Coforge Ltd
NSE:COFORGE
US |
Fubotv Inc
NYSE:FUBO
|
Media
|
|
US |
Bank of America Corp
NYSE:BAC
|
Banking
|
|
US |
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
|
US |
Uber Technologies Inc
NYSE:UBER
|
Road & Rail
|
|
CN |
NIO Inc
NYSE:NIO
|
Automobiles
|
|
US |
Fluor Corp
NYSE:FLR
|
Construction
|
|
US |
Jacobs Engineering Group Inc
NYSE:J
|
Professional Services
|
|
US |
TopBuild Corp
NYSE:BLD
|
Consumer products
|
|
US |
Abbott Laboratories
NYSE:ABT
|
Health Care
|
|
US |
Chevron Corp
NYSE:CVX
|
Energy
|
|
US |
Occidental Petroleum Corp
NYSE:OXY
|
Energy
|
|
US |
Matrix Service Co
NASDAQ:MTRX
|
Construction
|
|
US |
Automatic Data Processing Inc
NASDAQ:ADP
|
Technology
|
|
US |
Qualcomm Inc
NASDAQ:QCOM
|
Semiconductors
|
|
US |
PayPal Holdings Inc
NASDAQ:PYPL
|
Technology
|
|
US |
Ambarella Inc
NASDAQ:AMBA
|
Semiconductors
|
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
52 Week Range |
4 283.8733
7 753.75
|
Price Target |
|
We'll email you a reminder when the closing price reaches INR.
Choose the stock you wish to monitor with a price alert.
Fubotv Inc
NYSE:FUBO
|
US | |
Bank of America Corp
NYSE:BAC
|
US | |
Palantir Technologies Inc
NYSE:PLTR
|
US | |
Uber Technologies Inc
NYSE:UBER
|
US | |
NIO Inc
NYSE:NIO
|
CN | |
Fluor Corp
NYSE:FLR
|
US | |
Jacobs Engineering Group Inc
NYSE:J
|
US | |
TopBuild Corp
NYSE:BLD
|
US | |
Abbott Laboratories
NYSE:ABT
|
US | |
Chevron Corp
NYSE:CVX
|
US | |
Occidental Petroleum Corp
NYSE:OXY
|
US | |
Matrix Service Co
NASDAQ:MTRX
|
US | |
Automatic Data Processing Inc
NASDAQ:ADP
|
US | |
Qualcomm Inc
NASDAQ:QCOM
|
US | |
PayPal Holdings Inc
NASDAQ:PYPL
|
US | |
Ambarella Inc
NASDAQ:AMBA
|
US |
This alert will be permanently deleted.
Earnings Call Analysis
Q2-2024 Analysis
Coforge Ltd
This earnings call provided a glimpse into the company's strategic initiatives and operational achievements over the quarter. Notably, the company has made significant strides in enhancing processing efficiencies, such as reducing mortgage application turnaround times by over 50% and boosting offer release to customers by 25% within its BFS (Banking and Financial Services) business thanks to the implementation of a new system at a major European bank. Further, the company has shown a deepened focus on large asset migrations, including over $250 billion in assets for a U.S. bank's wealth management platform, marking their largest to date.
In alignment with its strategy to be an AI-first organization, the company has expanded its capabilities with over 100 pre-built frameworks and solutions. These tools have facilitated tangible outcomes for clients, such as reducing monthly losses for a U.K. retailer and enhancing retention ratios for a Tier 1 insurer. The company also embraced the AI risk assessment field by developing tools to identify AI bias and ensure model transparency. A productivity improvement of 25% was also achieved through the deployment of AI copilots within the company's maintenance programs.
The company was faced with a challenge in the form of indemnification claims from a North American client due to alleged contractual breaches. However, the company has responded to the notice, indicating that there have been no formal proceedings initiated, and it continues to service the client without any revenue impact.
Financially, the company ended the quarter with a total cash and cash equivalents of INR 3,259 million, a decrease due to significant dividend payments and investment in subsidiary stakes. The Operating Cash Flow (OCF) to EBITDA for the second quarter stood at 49%, with an expectation of this ratio increasing to between 65% to 70% in the financial year '24. Additionally, the company has achieved a healthy revenue growth of 16.2% in constant currency terms, with an exceptionally high client retention rate of 93%, instilling confidence in continued robust growth. Management has reiterated annual revenue growth guidance of 13% to 16% and an adjusted EBITDA margin similar to the previous fiscal year.
Ladies and gentlemen, good day, and welcome to the Q2 FY '24 Earnings Conference Call of Coforge Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vikas Jadhav, VP Investor Relations. Thank you, and over to you, sir.
Good morning to all. You will have received our Q2 FY '24 results by now. They have already been filed in the exchanges and also uploaded on our Investors section. So we have with us today our CEO, Mr. Sudhir Singh; our Chief Customer Success Officer, Mr. John Speight; Mr. Ajay Kalra, our CFO; and our Deputy CFO, Mr. Saurabh Goel.
We'll begin the call opening remarks from the management team and post that, we'll open the floor for the questions. Before we begin, please note that some of the statements made in today's discussion relating to the future should be construed as forward-looking statements and may involve risk and uncertainties. Please refer to the disclaimer to the statement on Slide #2, of companies' Q2 earning presentation. So with that, I would like to hand over the call to our CEO, Mr. Sudhir Singh. Over to you Sudhir.
Thank you, Vikas, and a very good morning, good afternoon, good evening to all of you across the world. Thank you for joining us today as we share our quarter 2 performance and the business outlook 2024. We meet today in the shadow of a material change in the shareholding structure of Coforge that has taken place since we met last quarter. As you're aware...
Sudhir can you start again? We lost you for a moment.
Let me just do that again. We meet today in the shadow of a material change in the shareholding structure of Coforge that has taken place since we met last quarter. As you are aware, Baring Private Equity Asia EQT, which was the promoter of the firm has sold its entire stake over the course of the last 3 months. Consequently, Coforge has emerged as the only material board governed, professionally run Indian IT services firm in the industry.
We believe that as an Indian IT services industry matures, this ownership construct of professionally run firms will likely increase, and we take our responsibility as been the first board governed professionally run firm very seriously. It shall be the intent of my team to ensure that in the years to come, we set a benchmark around governance and performance that we do justice to the trust that the investors have placed in us.
Moving on, I'm pleased to report that in quarter 2, the quarter under review, Coforge has delivered another strong performance despite the challenging and uncertain macroeconomic environment. At the end of the first half of the current fiscal year, our revenue has grown 16.2% in CC terms. 18.7% in INR terms and 13.2% in U.S. dollar terms.
In quarter 2, we recorded robust sequential growth. We've seen a significant sequential growth in our margins. We sustained our large deal signing velocity. We have in short broad-based growth across all verticals. We continued with our net headcount increase led by both lateral and campus pressure hiring and we have also continued our investments in SG&A to sustain our growth trajectory in the coming years. At Coforge, we have always believed that superior execution is key to driving sustained performance.
This quarter was again reflective of the execution intensity that is uniquely Coforge. With that preamble, let me move on to the quarterly performance and the revenue analysis. I am pleased to report that during Q2 FY '24, Coforge reported a revenue of USD 278.1 million, registering a sequential growth of 2.3% in CC terms. In U.S. dollar and INR terms, the sequential growth was 2.3% and 2.5%, respectively.
On a year-on-year basis, quarter 2 revenues grew by 14.1% in CC terms, 12.6% in USD terms and 16.2% in Indian rupee terms. I should now detail vertical-wise growth for the quarter under review. During the quarter, our banking financial services vertical reported again a sequential growth of 3.8% in CC terms and contributed 31.6% to the revenue mix. The Isurance vertical registered a third consecutive quarter of strong growth, registering a sequential growth of 2.4% in CC terms. It contributed 22.6% to the revenue mix. The travel vertical grew 2.3% Q-o-Q in CC terms and contributed 18.5% of the total revenue.
The other verticals portfolio saw a growth of 0.6% in CC terms and contributed 27.3% to the total revenue. During the quarter under review, top 5 clients contributed 23.5% of revenues while the top 10 contributed 35.2% of the revenues. During the quarter, quarter 2, that is offshore revenue contribution saw a further pickup and stood at 52% of the total revenues versus around 51% in quarter 1 FY '24. As I've noted earlier, in previous quarters, this shift towards higher offshore revenues over the last 2 years has been an important structural margin support for the firm.
With that, I can now move on to the margins and the operating profits discussed. During the quarter, we delivered an adjusted EBITDA of USD 48.8 million and INR 3,997 million. This reflects an adjusted EBITDA margin of 17.6% for the quarter, which is an expansion of 160 bps over the previous quarter. Adjusted for the hedge loss in quarter 2, the margin expansion would have been around 200 bps sequentially.
We are satisfied to see continued expansion in our gross margin, which has gone up by 180 bps Q-on-Q. and 42 bps on a year-on-year basis. This, again, is in line with our adjusted EBITDA margin guidance expansion of 50 bps for the current year. Our quarter 2 SG&A has a percentage of total revenue stood at 14.9% and has now increased by 121 bps year-on-year as we continue to invest in the business, which was the planned right at the outset. SG&A now stands at around 15% of revenue, which was the target that we had set for us. Reported EBITDA margin stood at 15.3% and saw an expansion of 33 bps Q-on-Q. Q2 saw a onetime increase in ESOP costs, and I repeat a onetime increase due to acceleration in ESOP percent, we expect the ESOP cost to normalize from quarter 3 onwards. Consolidated PAT for quarter 2 stood at INR 1,810 million, which was a Q-o-Q increase of 9.5%.
Coming to order intake. We reported an order intake of USD 313 million during the quarter under review. This is the seventh consecutive quarter where the firm has reported an order intake of more than USD 300 million. In terms of geographic regions, Americas contributed $118 million, India $138 million and the rest of the world is $57 million to the Q2 order intake. While the macros and the IT spend environment continues to remain challenging, we signed 3 large deals in quarter 2.
In addition to these 3 large deals, we secured a $10 million TCV cross-sell based contract in our BPS business and we secured our first sizable transformational wins in the Guidewire space for a large U.S. auto and home insurance. Our executable order book which reflects the total value of locked-in orders over the next 12 months now stands at $935 million, and it is up 16.6% on a Y-o-Y basis.
Coforge also signed 8 new logos during the quarter. People metrics now. At the end of the second quarter, headcount stood at 24,638 employees and saw a net addition of 414 sequentially. I think it's important to point out that in the first 6 months of the current fiscal, our net headcount has grown by 1,414. You will have noted that this quarter, our net headcount grew 1.7%, following a sequential growth of 4.3% in the previous quarter.
Utilization, including trainees, during the quarter stood at 80% compared to 81% in Q1 FY '24. There's a slight drop on account of campus fresh graduate additions. We continue to do campus fresh graduate addition, as I said last time. Last 12 months, IT services attrition during the quarter stood at 13%. Employee attrition at Coforge continues to remain amongst the lowest across the Indian IT services industry. As you're aware, we fully rolled out the annual salary increments for our employees on time on the first of April.
We had honored all commitments and continue to do so to onboard campus and lateral hires, and we had again paid out in full on time, the annual bonuses of fiscal year '23 in Q1 of '24 itself. With those comments, I can now request John Speight, Customer Success Officer, Coforge, to walk us through capability and delivery highlights. John, over to you.
Thank you, Sudhir. I shall now touch up on the highlights of the quarter related to our delivery operations. In our BFS business, we've successfully implemented a new system in major European bank to replace their U.K.-based legacy mortgage retention platform. This has reduced the turnaround time to process mortgage applications by more than 50% and increased offers released to customers by 25%. We also created a class-leading portfolio aggregation service for our largest banking technology [ plant ]. This has enabled them to target large private banks, we manage client assets in-house and product custodians. For the same time, we successfully migrated over [ 250 billion ] assets under management from a major U.S. bank onto their wealth management hosted platform the largest migration to date.
In the insurance sector, our ongoing commitment to expand our Guidewire capabilities has resulted in Coforge being selected for a multiyear deal by a major U.S.-based carrier to transform and then support their personal alliance business. At Tier 1, specialty insurance carrier appointed us as a strategic integration partner to design, develop and deploy more than 350 business services on Microsoft Azure over the next 18 months. Our Insurtech AdvantageGo closed a major deal with a global specialty reinsurer to implement their new product and underwriting workage. It's a class-leading solution that consolidates all information in a single pane of glass to enable efficient underwriter position. For a large travel technology clients, we successfully migrated more than 40 global airlines and 9,000 travel agencies onto a new passenger name record system hosted on Google Cloud, GCP.
The company has received and noticed from clients in the North American region regarding the clients intent to seek [ indemnification ] for third-party claims and costs associated with the claimed breach contract by the company. The company has responded to the clients notice and is not a party to any of it occasional of it's formal proceedings. Notwithstanding the receipts of such notice, the company continues to provide services to the client on a regular basis with no impact on the revenues received from such clients.
In our last earnings call, I talked about Coforge being an AI-first organization. We continue to develop and shape these things on our platform. It is now providing more than 100 pre-book frameworks and solutions that clients can use to develop and build their own Gen AI solutions. We recently used it to help our leading U.K. retailer reduced monthly losses from customer turns and a Tier 1 insurance have to increase customer retention ratios. We're also working now with a partner that specializing the AI risk assessment and certification to build [indiscernible], it's a framework and associated toolkit that clients can use to identify AI bias and enable transparency and explainability in their AI models.
Continuing with the AI theme, I wanted to highlight an organization-wide program we've initiated to understand the benefits of [indiscernible] copilot to deliver for our clients. We are training and implementing copilots across development, testing, documentation and co-migration, tracking the velocity and quality improvements on engagements. In [indiscernible], we were able to demonstrate a 25% productivity improvement on existing maintenance programs for global human capital management.
Lastly, we continue to focus on expanding our relationship with partners who are heavily invested in AI. That is the hyperscalers and the low code no code providers such as Salesforce, Pega and ServiceNow. For example, to date, we now have 8 solutions available on Microsoft Azure marketplace and are currently working with GCP and AWS to host our solutions on their equipment marketplaces. I would now like to hand over to Ajay for further details on financials.
Thank you, John. Let me provide a few more details on the financials. Total cash and cash equivalents as at September 30, 2023, were at INR 3,259 million compared to INR 5,699 million as at March 31, 2023. This was lower by INR 2,440 million during the period. This reduction of cash was due to payment of dividend amounting to INR 2,322 million and the payment of [ INR 3,523 ] towards acquisition of additional stake in our subsidiaries. Our OCF to EBITDA for Q2 stands at 49% and our H1 OCF to EBITDA was at 1%.
Looking at the past trends, we generate most of our cash flow in the second half of the year. In the first half of the year, we have significant payments like variable compensation for the full year, interest payment for the full year for the NCBs and certain vendor advance payments. We expect our OCF to EBITDA ratio to be in the range of 65% to 70% in financial year '24.
The details at the end of quarter stood at 64 days of sales outstanding compared to 70 days in the same quarter last year. Our CapEx for H1 is at USD 12 million. As Sudhir has mentioned in his opening prepared remarks, our ESOP costs have increased this quarter due to onetime cost on account of accelerated vesting on achievement of certain milestones. Hence, it could be approximately 30 basis points higher than what we had envisaged. However, we expect this to be lower next year. With that, I will hand over the call back to Sudhir for his comments on the outlook.
Thanks very much, Ajay. As I said earlier, at the end of the first 6 months of the current fiscal year, we have registered a revenue growth of 16.2% in CC terms, 18.7% in Indian rupee terms and 13.2% in U.S. dollar terms.
We believe that sustained growth is a function of both signing large deals and equally importantly ensuring that existing business is reading. Over the last 6 years, the order executable that we announced every quarter and we have this quarter as well, has correlated very strongly with the actual revenue and growth that we have actually seen in subsequent quarters. This has happened because not only has the large deal, median size and velocity gone up but also because our repeat client business at 93%, our ability to retain that business is best-in-class from our side.
This this ability to sign large contracts and also at the same time, sustained existing book of business gives us comfort that in fiscal year '24 and in the years beyond, we shall deliver sustained and robust growth. Based our performance to date, we reiterate our annual revenue growth guidance of 13% to 16% in CC terms for fiscal year '24 and the guidance of adjusted EBITDA margins being similar to FY '23 and FY '24 as well.
With that, ladies gentlemen, I conclude my prepared remarks. And my team and I look forward to hearing your comments and to addressing your questions. Thank you.
[Operator Instructions] Our first question is from the line of Abhishek Pathak from HSBC. Please go ahead, sir.
Sudhir, my first question was around deal activity. Most last peers have reported a healthy...
Mr. Pathak, we're unable to hear you.
Am I audible now?
Yes, sir, please go ahead with your question.
Sudhir, my question was around deal activity. So most large peers have reported healthy multibillion-dollar deal wins, but they've largely been around cost takeout and they've been saying that the appetite for smaller deals and the deal velocity has become quite slow. Now despite that Coforge and even some peers of similar size have continued to report healthy TCV numbers. How do we reconcile this?
And for Coforge, specifically, what offerings are clients willing to spend on in the current backdrop, which they are not willing to sort of pause or stock and assuming this macro uncertainty persists, what is the nature of deal conversations you expect to have in FY '25. Would they be materially different to what we are seeing right now? And how do we think about the nature of demand in FY '25?
I can say state of the band that we do not relate to what you talked about as commentary that you received on some of the larger peers. We continue to see a deal velocity that continues to be very robust. We continue to see median deal size climb up. And when we look at the funnel even going forward, we feel very confident around the fact that the bit and the probability of closure around large deals for us specifically stays very strong. So I mean, that's how I would characterize everything that we're seeing right now.
We continue to see, if I were to actually parse out where we see large deals in the offer going forward as well, we continue to see digital transformation as a theme, not as a theme that has not really played out 100% or as a theme that speeded out despite the cost constraints that are there.
Product innovation, legacy modernization, cloud migration continues to hold and deals continue to come into organizations that are resilient and adaptable. We continue to see a very significant focus from organizations across sizes and clients, enterprise organizations to very seriously consider challenger organizations like Coforge, which have crossed the $1 billion threshold are by no metric small and our active, strong, domain-focused and tech-focused client challenger organization.
We continue to see opportunities in Gene AI and Advanced Analytics. So if I were to just pull this all together, productization, legacy modernization, product innovation, cloud migration, the ability to look at challenger organizations as organizations that have both the capabilities and the customer centricity, differentiated customer centricity and hunger to satisfy enterprise client demand is what is causing us to see the number of deals that we are seeing and more importantly, converting them at scale.
Our next question is from the line of Sandeep Shah from Equirus Securities.
Sudhir, first question, any recent conversation with the client gives you any change in view on demand outlook where some of your other peers globally, like Globant has been talking a recovery in the second half of the calendar year. Are you expecting any green shoots getting emerged?
Sandeep, in BFS, we see green shoots, but we're trying to balance them against the geopolitical uncertainty that there is. Insurance within the P&C space, we do see productization, product vendors like Duck Creek, or even Guidewire that John talked about during today on the call as spaces where demand is seeing a clear uptick. Within the travel space, we're looking at productization, customer experience and security as potential areas where we see emerging green shoots. Those are the subsegment wise deals. Overall, on the macro front, the macro, I do want to reiterate continues to be challenged and demand does continue to be stressed.
Okay. Fair enough. And last quarter, you said to achieve the midpoint of the growth guidance, we have to grow at 2.5% compounded Q-on-Q from 2Q to 4Q. This quarter is tad lower despite the great deal wins of the first quarter. So do you expect pickup in the growth in the second half because some of your peers has been also calling out higher than normal for lows. So how do you see second half? And when do you expect the first quarter and second quarter deal wins first quarter, particularly which was a robust to start converting into revenues?
See, unlike a lot of our peers, our deal wins have converted into revenues. So we're not -- I think it would be very unfair to not characterizing our performance where we've grown 16.2% at the end of the first half and trying to conflate that with what we are hearing from some our other peers. 16.2% growth in the first half of a year like this with the kind of challenges that the industry has even though we said ourselves is exceptional growth. So we don't really want to go back and try to take what we've already done. One played that and contracts that we got the other peers have done.
As far as we are concerned, every time we called out large deals, we've also shown revenue growth post that. You look at the last 4 quarters results, look at the first 6 months results, we believe large deals have to continue to translate into revenue growth products.
Going forward, if we grow to hit the lower end of our guidance, all we need to do is grow 1.6% sequentially for 2 more quarters. To get to the higher end, we have to sustain the revenue growth that we've been seeing. We're already at more than 16% growth at the end of the first half. The macros are stressed. We believe that 13% to 16% will hold under almost every situation and that's why we're going the given range that we gave 6 months back and the year started.
One last question in terms of margins to achieve the adjusted EBITDA margin being a flat. The ask rate is still at 135, 140 bps Q-on-Q improvement in the next few quarters. So what levers which will help us to pull out such a big margin improvement quarter after quarter in the second half and is it fair to assume the ESOP cost on a full year basis would be close to 1% to 1.1% versus 0.7% last year??
I'll let Ajay take the second question. As far as the first question is concerned, Sandeep, we're not planning to do anything this year, which is very different from what we've done in the last 3 years. Second half, there is a significant growth. Q3 to Q2 sequentially, we will see a very significant growth. We've already seen a 160 bps sequential growth.
We expect the growth again to be very significant, around 100 bps or higher Q3-over-Q2. So there's nothing this year by way of new levers that we plan to flex in order to get through the guidance that we've given. Trajectory will continue.
The 1 point that I do want to add is last year at around this time when the firm was heading into the second half. We were looking at hedge losses. This year, given the currency movements, we are looking at hedge gains starting Q3 onwards. So that's why we feel confident. As I've said at the outset, of getting back around the same adjusted EBITDA margin levels as last year. Ajay, over to you for the ESOP question.
Thank you, Sandeep, as I had mentioned in my opening remarks, the cost would be approximately 30 basis points than we have envisage. You are right, it will be around -- in the range of 1% to 1.1% for the full year for the financial year '24.
Our next question is from the line of Manik Taneja from Axis Capital.
I had a question with regards to our offshore revenue mix, which has seen a significant increase post-COVID and we continue to step up packet over there. How should we be thinking about this metric going forward? That's question number one. And the second question was with regards to the outlook on the Travel & Transportation vertical. You had some commentary from global companies in terms of some cost pressures or demand cooling off? How do you see this translate into business outlook for us from a 12 to 18 month standpoint?
Manik, let me take your questions in order. The first question was around offshore revenue. When we hit 48-odd percent, this question was popping up, and we were -- we try to be very conservative and said that we don't expect it to climb materially, but it continues to climb.
Going forward, we expect the decline to be far more gradual. But we still believe, given what's happened over the last 4 quarters, the number will continue to climb, but it will climb a little far more slowly than it has over the last 8 to 12 quarters. As far as Travel & Transportation is concerned, the commentary that you talked about is commentary that we empathize will be related due to some extent, travel transport, we are seeing pockets of spend coming up. They are centered around security. Spend is centered around digitization, they're centered around productization and they're also centered around strengthening directly towards customer experience-based projects.
Having said that, there are initial signs of I wouldn't say stressed, but of a normalization and spend going forward, we would expect our travel vertical going forward over the next 12 to 18 months to continue to grow in line with the broader forms growth but not to outpace this.
Sure. And one last one, if you could also talk about the Board reinforcement post ownership change that has happened at the company?
I'm sorry, I lost you, Manik, could you please repeat that question?
Sure, Sudhir. I just wanted to understand your thoughts around the reinforcement of the Board post ownership change.
Yes. Manik, as I said at the outset, the leadership team and the Board, the leadership team believes it's a privilege, it's a very serious responsibility for us to have emerged as the first professionally run Board governed organization.
Today, during the Board meeting, 2 of the directors from Baring Private Equity Asia has stepped down. We've called it out as part of our results back as well. Going forward, we are working -- the Board is working, and we announced the Board is working. All of us are working towards reconstituting the Board and we would expect that process to get consummated or largely reshape over the next 1 to 2 quarters and we'll update soon on the next quarter meeting around that.
[Operator Instructions] Our next question is from the line of Ravi Menon from Macquarie.
So we saw pretty broad-based growth across all verticals. Can you explain BFS where I think most peers have struggled, but you actually shown pretty good growth.
Ravi, as we said, there are green shoots even though the macros are stressed. The digital transformation spend has not necessarily gone away. The play around product innovation to play around legacy modernization, the acceptance of challenger organizations like Coforge at $1-odd billion, close to 55% to 60% of our revenue comes from financial services has really picked up. So we are getting -- we are seeing growth from some of the areas that I talked about. We are seeing growth also because of our ability to penetrate increasingly at scale into Tier 1 financial services organizations as a very credible challenger. And we also continue to see growth across BFS areas like advanced analytics. John, would you like to add to that?
Yes. I would actually. A few things on this. There's been feedback from some of our Tier 1 banking clients. When we've been working with many of these clients, it's been very big focused in very specific areas. We haven't spread ourselves across the whole enterprise. We focused on very, very key business-aligned areas and many of those are in the nondiscretionary spend areas. So we're heavily involved in a number of Tier 1s around payments processing as you maybe well aware there's some major changes going on at the moment. There's also up in the regulatory and the compliance space, 2 areas where we're heavily involved in the transformation is going on the banks. So the combination has been very, very focused and therefore, very, very confident in key areas along with it being within the nondiscretionary and transformation areas has meant we've been able to grow where others have struggled to stay.
One more follow-up if I may. Your BPS business also has held up pretty well. I know that you only have probably a small exposure to what you just spoked about it before, but can you speak about what are the areas that are growing well in BPS business.
In the BPS business, Ravi, one of the overriding premise behind doing the SLK acquisition 2 years back was because it was a banking only focused BPS business and our premise was that we would be able to extend that business more actively into insurance and travel verticals, which has happened. We were also convinced that we could take the EPS capabilities across the other financial services clients of Coforge, and that again has happened.
Today, when we talked in the commentary section around new wins, we talked about 3 large deals. But equally importantly, we talked about a $10 million [ VPSD ]. The fact that we've been able to get new leaders, both at the front end and at the back end over the last 2 years after the acquisition was consummated, the fact that the team has seen very significant investments coming.
The fact that it is possibly an exceptionally stable not just management team but a business with possibly the lowest attrition across any BPO player and the fact that our AI and analytics business have been able to work very closely with the BPO team to make a difference has really help. John, any other comments on that?
Yes. One comment I'd like to make there is the fact that we've combined automation and technology with our BPS, we haven't just focused on people on seats. We've actually focused on how we deliver value to our customers, and that's resonated very, very well.
Our next question is from the line of Shradha Agrawal. Please go ahead, ma'am, from Asian Market Securities.
Congrats Sudhir on a steady quarter. Two questions from my side. Can you highlight more on the 3 large deals that we've done as of now, what is the proportion of net new deal contribution? And any highlight on which sectors have you won this deal in? And the second question is to you, Saurabh, when you said that adjusted for hedge losses, EBITDA margin would have seen an expansion of 200 bps but when I look at the -- just when I look at the hedge loss number in acquit term, it seems to be flat on a Q-on-Q basis. So how does the margin expansion of 200 bps comes through then?
Thanks for both the questions. Saurabh, would you like to take both questions, color around the 3 large deals and the hedge loss question.?
Yes. So 3 large deals came in. One was from the BFS space, which was a new account, and this was an account which we were kind of going after the last 6 months. So it's within the BFS -- in the BPS space, so within banking. So that is one. It's a new logo, 100% new revenue. Then the other 2 large deals came in, 1 from the travel vertical within the EMEA space. And 1 was the renewal.
And as Saurabh said, 1 of the -- out of the 2 travel deals, 1 was with 1 of the leading Middle Eastern airlines. And the other 1 was with another possibly the leading European airline. So that's where the 2 travel came from. And as Saurabh said, again, Shradha, what was interesting about the BFS win was, this is a large deal. We've opened a new client in BFS last quarter despite everything that's talked about around the uncertain macro with a large deal. So it's not an incremental hope. Saurabh would you like to address, ou were on the earlier hedge losses question as well.
So hedge losses in the current quarter were flat as compared to the previous quarter. Next quarter, going forward, these hedge losses will convert to hedge gains. So we will -- assuming the currency remains at the current levels, we at least assume there will be a 50 bps flick on the margins just because of hedge losses getting converted to hedge gains. So that's where we are today. So currently, we are at almost INR 10 crores of hedge losses in quarter 2, which at current levels will get converted. If I just do mark-to-market close to INR 3-odd crores of hedge gains. So we'll be a flick of INR 13-odd crores going forward as we move to Q3 and probably even more in Q4.
Got it. And the last bit from you, Sudhir. On the -- some of our larger peers have been indicating stress in their existing book of business because of discretionary projects being on hold by certain accounts. So do we see a similar situation for our discretionary book? Or how do we see our existing local business altogether?
Shradha, I believe they're right. The macros are stressed, but we've also always maintained that for robust growth to happen as a firm and as a team, we shouldn't just be signing large deals. That's quite really important but we should be focusing equally strongly on retaining the existing book of business. Otherwise, the good fancy stuff gets done, large deals are announced. And when you look back, subsequent quarters, you don't find revenue going up, and that's largely because the quiet grip that keeps happening around delivery because of client dissatisfaction or a lack of client delight more than negates whatever good comes from signing large deals. So what has worked for us is the fact that our repeat business, but a firm our size is possibly 1 of the highest 93%.
Just summarizing the answer, yes, everyone is right when they talk about the macros are stressed. But are we able to retain our business? I think the answer is yes, and that answer is also borne by the fact that not only have we been calling out over the last 4 quarters large deals, but we've been backing that up with actual revenue growth and material growth subsequently.
Our next question is from the line of Rishi Jhunjhunwala from IIFL Institutional Equities.
A couple of questions. One, couple of levers that you've talked about in terms of margins over the medium term. One was the initiatives around reduction in ARC. And second is increasing the offshore mix towards closer to 55% versus 52% where we are today. So I just wanted to understand on both these metrics, how much -- so of course, offshore mix, we can see but on the ARC, how much we have progressed and by when do we expect how much expansion coming through that. And on the offshore side, any time line in terms of by when do you expect to reach that 55% plus number.
Rishi, I'll give it a good shot, and then I'll request Ajay also to chime in if he has other comments. 55% offshore is what we're heading towards, but I don't believe it's going to be a very rapid upward line towards 55%. So it's a little difficult to call out how many quarters it will take. So we do think that's where we are likely to matter and get to. As far as the ARC is concerned, we are not happy with the progress that we made on ARC. Second half is when we expect to be very aggressive around ARC deduction. I called this out earlier also, we were possibly 1 of the few, if not the only tech services firm that on the first of April, gave 100% of the increments. We gave very high variable payouts as well. So when I look at ARC are we at the midpoint of the year on ARC, where we wanted to be at the beginning of the year, the answer is no.
But are we equally committed that we will deliver on the ARC promise before the end of the year? The answer again is very strong yes. So long story short, we are not happy with the cost that has happened so far. We are now going to be heads down, working on making sure that the ARC drops more significantly in the second half going forward. Ajay, would you like to add to that?
Sure, Sudhir. As you mentioned, we are working on the ARC, and we are focused to drive it down. Though it has not happened until now. However, there are actions that we are taking. And we believe that by the end of the year, we will be at the targets that we had set out ourselves for. And that's another lever that we have for the margin improvements for the second half.
Understood. And second question is just on your other vertical outside of BFS and Transportation. So I guess you had in the past talked about splitting it up sometime in the near future. But just among the 2 or 3 key verticals within that, can you give some color in terms of how the momentum is building there?
Yes. Retail, Rishi, seems to be doing well, much smaller base, but material growth that we've seen. Public sector has already scaled up. Don't call me to the numbers, but it's almost about 7% to 8%, roughly about 7% of our aggregate revenues. And that business continues to be robust. We do expect it to go up. You're absolutely right about the fact that we have committed to carving out a new vertical and calling out those numbers. We will start doing that starting next year because end of the year might be a logical time to start making changes to the reporting structure.
Our next question is from the line of Saurabh Sadhwani from Sahasrar Capital.
Despite the furloughs in Q3, you expect a margin expansion of 100 basis points. So I understand that partially it's due to the hedge gains expected. But what are the other levers?
So let me just be very clear. In Q3, we expect revenue growth to be tepid because all of us, all 4 of us out here are not standing and talking about the fact that we will not see significant furloughs, we will, like many other organizers. Revenue growth will be tepid. Margin expansion will be significant, which is a point that Saurabh made 100 bps, possibly higher, around 100 bps at least. One, driven as you rightly said, because of the hedge gains, the reversal on the hedge front that we talked about; second, driven by what we just talked about, the ARC initiatives that Ajay and I were talking about. We expect that, so going forward to be also a significant. Did I miss anything? Ajay, Saurabh?
Yes. So I think that we also, every year, either towards the end of September or beginning of October do a client event. So that will again add almost 40-odd bps into the margins next year -- next quarter. So I think as we move to from Q2 to Q3, 1 is hedge losses converted to hedge gains. Second is the impact of a client event, which happened in Q2, which was annual event, which will again give the margins next quarter.
Third thing is ARC initiative has seen slow movement, but whatever actions have been taken, some benefit of that will start flowing in from Q3 onwards. So that benefit will start coming in. So I think those benefits will offset the impact of the furloughs, and hence, we will see at least 100 bps plus margin that's how we're looking at it.
Right. And Saurabh, just to build on what your namesake. Saurabh talked about, what we normally did was our annual client even used to happen in quarter 3 of the year. As Saurabh said, we did that in quarter 2, and that's for a firm our size that a material spend. We would like to invite some of you to attend it. We'd like to think we throw a very good event. Because that event happened in Q2 and the costs have been fully booked by Ajay, Saurabh and the team that is not going to be a cost impact in Q3 and hence the 40 bps of spend that he was talking about.
Our next question is from the line of Abhishek Kumar from JM Financial.
Sudhir, my question is, on events, BFS from what I hear, what we hear from most of the players is that most of the deals out in the market are kind of vendor consolidation, cost takeout deals. At the same time, we continue to win new logos in the BFS space. So I just wanted to understand who are we winning against? Are we kind of consolidating local subcontractors? Or are we winning against some of the larger peers in this space?
So both -- I can see John is smiling. Both John and I will attempt an answer. Abhishek, in the real world, right, other than analyst reports, mid-tier don't complete with mid-tier. So firms our size if I look at 19 out of our top 20 clients, our biggest competitor there is a scale IT player. It could be anyone from Accenture to Deloitte to the TCSs of the world. These wins are coming against those players. They always have, and I suspect they always will. Very rarely, if at all, have a mid-tier competing with a mid-tier at scale in an enterprise IT client. So that's the ground reality. John, would you like to add to that beyond this smile.
Not too much. But yes, I mean we are winning against the Tier 1s significantly. And I think it's not the fact that we're able to execute so well. We've got a recent case in Australia, where we want to get a Tier 1 into a part of the business. And because the ability to actually execute so well, we're actually taking more and more business. That's just a classic example of what we're achieving.
Okay. Second question is maybe on the smaller deals. A significant part of our deal wins still constitute of smaller deals. Just wanted some color on the kind of deals which we are winning here, these are largely renewal or we are also getting net new deals? And any change in the type of deals here and the pipeline that we have in the smaller leases.
Abhishek, to the point that John made earlier, the smaller deals are 1 on the back of execution. No client asks a vendor that is delivering well ever to lead, that's an axiom in our industry. That's where most of the growth comes from. The headlines come from large deals. The growth comes from delivery. So the reason why we're signing large and small deals, and I think it would be very unfair to start characterizing them into 3 or 4 buckets. These deals are contextual, depending on the client, depending on where they are in their tech journey, depending on where they are on the budget spend, they are of all kinds.
I know it's fashionable these days to try to bucket them into cost consolidation or something else. They include cost consolidation deals. They include a lot of productization deals. They still include innovation fees and to your question around in [ MM ] , as I said, 1 of the 3 large deals that we signed during the quarter was signing a new line with a $20-plus million contract straight of demand. John, would you like to add more color to that?
Not too much there. I mean I'll keep coming back and you mentioned the execution, execution and quality. And what we're finding is a lot of our -- the CXO that we're dealing with are actually turning around and saying, you're different because of the quality of your execution. And what is helping us is as we're seeing in the public sector at the moment in the U.K. is where those CXOs and they tend to -- they move around every few years, but into other parts of the public sector and they're actually reaching out to us as soon as they get into those new organizations to say, how could we get you into our organization, and that's helped us develop. But it's all on the back of execution.
Great. That's helpful. One maybe last clarification. Sudhir, you mentioned you expect Q3 to be tepid. Then in that case, that would really increase the ask rate for Q4 significantly. So in that context, I just wanted to understand, are we seeing that kind of pickup as we stand today? Or maybe in other words, are we still confident of achieving even the upper half of the guided band?
Difficult to say, Abhishek. What we are absolutely crystal clear on is that the guidance that we gave at the beginning of the year, which was very aggressive guidance, 13% to 16% growth is the guidance we will deliver on. Q3 is going to be soft. I think it will be soft for the industry further the sale have been aggressive.
We believe, and we've always said this, we believe that we always have very -- we have a very strong fix given the execution that John talked about on 2 quarters here on. So we at least internally know the broad number we will land at in Q3, which anyway, almost 1 month out of 3 is gone. Even Q4, we have a clear fix. Q4 should see a material upside compared to Q3. Tepid of course, is the qualitative term. So our intent is to make sure that it's not terribly tepid but we'll try to be on the higher end of tepid in quarter 3 for now. That's how I would put it for now.
Our next question is from the line of Rahul Jain from Dolat Capital.
Just 1 question. That since, of course, you mentioned some of the things that will benefit the profitability in near term and for this year. But as a measure to protect margin or do cost optimization, is there an active program given that there is a potential risk of a growth slowdown at some point? Or you are saying that since the momentum for you is continuing, you don't -- looking more on the cost optimization, but more on the growth side of the business?
Rahul, we always look at cost optimization, but we do not do cost optimization on the back of cost out that impact our employees. We believe that is counterproductive and those kind of optimizations are attempted by firms that are not confident of growth. We are crystal clear, we are a growth firm, we will deliver growth, not just in FY '24, where the guidance is 13% to 16% but in FY '25, '26, '27 and thereon. So cost optimization are we focused on? The answer is a definite yes. But please also remember, we're possibly the only IT services firm that on the first of April this year gave 100% increments, gave exceptionally high variable payout for the previous year, and we will continue to follow that path. The cost optimization will we do it. The answer is yes. Will we do it at the expense of things that in the long term will hit the growth trajections of our firm, the answer is no.
Our next question is from the line of Vibhor Singhal from Nuvama Equities.
I'm sorry, I joined the call late, so I hope it's the question that hasn't been answered. So Sudhir, just 1 question is on the margin guidance. I think for long, we have kind of guided margins on the adjusted basis. But at the end of the day, the ESOP cost that we gave, I think the ESOP cost that we adjust margins for is a part of the business, and it's part of the compensation that will get to employ.
So any road map or any outlook as to when we could actually look at providing a margin guidance on a reported basis because I mean the gap between the 2, I mean, is quite big even for this quarter for multiple quarters. And eventually, that cost does translate keeping down to the profit numbers and eventually the profitability of the company. So any color on as to when we could probably really move to more of our reported basis margin guidance, which could help probably help get a better understanding of the profitability of the company?
That's a fair question, Vibhor. Ajay pointed out earlier in the call that this year there's been a spike in quarter 2. We expect the cost to normalize quarter 3 onwards. In next year, as Ajay said, we expect the ESOP cost to come down. Ajay, correct me if I'm wrong by about 30, 40 bps from wherever we're likely to end up in fiscal year '24. We've taken note of your suggestion and we will work on that and then revert even the future around giving reported EBITDA guidance as well.
Our next question is from the line of Ashish Dash from Mirae Asset Capital Markets.
So Sudhir, I just want to understand, usually, we say that Q2 used to be a strong quarter in terms of revenue growth for a year. Now this quarter, we have -- the growth is moderated compared to Q1. And so just wanted to understand your view why this -- it happened this time that Q2 growth is not so strong?
Well, I mean, Q2 growth 2.3% has still meant that at the end of the first half, we're growing 16.2% over the first half last year in CC terms Ashish. That 2.3% growth count after a 2.7%, a 3.7% and a 4.7% growth. So if you look at the last 4 quarters, sequential growth has been between 2.3% to 4.7%. If you were to ask me, why has there been a slight deceleration, the answer is the same that we've heard in the call repeatedly, the macros are tough. And that's why we are the number that we are right now.
At the same time, as we've also said, and I think it's important to reiterate what we said at the beginning of the year, the guidance we gave, we will deliver on it. That we continue to maintain. We have maintained and we will continue to maintain even at the end of Q3, you will not hear me, Ajay, John or Saurabh to say something different. We will deliver on the guidance given at the beginning of the year, which was an aggressive guidance. That's how I would respond to that question.
Okay. And my second question is, I can say that top accounts, actual top 5 top 10 got decline quarter-on-quarter basis. Anything to read there?
No, Ashish. I won't read much there because last quarter, the top 5 account, if I remember, I went up 12.5% sequentially sort of keep me honest on this, but it was about 1.5%. That was a massive spike. This has normalized. Top accounts, relationships are solid, growth on a secular long-term basis will continue to be soft.
Our next question is from the line of Sandeep Shah from Equirus Securities.
Yes, sir, just a clarification. Saurabh, you mentioned and quantify about the hedge gains in the Q3 and Q4. Sorry, I missed it, if you can repeat the same, it would be helpful.
So I mentioned that in current quarter, we had a hedge loss of INR 10.5-odd crores. which at the -- if the currency stays at the current levels don't move much, we should be seeing a hedge gain of INR 3 crores in the next quarter, and it will only expand in Q4. So that's what I said.
Okay. So that may drive 50, 60 bps kind of ...
Easily, easily. Absolutely.So 50-odd bps, assuming the currency stays at the current level, it should be 50 bps.
So Sudhir, that scenario that plus no client event, which will have a tailwind of 30, 40 bps margin absolutely could be higher than 100 bps in the Q3 itself, right?
I hope you are right. That's the main theme. It's a valid question, Sandeep. That's going to be intake, but as Saurabh said as well, right? A lot of it will also play into currency movements as well. Hence, we've said broadly about 100 bps, we will attempt to try to make it beyond 100 bps sequential.
And Sandeep what will happen is we all know there'll be furloughs in the next quarter. So benefit of this part might get set off against the furlough impact. But 3 levers, one, the hedge losses getting converted to hedge gains. Second is the client event and a bit of actions that were taken in Q2 around ARC. Some benefits will start flowing in. That will get set off against the furlough impact that's coming in. But net-net, we're still looking at 100 bps at least and then looking at beyond that. So that's how I'll table the overall waterfall.
Ajay, you would like to say something? Would you like to add to that?
No, no, Sudhir. I was trying to mention the point about the furloughs because that's going to offset the gains that we are going to have. So yes.
Ajay sir, is it fair to assume ESOP cost may decline by 30, 40 bps by FY '25.
Yes, they will decline if no further ESOPs are given. On the current level, they will decline in net around 30-odd bps next year.
There's a high probability as Ajay said Sandeep that it will decline by about 30 bps.
Ladies and gentlemen, that was the last question of our question-and-answer session. I now hand the conference over to Mr. Sudhir Singh, CEO, Coforge Limited, for closing comments.
Ladies and gentlemen, thank you very much for your time. It's early morning in India, and late evening in the States. Thank you very much for your time, for your interest, for the commentary and for the insights that you leave us with. I just wanted to point out that over the last few quarters, we've also started doing this investor call over video.
There's not much to look at, but if you do want to join the video link going forward, we would really appreciate seeing you as we answer your questions. We will make sure that the video transcript is also uploaded immediately after this conversation on our website. Thank you once again, and we look forward to seeing you next quarter. Bye bye.
Thank you. On behalf of Coforge Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.