Executable order book: US$1.75 billion (+16.4% YoY)

Additionally, framework agreements—excluded from the order book—provide incremental upside, enhancing medium-term visibility.

The chart on page 5 highlights a consistent upward trajectory in both order intake and executable backlog, reinforcing the company’s strong pipeline.

AI Transformation: From Capability to Core Growth Engine

AI is no longer an ancillary offering—it is becoming Coforge’s primary growth driver.

Management emphasized that enterprise clients are rapidly transitioning from pilot AI projects to full-scale deployments. Key opportunity areas include:

AI-led modernization programs
Agentic AI workflows
Data infrastructure and governance solutions
High-margin managed services

Interestingly, while AI reduces coding costs, it expands demand for integration, monitoring, and lifecycle management—unlocking recurring revenue streams.

Coforge’s positioning as an “AI-native services player” is further strengthened by:

Domain-specific AI capabilities
Hybrid human-AI delivery models
Internal productivity enhancements via AI adoption

Encora Integration: A Strategic Inflection Point

The successful integration of Encora marks a pivotal milestone in Coforge’s evolution.

This acquisition:

Expands product engineering capabilities
Enhances presence in high-tech verticals
Unlocks cross-selling opportunities
Drives 20–25% G&A synergies

Encora is expected to play a central role in scaling AI-led engineering and modernization capabilities, directly contributing to both revenue growth and margin expansion.

Financial Outlook: Upward Revisions Signal Confidence

PL Capital has revised its estimates upward, reflecting stronger-than-expected execution:

EPS estimates have been upgraded by 6–8%, driven by improved margins and operating leverage.

Revenue growth is expected to remain robust:

FY27E: ~45.7% growth (including Encora consolidation)
FY28E: ~14.9% growth

Organic growth is projected at ~13% annually, reflecting steady underlying demand.

Balance Sheet and Cash Flow: Strategic Investments Ahead

Coforge’s balance sheet is undergoing transformation due to strategic investments.

Debt expected to rise due to acquisitions (USD 550 million funding)
Cash reserves projected to increase significantly by FY28
Free cash flow conversion targeted at ~100% of PAT from FY27

While near-term leverage may increase, improved profitability and working capital discipline are expected to offset risks.

Valuation and Investment Thesis: Re-rating Potential Intact

PL Capital values Coforge at 28x FY28E EPS, arriving at a target price of Rs 2,020.

Key valuation metrics:

FY27E P/E: ~19.8x
FY28E P/E: ~16.2x
EV/EBITDA (FY28E): ~8.6x

Given the company’s transition into a high-margin, AI-driven IT services player, the valuation appears reasonable relative to growth visibility.

Key Risks to Monitor

Investors should remain mindful of potential downside triggers:

Prolonged weakness in BFS vertical
Integration risks from acquisitions (Encora, Cigniti)
Margin pressures from wage inflation or pricing challenges
Macroeconomic slowdown impacting discretionary IT spending

Bottomline: Structural Growth Story with AI at the Core

Coforge is entering a new phase of growth, underpinned by AI, deal momentum, and strategic acquisitions. The company’s ability to consistently outperform on margins, coupled with strong order visibility and execution discipline, positions it favorably within the mid-tier IT services space.

With a clear roadmap toward higher profitability and scalable growth, Coforge remains a compelling BUY for long-term investors seeking exposure to AI-led digital transformation themes.