Coforge Limited (COFORGE.NS) Q3 FY2026 Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Coforge Limited Q3 FY 2026 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded. Joining us today from the Coforge leadership team are Mr. Sudhir Singh, CEO; Mr. Saurabh Goel, CFO; and [ Mrs. Simone Pearson ], Global Head of Coforge Limited; and Mr. Manish Hemrajani, Head of Investor Relations. I now hand the call to Mr. Manish Hemrajani. Over to you, sir.

Thank you. Good morning and good evening to everyone on the call, and thank you for joining us today to discuss Coforge's financial results for the third quarter of fiscal year 2016 that ended on December 31, 2025. As Inba indicated in her introduction, we have Simon Pearson filling in today for John Speight. Before we begin, a reminder that today's discussion may include forward-looking statements, which involve risks and uncertainties. Actual results may differ materially, and Coforge assumes no obligation to update these statements. With that, I'll hand the call over to Sudhir for his opening remarks.

Thank you, Manish, and a very good day, ladies, gentlemen. Thank you for joining us today as we share our quarter 3 fiscal year 2016 performance and our outlook for the years ahead. As Manish has shared, John is on vacation in sunny Kerala. He sends his regards to all of you, and he's keen to rejoin our call starting next quarter. Simon, my colleague, shall stand in for him during the call today. I shall provide an overview of our performance, touch upon the current market context and then do a deep dive on results and operations data along with my colleagues. In quarter 3, we registered a growth of 4.4% in CC terms, and our year-to-date dollar revenue growth is now 32.8%. What we find particularly reassuring about our growth performance is the large deal velocity and the key accounts growth that underpins it. The 6 large deals that we've signed in the seasonally weak Q3, our next 12 months signed order book, that is 30% higher than where it was at the same time last year. and sustained growth across almost all key and top accounts has set us up for continued robust growth performance not just in fiscal year '26 but in fiscal year '27 and hopefully beyond. Equally importantly, on the margin front, it is pertinent to note that our reported 13.4% EBIT for the quarter and our plan to register a 15% EBIT in quarter 4 will lead us to the 14% EBIT guidance for fiscal year '26. In the current quarter, excluding hedge losses, the underlying EBIT for the firm is 14.4%. Finally, free cash flow for the quarter came in at 10%, and significantly ahead of our guidance of around 70% to 80% FCF on a sustained basis. We believe we are set to close a very successful fiscal year and we are headed towards an exceptional fiscal year '27. With that, I shall now move on to the current market context. Outside the usual narrative around discretionary spend linked to macro environment, it is important to note that the tech services landscape is shifting in ways that we at Coforge believe create extraordinary opportunities for firms with the right capabilities and importantly, resolved. While 2 years ago, every Board was asking how can we adopt AI. That question has now fundamentally changed. Our customers are no longer interested in AI strategies or pilot programs. They are demanding proof of business impact. They want measurable KPI improvements. They want clear parts to operational transformation. The age of AI experimentation is over. What we're witnessing is a market inflection point. The new era of enterprise tech is emerging, one where AI driven by cloud and data is becoming the engine or enterprise arrangements. The next-gen enterprise will have its business capabilities defined and executed via a combination of humans and AI agents, underpinned by an enterprise data core and a cloud foundation that is purpose-built for AI. This shift is separating those who can talk about AI from those who can actually deliver it at enterprise scale. Today, let's be frank, most enterprises aren't truly AI ready. Decades of technical debt, fragmented data landscapes, patchwork infrastructure, block AI ambitions. Clients need partners who can modernize their foundations while implementing AI, not a separate multiyear initiatives, but as one integrated transformation. In this emerging world, enterprises are done managing fragmented partner relationships. They're asking for partners who combine digital native innovation velocity with enterprise-grade delivery maturity, partners who can move at start-up speed while managing enterprise scale risk. It's in this context that 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 mode for the firm. This allied with Coforge's hyperspecialized industry expertise and execution intensity is likely to further accelerate our industry-leading growth. It also sets us up as a tech services firm that is likely to be the first to deliver upon the promise of the AI infused future that lies ahead of our industry. With that, let me walk you through how all of this translated into our quarter 3 performance. I shall start with the revenue commentary first. As mentioned earlier, the firm registered a sequential revenue growth of 4.4% in CC terms, 3.5% in U.S. dollar terms and 5.1% in INR terms. The 4.4% sequential CC growth came after registering 5.9% and 8% CC growth in the 2 previous quarters. At the end of quarter 3, we are now growing year-to-date at 32.8% in dollar terms. On a year-to-date basis, health care and high-tech verticals, which now together contribute 10.5% of the total revenue have nearly doubled from where they were just a year back. The travel vertical has grown 66% year-to-date. BFS has grown 21% year-to-date. Government outside India own 20% year-to-date and the other vertical buckets, which includes retail and manufacturing has grown 23% year-to-date. Ally this data with the 6 large deals that I talked about. Two out of the 6 large deals in quarter 3 came from banking. One came from travel. Yet another 1 came from insurance. A fifth came from the new health care vertical of the organization. And health care, interestingly that one deal was a large NN contract that we won. Our top 5 clients and our top 10 clients grew 51% and 47% of YTD, respectively, in dollar terms. They contributed 21% and 30.7%, respectively, to our overall Q3 revenue. Moving on to order intake. Quarter 3 was yet another strong quarter, both from an order intake and a large disclosure perspective. During the quarter, and I've said this earlier, we signed 6 large deals. The total order intake during the quarter was $593 million. It was almost within kissing distance of $600 million. The executable order book which reflects the total value of signed orders over the next 12 months is now at a record $1.72 billion. This number is 30% higher than at the same time last year. People front. Our total head count at the end of quarter 3 stood at 35,341. We saw a net people addition of 445 during the quarter. We continue to hire aggressively from campuses and laterally. Utilization during the quarter stood at 81.8%. This is a metric that we think will sharply increase in Q4. Last 12-month attrition for the quarter fell further and is now at 10.9% only. We remain, as always, while the lowest nutrition firms across the industry. I will now hand over the call to my colleague, Simon Pearson, who is the Head of Consulting and Solutions for Coforge, and I'll request him to provide insights into our operations and our capability questions. Over to you, Simon.

Thank you, Sudhir. I'll now highlight this quarter's delivery and capability milestones. We continue with our strong progress in agentic AI, delivering business impact at scale. Through our AI assets, we are making engineering faster, smarter and more resilient, enabling speed to market, architectural modernization and precision in delivery. For example, in a recent landmark win at a leading global systematically important bank based in Europe, we deployed autonomous agents across data silos to transform cash flow forecasting for its corporate clients. It was a win that proves at the intersection of deep domain expertise and emerging technologies Coforge is the partner of choice for mission-critical transformation. This quarter, Forge-X, our integrated Agentic-AI engineering platform delivered on further strategic engagements, each addressing complex engineering challenges. Some examples include a leading global airline where we have accelerated delivery and improved operational resilience, for a critical program through an AI-led software development life cycle. In a large U.S. financial services provider. We have built a platform with a road map of more than 20 domain-specific agents to industrialize automation and governance. We have modernized the legacy architecture of 1 of Australasia's largest general insurance brokers using gene accelerators to automate the refractoring processes, strengthening reliability and quality. And in a leading investment management company, we have deployed intelligent agents for product ownership and quality engineering to automate testing and defect analysis. Along with Forge-X, our AI asset portfolio continues to grow with 2 further additions this quarter, integration Studio and extend AI. These assets, along with the broader portfolio are deployed at scale across 54 clients, solving complex engineering and business challenges. Our cutting-edge Gen AI power platform, CodeInsightAI is a state-of-the-art legacy modernization toolkit available directly in the Microsoft marketplace, deployment ready in Microsoft Azure secure cloud-native platform. It is already in use across large-format programs in travel, insurance and banking, reducing risks, bridging legacy skill gaps and accelerating transformations. On to our successful engagements delivered in quarter 3, in Banking and Financial Services, we have been acknowledged by a leading U.K. bank for our work in secured loan migration, advanced mortgage transformation and deploying end-to-end bereavement automation. This program was recognized as their transformation of the year. As a global bank, our conversational analytics solution went live, reducing turnaround time by over 60% and improving case resolution quality. We executed platform upgrades and experienced modernizations across multiple financial institutions, rebuilt a core digital interface for a major U.S. utilities provider enabled process led savings for an Australia New Zealand financial institution and completed a complex SAP HANA upgrade for a global manufacturer. In insurance, we delivered a surety claims platform for a large U.S. insurer, migrating bonds and payments from a legacy estate into a modern digital platform. For a major supplemental benefits provider, we completed ONE of the industry's largest conversions, migrating more than 5,000 groups and 2.6 million policies to a new policy administration platform. We also implemented the governance uplift for a specialty insurers excess and surplus casualty clearance process, reducing manual entry by about 80% and enabling straight-through processing by AI-driven rules and digitization. Moving on to awards and recognition. This quarter, analysts have reaffirmed our leadership positioning across AI-based analytics and automation, AI-driven ADM services application development and application managed services and the travel and hospitality ecosystem. ISG has recognized Coforge with a Star of Excellence Award in IT operations and secured 2 ISG Provider Lens awards in multi-cloud public services. Additionally, ISG has positioned Coforge as a leader in insurance ITO services specialists in the ISG Provider Lens Quadrant study, insurance services, strategic capabilities 2025. And finally, Nelson Hall have positioned Coforge as a leader in AI-based analytics and automation, Jenai use case capability overall QE services and SAP testing capability in the Nelson Hall Quality Engineering 2025 NEAT. And with that, I will now hand over to our CFO, Saurabh Goel.

Thank you, Simon. We're pleased to report revenues of INR 411 million in Q3 of FY '26, reflecting a sequential growth of 4.4% in CC terms and 5.1% in INR terms. EBIT margin for the quarter stood at 13.4%, up 191 bps Y-o-Y and down 60 bps quarter-on-quarter. The reduction in EBIT was mainly on account of wage hikes of 100, which had an impact of 150 bps on margins, which is partially offset by various margin initiatives that we've been delivering within the organization for the last 3 quarters and lower ESOP cost. We also had a headwind on account of increase in hedge loss during the quarter. The hedge loss reported for the quarter amounted to INR 434 million as compared to $307 million in the previous quarter, reflecting an adverse impact of 26 bps in the current reported EBIT. As you know, we take hedge losses in the top line. The same had an impact of 90 bps on reported EBIT margins. There were exceptional items to the extent of INR 147 crores during the quarter, out of which INR 118 crores is on account of new labor code introduced by government of India. There is INR 13.5 crores related to expenses for the proposed Encora acquisition, and there is INR 16.2 crores on account of legal expenses, which have been booked on a conservative basis related to the cybersecurity incident. We have E&O cover and part of these expenses will be reversed once we receive the money from the insurance company. As we have just concluded a large acquisition and are in process of taking regulatory approvals, we are expecting expenses associated with the transaction, including integration, funding and WNA insurance and others over the course of next 2 quarters. and that would be in a range of $10 million to $15 million, which -- and details of that would be shared as we move along, but that's the ballpark range we are expecting. Excluding exceptional items during the quarter, earnings per share for the quarter stood at INR 10.9 per share. EPS for 9 months stands at INR 31.6 per share, which is 83% higher than the last year same period. This is further expected to go up post approval of Cigniti merger because minority interest will get added back to profits and which should be far more than the impact of that will be far more than the impact of increasing number of shares. Coming on to the cash flows, we're pleased to report that FCF increased to $45.7 million, resulting in an FCF to normalized PAT of 110%. We excluded the impact of exceptional items to arrive at this ratio. Billed DSO at 67 days unbilled at 20 and contract assets at 14, totaling to 109 days. We also have deferred cost, deferred revenue and current liabilities to the extent of 60 days, reflecting a working capital of 49 days. This was 48 days in the previous quarter. Capital expenditure for the quarter stood at $3 million. During the quarter, the company entered into a share purchase agreement for the acquisition of equity shares of Encora for an enterprise value of $2.35 billion. out of which $1.89 billion are getting financed through share swap arrangement and balance through term loan to retire the borrowings of Encora Group. During our last call on 26 December, we had mentioned that we are looking for multiple options like bridge loan or a term loan or QIP of $550 million to retire the term loan of Encora. We are very close to finalizing a term loan of $550 million for a period of 3 years with a consortium of 4 to 5 banks. We are comfortable with the pricing that we've negotiated with the banks and have concluded that we will not need a QIP for retiring the term loan in the target company. The guidance related to no dilution of EPS in FY '27 of the combined business stays intact even after this debt. With that, I will hand over the call back to Sudhir.

Thank you, Saurabh. Proceeding with the summing up and the outlook. Over the last 8.5 years, the revenue run rate of Coforge has gone up almost 5x and the market cap has increased almost 20x. As we shared in the past, it remains our intent to ensure that the next 8 years, see us maintain and improve upon the sustained business performance of the previous ADS. We hope to continue to be the industry leaders when it comes to growth, with increasing margins and investor value creation. 5.9% CC, 8% CC and now 4.4% CC sequential growth are the numbers are the growth numbers that we recorded in the first 3 quarters of this year. Top 10 accounts growing at a 47% YTD clip. Our next 12-month signed order book, which is 30% higher year-on-year. a sales execution engine that has signed 14 large deals last year and this year in 3 quarters has already closed 16 large deals, a pathway to 14% EBIT in fiscal year '26. All these factors cumulatively set us up to close a very successful fiscal year and head towards what will hopefully be an exception fiscal year '27. With that, I conclude my prepared remarks and my colleagues, Saurabh, Manish, Simon and I look forward to hearing your comments and to addressing your questions. Thank you.

[Operator Instructions] The first question is from Abhishek Pathak from Motilal Oswal.

Congrats on a good strong quarter. So a couple of questions, Sudhir. Firstly, on the vertical mix, very, very strong showing in health care, high tech, transportation, et cetera. BFS and Insurance seem to be a little bit soft on a Y-o-Y basis for the past couple of quarters. Just wondering on the BFS side, is this temporary? And sort of is this partly attributable to the transitioning leadership you've seen in this vertical? And do you expect this to kind of reverse meaningfully over the next couple of quarters considering BFS remains a very strong vertical from a macro discretionary perspective as well? And the second question was around pricing the deals and how the delivery is changing for us in context of using AI tools -- so just wondering sort of how are we pricing deals differently? How are restructuring these deals differently from a year back? Do you see more and more margin gains coming in as we use? I mean as we change that balance between humans and AI? And just lastly, a bookkeeping question for Saurabh. The unbilled long term seem to have kind of increased a bit Y-o-Y and Q-o-Q. If you could just explain sort of why -- I mean, what's happening there? And how should we kind of model that going forward?

Is, thank you for all the 3 questions. As you noted, I'll take the first 2 and I request Saurabh to take number three. Vertical mix, let me start off by saying just reiterating, Abhishek, I we said that we signed 6 large deals in quarter 3, a short quarter and 1/3 of those -- 2 out of those 6 were from banking. Given the large deal momentum we've seen in quarter 3 and what we think is likely to happen in quarter 4, we would suspend that while health care and high-tech will continue to grow at a tier that they are banking might be the fastest-growing core vertical of the firm next year, given the growth momentum that we see ahead of us, both in terms of large deals and in key account growth that's ahead of us. So banking be very assured about where things are. Banking, again, as you noticed, YTD is still growing 20% plus. As far as insurance is concerned, insurance has not degrown. Insurance has grown on a Q-o-Q basis. One out of those 6 large deals was insurance. We expect robust growth in insurance. FY '26 is almost done, very robust, possibly higher growth in insurance in FY '27 than what we registered even in FY '26. That's the growth momentum there. We feel extremely assured. And finally, the sector that did see a Q-o-Q decline was government outside India. We expect to close one of the largest deals that we've ever signed in that sector in quarter 4. So outside the Q-o-Q mix, if you were to look at YTD numbers, they are strong. And given the large deal velocity and the very strong growth of our top accounts and key accounts, I guess we're going to see them getting stronger starting Q4 itself. That was answer to question 1. Question 2, pricing, delivery. We've talked about delivery. We've always talked about execution in the context of delivery and fact that our clients believe that the age of AI experimentation is over and they need digital native velocity with enterprise-grade delivery maturity. We have transformed our core delivery model. We're not adding AI as a separate offering, but we are infusing it into every engagement. Our platforms, CodeInsightAI, Blue Swan, Forge-X, Quazar have helped us now for almost 2 years to embed AI in the way we deliver value to our customers from day 1, and that's important. We've restructured how we deliver. We are moving towards hybrid delivery models that combine agentic workflows with human expertise. And finally, to the other subjects around that question, Abhishek, critically, we're also willing to underwrite outcomes. Our rest award commercial models tie our fees to our clients achieved results. We believe in the integrity and the strength of our delivery execution to be able to do that. And when we say we put skin in the game, we meet it contractually as well. That was answer number 2. Saurabh, I'm going to request you to take #3, please.

Sure, Sudhir. So Abhishek, the increase in whether it is debtors or it is long-term unbid. It is tied to the nature of the contracts that are being signed up. And the way we are tracking our numbers internally is we are making sure that there is FCF2 PAT as a ratio that is getting delivered quarter on quarter-on-quarter. And that are the guardrails that we have put which will restrict the investment beyond a certain point in any particular account. So I think that's the short answer to that.

Our next question is from Vibhor Singhal of Nuvama.

And congrats Coors team on our rock solid performance yet again. Sudhir, my question was -- my first question was on basically the changing mix of the business that we might see over the coming quarters -- you had mentioned in the analyst meet that health care, high tech and public services are the verticals that we are focusing on going forward is basically in terms of diversifying our base. This quarter also, you mentioned that we have won a large deal in health care. And probably another in the public service coming in the coming quarters. So if you could just take through the dynamics of these 2 sectors, how are we positioning ourselves in this pre Encora, of course, there is Encora also, which will start contributing into it. In health care, how are we looking in terms of payers and providers in public services, are we looking more at the U.K. public services or is it to U.S. as well? And what are the kind of growth avenues that we are looking in these verticals as we look to expand these verticals?

Thank you for the question and for the kind comments, Vibhor. As we discussed earlier, in the investor meet that we've done in Mumbai, we believe health care, high-tech, public sector will grow on steroids next year. If I were to put it to you euphemistically, even if you were to reflect on their performance right now, these 2 verticals, just health care and high tech, and this is all in core. We're not factoring in everything that will happen after an Encora comes in on Hi-tech are already 10.5% of our aggregate revenues. And if I remember my numbers right, we are growing 95%. We've almost doubled it over the last 4 quarters. As I've said earlier, we signed an NN large deal in Q3 health care. We believe we will sign another NN large deal in the quarter that has started Q4. We also believe that in the Allied vertical, which you refer to U.K. public sector, we signed one of the largest deals that we ever have in that sector. In the current quarter that's going on right now, which we haven't announced because this was the Q3 results call for now. In health care, we continue to focus on life sciences, and we continue to focus on payer. However, please recognize that we are still relatively small. The Encora and the Coforge business, once it comes together, will only be about $170 million, $175 odd million. And therefore, we will also be -- we will also look for tactical wins. The large win in health care that we do expect to close in quarter 4 is likely to come from a provider client and NN client even though our primary focus longer term is going to be around life sciences and payers. Public sector, we continue to focus as we have. It takes a long time to build those relationships. On U.K. and on Australia public sector largely, we have no plans, no intention of approaching the U.S. public sector. I trust I've answered your questions, Vibhor. Thank you once again for the question.

Yes, very much, Sudhir. So in that context, do you see that going forward, the breakup of our deal wins are also going to change a bit maybe. So for example, in this quarter, out of 6 large deals, for in our traditional segments of banking, travel and insurance. Do you think we could see a mix of more large deals in health care and public services maybe going forward? Or do you believe banking, travel and insurance will continue to remain the 4 of our growth, and that is where still the large part of the large deal and the demand remains?

We believe that the total number of large deals on an average will go up. Banking, as I said earlier, we feel very confident about the pipeline that's building up. So banking, even this time, 2 out of the 6 large deals came from banking. Banking is likely to do extremely well. Travel, we think, is likely to do exceptional event. So out of the 3 core verticals Insurance, we think next year will do better than it has even in this year, fiscal year '26. Having said that, banking and travel should outpace insurance high-tech, health care, and this is all pre Encora will, we believe, continue to grow on steroids going forward.

Got it. Got it. Just 1 last question for Saurabh. I think this time, the numbers are quite very well explained and there. Just on the time lines of the 2 things. So I think Cigniti shareholder approval, as you mentioned, I think we've all seen us have all come. So when do you think Cigniti could finally get fully integrated into our numbers in terms of financially. And in terms of Encora also, what is the time line that you're looking for the share swap to be executed and thereafter the term loan to be retired?

So Vibhor, 2 things. One, shareholder approval was received and the application to the second motion application to NCLT was filed in the month of December itself. There's a hearing with NCLT in March. And I guess we should be able to get a result in 1 or 2 hearings. Our take is that maybe by March, and latest sometime before our results for sure, we'll be able to get the approval for Cigniti merger. And as and when the merger notice is received, as I mentioned earlier, the effective date of the merger is 1st April 2025. So which means we will -- if we have not reported our numbers for Q4 and the financial year FY '26, we will restate the 3 quarters. And when we report the full year numbers, hopefully, there will be no minority interest and new shares to Cigniti shareholders would have got issued. So that is on. That is on. So from a financial perspective, the integration would happen or the merger would get consummated by the time we report FY '26 financials. That is point number one. Number two, when it comes to Encora acquisition, number one, we had mentioned last time, and I mentioned that in the call as well that we are looking at a bridge loan or a QIP. I think the -- with the discussions that we've had with multiple banks and the rates that have got negotiated, we have finally decided that there is no need of QIP that we need to kind of do to retire the term loan in Encora and the interest rates are very, very lucrative. The terms -- the other terms and the term sheets, the agreements with the banks are now getting finalized. And the period of the loan will be 3 years. More details around the loan that we will take will be shared once we have kind of signed up the loan with the banks. That is one. Second, on the time line for acquisition, closure. We've already filed all the regulatory approvals that had to be filed either with RBI or with the exchanges or with the U.S. Competition Commission, which is HSR or any other geography. Approvals will start coming in. The HSR approval, which is competition commission equivalent approval in India is expected sometime in Feb. And I think by March time frame, we should be able to get pretty much all the approvals between March and April. And that's the time when we'll start consolidating Encora as well.

Our next question is from Manik Taneja of Axis Capital.

Congratulations for the steady performance. I basically had a question related to some of the cost split up during the quarter as well as the segmental margins first. So Saurabh, basically, is there some sort of a onetime element to the other expenses line item in 3Q because that seems to jump up very sharply in 3Q. If you could help us understand that? That's question number one. The second question is with regards to our segmental margins. If you could help us understand what drives the sharp move across segmental margins on a quarter-on-quarter basis. That will be helpful. And the last question is with regards to [indiscernible], given we've been executing on that through the ports of now I guess, probably about anywhere between 6 to 9 months. If you could help us understand how that essentially shaping up? Are we on track with regards to some of the product delivery there and talk about talk more to progress that?

So Manik, the other cost typically includes a cost related to either if there is any laws deal, which includes any third-party component. So that cost is included there, and that goes up and down depending upon when milestone is achieved. So the cost gets recorded accordingly, and then it goes up and down. it had happened in the same quarter last year also when the third-party costs had gone up significantly, and I'm not referring to the subcontractor cost but the third-party cost. So that is because of that. But you will also note that when we look at the expense lines and we look at people cost, this was a quarter wherein we give wage hikes, but the wage hikes have not -- the cost lines around people cost has not significantly gone up purely because of the optimization initiatives that are going on within the organization. So that is the answer to other costs. And yes, it is seasonal. It's not that it will continue to stay where it is. it keeps moving up and down depending upon when the costs are hitting and when the revenue is getting recognized. Now what was your second question?

My second question was with regards to the segmental margins from a geography standpoint, given the volatility that we see across the regions through the period.

Yes. Yes. So one is a large impact is one is because of the currency. I think that's the biggest impact that we are seeing because hedge losses get allocated not to the overall revenues, but largely to Americas and Europe. And that is where the hedge, the amount of hedge losses that we are having in our top line because we report hedge losses in top line, that is impacting the reported EBITDA margins of the segments that we are in. And the third thing is about Sabre deal. I think from a saved standpoint, when we look at the ramp-up that was expected to happen in quarter 1 and quarter 2, the deliverables that had to be delivered during that time frame. We are on track. And the cost that had to be incurred, we are lesser than the plan that we had to incur. So I think from a Sabre deal standpoint, we feel very, very comfortable in terms of what we have delivered so far, what our road map is as we move along and we get into next calendar year, which is calendar year '26 and from a comfortable around the -- and Sudhir, maybe if you want to add something on Sabre.

Thanks, Saurabh. Manik, to your question, how the Sabre project is doing, we would characterize it. And I guess, John and Sunil would characterize it more appropriately, possibly apply as it's going swimmingly well. We had a meeting earlier this month around the first week of the new calendar year. with the CEO, the CEO, the CIO and the Head of the transformation program. The feedback from them was exceptional. The feedback from our team to them around the partnership and where we are against the agreed upon milestone again was exemplary and of the highest order. So things are doing -- things are moving exactly where we expected them to be and possibly slightly better than that. Did we answer your question, Manik?

No, that's quite helpful, like in all the best in the future.

Our next question is from Kawaljeet Saluja of Kotak Securities.

Sudhir, Saurabh, congratulations of good print. I have a couple of questions. First is on the nature of deals that drove strong growth in -- can you just elaborate on the type of deal that would have contributed to such a large number? And would this end up being a headwind to your growth as you move into 4Q? That's the first question.

Okay. Saurabh, I'll start off and please add on. Kawaljeet, at this point in time, beyond reliant on 1, 2 or even 3 access for growth. We referred earlier to the kind of growth that we see around health care around public sector, potentially getting accelerated post Encora coming together around hi-tech. Banking, we've alluded to the fact that not almost 2 out of the 6 deals came from banking itself. Banking is likely to do it really well next year as its travel given the large deal tends we're looking at. So we think, and I think we said this earlier, we think fiscal year '26 has been a very good year for us. Fiscal year '27 is likely to be an exceptional year. If the growth momentum continues, A lot of our confidence is also coming from the balanced nature of the growth across account size cohorts. The pipeline, the relationship status across the top 10 the top 20 clients is extremely robust. And then it's also coming from the next year unsigned order book that we talked about. It's 30% higher than where it was 4 quarters back. So we have a lot of prongs that give us significant confidence that what has been a very good year is likely to be followed by an exceptional year coming away. Did we answer your question? And Saurabh, would you like to add anything?

Sudhir, if you can just elaborate what was the nature of contract in the India business that drove that sharp growth in the December quarter?

In India -- sorry, go ahead, Saurabh. Yes.

So Kawaljeet, a couple of things. One, when we look at the other direct cost, okay? So it has grown almost 4.5% Y-on-Y. And so there was a seasonality. So a similar spike in quarter 3 last year, it happened in the other cost. And it happens in case there is any third-party component, which is included as part of the solution to the customer and you recognize revenue and book cost once the solution is delivered. So that spike came in, in quarter 3, which led to increase in DSO and also increase in liabilities and also increase in direct cost.

Okay. Got that. The second question that I had, Saurabh, what is your hedging policy? And are the hedge losses purely on account of the euro net of hedging GBP or USD? And if that's the case, what's the average rate of cash flow hedge book that you're carrying right now?

So one, Kawaljeet, we've been using the same hedging policy consistently for the last, I guess, a decade or so. And we look at -- we take 90% of the -- we hedged the 90% of the exposure in respective currency for next quarter, followed by 800 which is total exposure of 75% over a course of 1 year. And we do cash flow hedges and our heads are effective because of which the hedges -- the hedge gains or losses goes and sit in the top line. The reason why the hedge losses have come in, it's not because of just dollar pound. It's because of -- I mean, largely because of dollar because dollar has just continued to run up quarter-on-quarter, month-on-month. We are also now revisiting the hedging strategy, wherein we will stop taking the cash flow hedges which will then allow us to at least take the hedge gains or losses as part of the other income, so that it does not impact our EBITDA or operational EBIT performance. And so that's where we are, yes.

Okay. So are you going to basically pull back from hedging of cash flow so to be at value sheet hedges in future?

Again, nothing finalized yet, but yes, it is between cash flow and balance sheet hedging. Maybe we'll do something balanced. Maybe something do with debt that we are taking, maybe there will be a natural hedge that will come in. So allow us a quarter or 2, and we'll be able to provide more clarity on that. But it is under works, and there will be some update on this, if not later, but maybe next quarter for sure.

[Operator Instructions] We take the next question from Dipesh Mehta of Emkay Global.

Yes. A couple of questions. I think first of all, you said risk reward where we are taking risk of about, let's say, delivering deliverable kind of thing. So can you help us understand how we get the sense about it, whether it would be part of contingent liability about the potential risk, which we are taking as a part of contract. So some color around it? Second question is about the employee cost. I think Saurabh partly touched upon about some of the cost optimizes and excellence or initiative, which we have taken. Can you elaborate and provide more detail around it?

Let me take a quick stab at it. Risk/reward, as you can imagine, is multiple flavors. Each one of those goes through our own risk assessment framework. This is something that Saurabh is the CFO of the organization owns, and this is something that our controller also gets into as does the pricing head. When it comes to commercial constructs, there are decisions that are made strategically around engagement structures, whether they are joint ventures, BOTs, reverse BOTs, standard fixed price contracts or milestone-based deliverables. Precisions are taken jointly by the CFO's office, along with the CEO's office, which is [ Sunil Fernandez ], the Global Head of Delivery of the organization. These are reported 3 times in a year to the Risk Management Committee of the Board to make sure that we stay aligned with where we are. You will have noticed, given the increasing margin and the very sharply increasing growth rate, not over 1, 2 or 3 years, but we're now 8.5 years. this approach where we've been commercially judicious, but also been open to new paradigms has worked very, very well for us. So that's the broad risk management framework that we apply I'm going to hand this over to you Saurabh to address the employee cost issue that was asked.

Sure. And also on the contingent liability piece, Dipesh. Typically, what we do is we contain the revenue recognition because there is a risk and reward. So we do a balance assessment and we contain the revenue recognition. And once we pass the tollgate, of -- which is a contractual tool gate, then the revenue gets recognized. So there is no contingent liability in the balance sheet that you will see, but it is the revenue recognition, which is contained. So that is one. Second, employee cost, you would recall, I mean, in quarter 4 of last year, we had said that we're making margin improvement initiatives. Maybe we've actually been talking about it for over a year now. wherein we were looking at improving ARCs, we were looking at containing bench, and we are looking at containing overheads. So I think those initiatives were on -- and we have taken a lot of actions between quarter 2, quarter 1. And quarter 3 is the period when at least we have seen the impact of those in the P&L because of which, even after wage hikes, the salary costs have not gone up. And because we have not been only able to optimize the head count. But even after head count addition and which hedges the salary cost has not gone up significantly. And you will continue to see this and which is a function of actually reduction in ARC. And you will continue to see this benefit flowing down. And that is what gives us confidence for quarter 4 EBIT margins as well.

Whether it partly reflect your pyramid change kind of thing?

It is a function of everything. It is a condition even not just the pyramid at the same band, people getting replaced with lower cost, it's even a function of that as well.

Our next question is from Rishi Jhunjhunwala of IIFL Capital.

Two questions. Firstly, Sudhir, ESOP costs have been a lever for us over the last year or so has given us 100 bps on margins. We have mentioned in the past that we do not expect this number to go up. In fact, if at all, it may trend downwards. With a large acquisition like Encora, do you think the trajectory may again change on the ESOP side, given any potential retention through ESOP schemes in there?

So as a percentage of revenue, Rishi, you will not see impact on margins. The absolute number might change. We will not -- we're not going to come right now for any incremental pool. But even if ESOPs are getting issued, the cost, the margins that we have spoken about will continue to be intact.

Fair enough. The second question is on head count, right? So if you look at in the last 1 year, our head count has grown at about year-on-year, 3Q to 3Q, without any material improvement in utilization, which Sudhir called out as a lever going forward whereas our revenues, of course, have grown at 25%, is it possible to just give a breakdown in terms of what is driving this gap between revenue and head count into how much of it is non-headcount linked revenues versus how much of it is driven by automation, productivity and some of the other initiatives? And how do we expect it to trend going forward?

So I'll answer that in 2 parts. One, obviously, it is a function of the kind of contracts which are outcome-based were getting signed, which gives you higher realizable revenue. And that's what you see, which is getting reflected in revenue per employee that we report. You look at current quarter, we almost -- we've crossed $71,000 per annum. So that is reason number one. Second, we've continued the utilization levels that we are reporting today. I think there is a significant upside that is possible. The reason why we are right now not seeing an upside is because we continue to induct pressures, and that's why we continue to maintain lower levels of utilization. But as the -- those presses are getting built, that has helped us in bringing down our ARC. So that is answer number two. Number 3 is that the point that Sudhir was making that not just contracts, which involves third-party cost, but outcome-based contracts, which has now become a significant portion of which is now continuing to become part of our deals as we are signing those deals over there, it's not just the revenue per employee, but the margin margins are high because of the risk that is being taken in those deals. That is leading to higher revenue per employee and leading to lower head count addition as compared to revenue growth.

We take our next question from Ravi Menon of Macquarie. .

Congrats on good revenue performance. questions here. One is this unbilled revenue trend as we take on more of the system integration contracts. Is this likely to continue going up? And is there an absolute kind of unbilled DSO number that you would be comfortable with because this is the level of risk that we are taking on and how do you actually plan controlling that Second is on the other direct costs. So again, there is seasonality I understand. I mean, this is also something that we should see going up because as you do these large estimate dated contracts, is the other line item that might go up?

So I'll take one by one. So Ravi, when we look at our balance sheet, we look at total working capital cycle, okay? So I think today it's sitting around close to 48, 49 days. And I think that is a number. So there are 2 lenses. One, you look at overall working capital cycle. Second, you look at FCF2 PAT, we're committed to make sure that we continue to deliver an FCF2 PAT that we've already talked about and also maintain a working capital cycle, which is closer to 50-odd days. If these 2 guardrails are kind of there in place, we will continue to sign large deals. We will make sure that -- as I mentioned, FCF2 PAT is getting delivered, EBIT margins are getting delivered. And within these guardrails, we'll continue to kind of invest in the customers or sign deals, which if requires investment in the customers upfront, we'll do that. So that is answer to question number one. Number two, other cost. It's not that this will continue to go up. I mean, as I said, over the last 1 year, the revenues have grown almost 28-odd percent. But if you look at year-on-year, this cost has only grown 3%, 4%. So it's not that the -- this line item will continue to grow. It is seasonally in nature. It will come -- start coming down from quarter 3 or quarter 4 or quarter 1 onwards. And you will also see, as a percentage of revenue, even the sock-on cost for us has now started as a percentage of revenue started coming down. I had mentioned that it has gone up because of certain either deals getting signed or certain acquisitions that were done, which had a larger subcontracting cost. So these costs will start coming down at the end of the day, if these costs continue to go up, there is no way we can keep delivering the EBIT margins.

And it's so that the salespeople cost has gone a little faster than revenue. I mean, is this because of payouts related to some of the large deals we signed? Or is this a sign that we are investing a bit more in sales to scale up some of these smaller verticals?

You're referring to quarter-on-quarter or year-on-year?

Year-on-year. It looks like it's a bit faster than revenue. .

Yes. I mean, year-on-year at 23%, 25%. So if I look at growth between 23% is revenue growth. Year-on-year, sales people cost is 25-odd percent. So I think it's a function of the investments that we have done. And -- but you will look at the G&A cost has gone down. So what our focus has been that we make sure that the investments in the sales is there because it's not because of the commission, but it's because of the absolute investment in the salespeople.

And one last question on Sabre. Because of the Sabre deal and the whole new platform that Sabre is creating, do you think there is a cross opportunity with airline customers and their own transformation programs?

Yes. I mean I think, Ravi, thanks for the pin. It has -- the Sabre deal has already had. It's not in the hypothetical. It's already when we look at the post saver scenario for cohorts. We are on the verge of standing up a $20 million relationship with an airline, which was not a material customer by any stretch for Coforge but was one of the biggest customers of Sabre. So that cross-sell has already happened. And we believe there is significant runway for more such relationships to get constructed over time because Sabre is not just a client for us. It's also a partner for us on an ongoing basis.

And with Encora, is that something that you think you can replicate in other segments to where you do more product engineering work and you start to cross-sell into different verticals?

You're right, Ravi, that's the intent. And if Cigniti is any reflection, the success of that acquisition, hopefully, Encora, a minimum will be as good as Cigniti was. And the intent, of course, is to take it up a few, not just from even the Cigniti's success.

We take our next question from Dhanshree Jadhav from Choice Institutional Equities.

Yes. Congrats on good set of numbers team. So it was a great performance. My question is on Encora integration. So as you said, the approvals will be done by the end of March. So should we see the integration or taking off in terms of numbers during end of the first quarter? Or how should we look at it? And some qualitative in terms of numbers post EBIT margins with the integration would be helpful.

Saurabh, would you like to take that?

Yes, yes. So Dhanshree, we will -- we have to -- so again, as I said, regulatory approvals are going on, and there are expenses related to regulatory approvals wherein the legal expenses are getting incurred, that will be coming in quarter 4. And the integration expenses will not be very significant in the current quarter, but there will be expenses related to, again, legal expenses around funding that we're going to tie up with banks. And I don't think other than that material -- there will be WNA insurance expenses also. So I think as of now, I have only this much of detail, but the whole integration-related expenses would largely hit either towards the end of quarter 4 or March start coming in then when we are closer to the approvals from the all the regulatory authorities or in quarter 1. So -- but again, right now, too early to say, the only 3 line items that I can expect between now and next couple of months that I have visibility of is the line I just mentioned. The balance integration-related expenses should actually come in Q1, which would be largely on account of -- there could be short close of certain contracts, the licenses and whatnot. There should be -- there could be other expenses also. So I'll provide more details once we have more clarity. And we'll have to just wait until we get closer to the regulatory rules and then I'll have more details around it.

And if you can, just to get some color on the rates at what we are -- I mean, whatever interaction we are having with the banks. So whether lower single digit or if that would be helpful.

It will be around mid-single digit.

Our next question is from Manik Taneja of Axis Capital. Mr. Taneja, could you please unmute your microphone and ask a question.

Thank you for the follow-on opportunity. This was once again a clarification on the other expenses line item. You said there is some seasonality to it related to certain contracts. So just trying to understand, is this largely linked to pass-through license sales? That's one. And given you're talking about very strong robust growth going into the next year, how should we be thinking about why you've given was only in the prior quarter. But how should we be thinking about some of the supply side factors going into FY '27?

So Manik, as I said that when we look at our P&L, which is year-on-year, the revenue growth in the P&L is close to 23-odd percent from a dollar perspective. And the other direct expenses have actually gone up only 4.5%, 5%. If you are looking at the result sheet, then it also includes the subcon expenses, which actually shot up for us. in quarter 1 of this year and which have now started getting contained at $50 million, $51 million level and it started actually -- this is the first quarter it has actually started coming down. So yes, there's seasonality to it. And Q3 last year, the same thing happened. This number then came down to close to $40 million in Q2 and again gone up. So it will -- it is a number which will move up and down. We expect this number to come down either as I said, in Q4 or Q1. And despite that, again, the pipeline that we have in place, the deals that have already got signed are on the word of signing between now and next a few weeks or so gives us confidence in terms of the revenue growth that we will see in the coming future.

So Manik, to your last question around supply-side pressure, as you can imagine, given where the industry is right now, supply side on the cost side, supply side pressure is very muted. Wage hike has just been announced. It is obviously not going to be done at least for the next 4-odd quarters. 4 quarters at a minimum. Therefore, the confidence around margin increase, further margin increase in FY '27 over '26 is also strong.

That was the last question for today. I now hand the call back to Mr. Sudhir Singh for closing comments. .

Thank you, Inba, and thank you, ladies and gentlemen. We know it's early morning for those of you joining in from there. We really appreciate the time and the intent. We always find these calls extremely productive and instructive from our vantage. We look forward to meeting all of you over the virtual call 3 months from now. Thank you very much. Have a great day.

Thank you, members of the management. Ladies and gentlemen, on behalf of Coforge Limited, that concludes today's call. Thank you for joining us. You may now click on the like Leave icon to exit the meeting. Thank you all for your participation. Goodbye.