Expect margins to expand further despite drop in revenue growth: Coforge CEO

Midcap information technology (IT) services firm Coforge registered a record FY23 on Thursday, outpacing its own 20% revenue growth projection and crossing $1 billion in annual revenue. In an interview, Sudhir Singh, chief executive, Coforge highlighted why revenue growth projection is significantly lower for FY24, what the company is doing to further expand gross margins despite revenue growth drop, hiring targets, and why he feels that generative AI is still an uncertain hype cycle. Edited excerpts:

Your Ebitda margin dropped by 60bps, despite posting record annual revenue. What contributed to this?

The only material factor for this was that we take our hedge gains and losses, and offset that against our revenue. This year, the hedge losses were significant due to currency fluctuations, the impact of which was 60bps. This drop is not due to performance issues, but because of the way we do our accounting.

At the company performance level, there was a reported drop of 40bps. But, that’s largely because of the 60bps hedge loss that our Ebitda margin accounted for.

Your revenue growth forecast for FY24 is 13-16% as against the 22.4% constant currency growth achieved against a 20% expected revenue growth for FY23. Is this linked to slowdowns and concerns from clients?

We are seeing concerns, but how this will translate depends on which sectors are being hit the most in terms of slowdowns. In theory, the macroeconomic uncertainty is leading clients to be cautious about their spending on an ongoing basis. But, the demand from clients varies across industries.

For instance, there is significant pressure among banks to optimize spending. Within this, the nuance is that run-the-bank deals are being cut, while change-the-bank deals are not being cut by as much. In the travel industry, however, the story is the opposite. Demand in the travel sector, especially among airlines and airports, is far ahead of the supply of services. As a result, confidence in spending in digitization initiatives such as biometric services, productizing and low-code solutions is significant.

The overall market demand for IT service providers is clearly depressed, but it is also a function of how within an industry, which segments are still doing well and which aren’t.

If discretionary spends are being cut, would this put pressure your operating margins?

Yes, there is a clear downturn in discretionary spending. But, I don’t think this should put any material pressure on margins. If we continue to grow at between 13-16%, operating leverage by itself normally tends to offset any pressure on pricing of our services.

Some of your larger peers, like Infosys, guided revenue growth as low as 4% for FY24. What is giving you the confidence for revenue growth of up to 16% for FY24?

Our gross margin expanded this year because our offshore revenue as a percentage of overall revenue has gone up. Two years ago, our offshore revenue was significantly below some of the larger peers, at 36%. In the March quarter, this has risen to 51%. This is the biggest lever for expanding our margin, which gives us confidence to expand another further 50bps in gross margin in FY24, even taking the present market dynamics into account.

The BFSI industry is your largest segment-wise revenue contributor. Do you expect it to report a drop this year, which could hurt the business?

No. The BFSI industry typically clubs banking and insurance together, but they are two very different sub-verticals. In FY23, our banking business grew 47% annually, while the insurance business shrunk by 3%.

Going into FY24, we expect our banking vertical to grow at 15% over FY23. But, we also expect to see insurance clients to account for a 15% annual growth -- it is already showing signs of recovery with a 5% sequential growth in the March quarter. This nuance is important to understand.

Do you expect your large client's share of revenue to decline in FY24, given the economic pressures and spending caution?

Not really. Our revenue from large clients ($1 million and above) grew around 23% in FY23, which is in line with our overall revenue growth. I don’t think we’ll see more smaller deals or shorter duration deals, or anything of the sort. The market actually has much more nuance than such an oversimplified narrative.

We’ve already spoken about the bifurcation of demand in banking and insurance within BFSI. Similarly, even within insurance, commercial business insurance spends remain solid, while L&A spends are declining. Geography wise, while North America spending is showing signs of decline, tech spending in Asia-Pacific and Australia are through the roof. It’s clear that there are obvious pockets of opportunities for service providers like us, so the actual nuance of the market is more complex than oversimplifying the narrative.

Have you set any hiring targets for FY24?

Our gross headcount should go up significantly, up by about 5,500 people. Net headcount should also rise by at least 2,500 people.

Do you see generative AI as a growth area for FY24?

I see it as another hype cycle that’s going on right now. This started with ChatGPT in November last year, but some forms of generative AI and automation have been there for the past five years — it’s not strictly new. Now, it’s become a big deal due to the hype.

It feels the same as hypes around fields such as robotic process automation (RPA) were seven years ago, or no-code from three years ago. These hypes are real, so we have to embrace them as service providers. What we have done with ChatGPT is merged the latter with Quasar, our intelligent data processing platform, specifically for use cases for insurance clients.

The problem with generative AI is that at least in the short term, given the data and security issues at hand, I don’t think too many enterprise clients would be using it — unless a Big Tech firm like Microsoft creates a fully firewalled usage environment.

When no-code/low-code created buzz, many projected heavy adoption, but that did not really happen at projected scales. The same applies for RPA, too. Metaverse is already dying down, but it still has some interesting use cases that are being used such as in augmented reality travel experiences with headsets.

So what will be the key areas where Coforge will focus on to drive its FY24 growth?

For us, new verticals such as the public sector will be key, as spending remains very solid there. Public spending in healthcare remains solid, and is nearly recession-proof. We’ll also continue to invest and grow our three core verticals — banking, insurance, and travel and hospitality. We’ll also focus on low-code/no-code deployments, as well as data and analytics, as analytics in particular is doing extremely well.

However, from a demand perspective, cloud deployments are iffy. We’ll focus on integration, because right now, with the multiplicity of cloud platforms, every firm is looking at a hybrid or multi-cloud model. Integration demand remains resilient.