Coforge Limited (COFORGE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Coforge Limited Q1 FY '26 Earnings Conference Call. this conference is being recorded. We have today with us from the management team, Mr. Sudhir Singh, CEO; Mr. John Speight, Chief Customer Success Officer; and Mr. Saurabh Goel, CFO. We will begin the call with opening remarks from the management team. And post that, we will open the floor for 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 risks and uncertainties. Please refer to the disclaimer to this effect in the company's Q1 FY '26 earnings press release. With that, I now hand the call over to Mr. Sudhir Singh. Over to you, Mr. Singh.

Thank you, Emma, and a very, very good morning, ladies and gentlemen. Thank you for joining us today as we share our quarter 1 fiscal year '26 performance and the outlook for fiscal year '26 and beyond. Quarter 1 FY '26 has been an exceptional quarter for the firm. More importantly, we believe that it has set the foundation for what is likely to be yet another exceptional fiscal for the firm. In quarter 1, the firm recorded 9.6% sequential dollar growth, and we believe we have established a path to deliver 14% reported EBIT in fiscal year '26 itself. Our sustained robust and accelerating growth story is now entering its ninth year. Before I delve into the nuances of the quarter's performance, I would like to reflect on the 3 key reasons that have driven our accelerating and sustained growth over the years. And more importantly, these reasons will continue to power our growth in the quarters and in the years ahead. Reason number one is an execution intensity that is uniquely our own. Execution, the often neglected but the most essential part of what gets things done, is an art which warrants not just setting and sharing lofty plans, but getting into the details of every aspect of bringing those plans to life. Across every aspect of our operations, be it sales operations, solutioning operations, capability, build operations, delivery operations or even acquisition integration exercises, we have created execution-centric measurement metrics that are -- typically and yet are highly effective. For example, when it comes to sales execution, we do not only use the standard measures of TCV, ACV signed or year-on-year growth delivered to measure execution effectiveness of our sales teams. Those measures are important. But we have learned over time that for us, Coforge, the single most important measure for turning in year-after-year sustained performance is every week's count of proactive large deal proposals submitted. This approach to measuring and powering sales execution is atypical, as I said, and yet, as our results prove, it is highly effective. Another reflection of our approach to execution is how we approach our big bets. A big bet could be a geo expansion play, it could be a capability build play or it could be a new partnership scale-up play. Where we differ in our execution is in severely restricting the number of big bets that we pursue as a firm at any one point in time. And we also differ in our execution in that we have never ever given up on even one of the big bets that we've undertaken. If a big bet is not turning out as planned, the team working on it is reassigned, but the big bet is not given up on. It is always delivered on. Those 2 examples illustrate reason number one: An execution intensity; and a single mindedness that is uniquely Coforge. Reason number two is our hyper-specialization in a few select industries. Over the last 8.5 years, it has been our belief that hyper specialized industry knowledge remains essential to creating differentiation and value. Technology is an enabler, and industry depth is the blueprint we use to apply it effectively. The industry-first approach is why our clients trust us with some of their most mission-critical initiatives. With the enhanced adoption of AI, organizations are shifting resources from run the business to grow the business. And AI budgets are expanding at double-digit rates, making AI the primary engine driving innovation and competitive advantage. Coforge is at the vanguard of this change with real-world deployments executing at scale and making impact across sectors where we have hyper specialization. We have been able to deliver these real-world deployments, mainly because of the deep industry domain knowledge that we bring to the table. Our Quasar AI marketplace has more than 100 case examples of industry-specific solutions that we have delivered. Coforge in sum is turning AI into business critical infrastructure, and we believe that industry expertise will remain a critical success factor and a critical growth factor in the new AI era. Reason number three why our growth has been strong and continues to accelerate is our deep engineering capabilities and assets. Engineering excellence is central to our operations. You've heard me say this for the last 9 years almost. We've built and supported complex platforms for SAAS which power half of the world's air cargo. We're now applying this engineering strength to AI integration across the development life cycle. Our unified delivery platform, [4GX], accelerates software development and legacy modernization using AI. You will recall that earlier this year, we partnered with a leading travel tech firm to modernize their product suite, delivering results in months instead of years using our own AI tools. This is part of a broader strategy to embed AI across programs. Real-world AI deployment requires more than just gen AI tech. It demands robust infrastructure, data foundations and AI Ops processes. As systems integrators with a deep engineering DNA, we understand this well, and we have created purpose-built assets from responsible AI frameworks and data readiness tooling to performance optimization and auditability that enable our clients to deploy real-world AI solutions at scale. Quickly to recap, we believe that these 3 factors, our execution intensity, our hyper specialization in select industries, and our deep engineering capabilities, are what have, over the last 8 years, allowed us to build a strong differentiation. And that, in turn, will allow us to deliver on a sustained basis going forward in the quarter -- quarters and years to come, robust and sustained growth. With that, I'll switch over quickly to the nuances, the details of quarter 1 performance. Starting with revenue. I'm pleased to report that the firm registered sequential revenue growth of 9.6% in U.S. dollar terms. In Indian rupee and CC terms, the sequential growth was 8.2% and 8%, respectively. The growth during the quarter, not surprisingly, was led by the TTH vertical, travel vertical, which grew 32.3% sequentially in dollar terms. The other emerging verticals, which include health care, retail and high tech, grew 12.7%. This is sequential. Government outside India vertical sequentially grew 6.8%. The insurance vertical, in turn, grew 1.1%. And BFS vertical saw a marginal decline of 1.1% Q-o-Q in dollar terms. I do want to point out at this stage that BFS on a Y-o-Y basis is growing 32%. And the BFSI segment is a segment where we see large deals in the works and near imminent. Our top 5 clients and our top 10 clients grew 25.1% and 15.7%, sequentially, respectively. They contributed 20.8% and 29.4%, respectively, to our overall quarter 1 revenue. It is important to note that our top 5 clients and top 10 clients grew by 50.8% and 36.8%, respectively, over the same quarter last year, and those relationships continue to be strong. Moving on to order intake. Q1 was yet another strong quarter, both from an order intake and large deals closure perspective. During the quarter, we signed 5 large deals. The velocity in the median side of large deals signed by Coforge has been increasing over the years, and I shall reflect more on this in my concluding remarks. The total order intake during the quarter was more than $0.5 billion. The exact number was $507 million. The executable order book, which reflects the total value of locked orders over the next 12 months, stands at a record $1.55 billion. This number, some of you might recall, was $1 billion a year back and is currently 46.9% higher than at the same time last year. On the people front, our total headcount at the end of the quarter stood at 34,187. We saw a net people addition of 1,164 during the quarter. Utilization during the quarter stood at 82.1%, a number we are comfortable with. Last 12-month attrition for the quarter fell further and is now at 11.3%. We remain, as always, one of the lowest attrition firms across the industry. With that, I will now hand over the call to John Speight for providing insights into our operations and capability creation. Over to you, John.

Thank you, Sudhir. I shall now touch upon the highlights of the quarter related to our key capabilities and delivery operations, starting with updates on our AI assets. This quarter, we launched the Coforge AgentSphere platform with over 100 foundational agents that can address industry pain points across travel, financial services and health care clients. As Sudhir mentioned earlier, we have also launched Forge-X, our unified delivery platform that applies AI to accelerate and streamline software development. It provides assets such as code insight, AI, a solution that can deliver 10x productivity gains in legacy modernization programs. With these additions, we now have over 20 core AI assets that accelerate execution of services, such as reverse engineering of legacy code, intelligent test automation and resilient cloud and infrastructure operations. We also launched a number of agentic AI solutions onto the ServiceNow marketplace, including smart gen change for improved change management. This Agentic AI workflow is among the top 5 partner-created AI agents now available on ServiceNow. By applying these innovations across cloud portfolios, we are shortening time to market, boosting operational efficiency and improving ROI on technology investments. I will now share a few examples. In Banking and Financial Services, we have developed a Gen AI-powered solution for the wealth and private banking division of a large multinational bank, providing real-time analysis and automated transcription of the calls. This solution was built in partnership with a leading hyperscaler and has enabled the bank to improve operational efficiency, provided benefits such as summarized conversation view, automated call scores, customer sentiment analysis and recommendations on next best action. For a leading European bank, we leveraged AI to streamline their customer onboarding, loan processing and business banking outreach capabilities. This has reduced approval cycle times, reduced the operational costs and reduced the number of nonperforming loans. Meanwhile, for our insurance clients, we developed a Gen AI powered by circular form summarizer that enabled automated extraction and summarization of circulars and forms. The solution integrates seamlessly with platforms such as Duck Creek and Guidewire delivering over 35% improvement in operational efficiency. In the travel segments, Coforge has just delivered significant value for an airline post merger, managing a major passenger service system migration. It was a large-scale digital transformation, has reduced operating costs as well as improving customer experience. Finally, for a leading Australian retailer, we've been pioneering the use of gen AI to drive innovation within our quality engineering services. It has created a quality intelligent foundation that is used to drive intelligent test case generation. These efforts have been recognized as 1 of the top 3 initiatives of the recent ISG Paragon Innovation Awards. Moving on to partnerships. Following the successful ServiceNow dispute management rollout in the U.S., we now offer dispute to accelerate as a prepackaged solution for efficient dispute management based on ServiceNow financial services platform. Coforge was recognized as a leader in Nelson Hall's meet report for ServiceNow across overall create a workflow and customer and industry workflow segments and as an innovator in the employee and technology workflow services. We partnered with Zscaler to launch Secure Access 360 on Microsoft Azure, delivering zero trust access and advanced security capabilities. With Snowflake, we introduced a Data Insights Retrievable AIS system built on Snowflake Cortex, enabling nontechnical users to access and analyze data needs. Our growing role as a Snowflake partner further strengthens our enterprise data and AI capabilities. With that, I will now hand over to Saurabh Goel.

Thank you, John. Before our financial performance, I would like to highlight enhancements made to our disclosures in the current quarter. We have started providing a comprehensive breakdown of the profit and loss statement, balance sheet, cash flow and EBITDA and EPS reconciliation as part of the management fact sheet. Going forward, from a margin perspective, our commentary will focus on EBIT margin and EPS rather than adjusted EBITDA. As previously indicated by Sudhir, our quarter 1 revenue reached $442.4 million, reflecting a sequential growth of 8% quarter-on-quarter and 51.5% year-on-year in CC basis. Organic revenue increased by 5.9% quarter-on-quarter on CC basis. The hedge loss during the quarter is $1.9 million, which is reflected in the top line as against the gain of $100,000 in Q1 last year. Q1 was a quarter which witnessed a ramp up of the largest deal that was signed by the company. And because of our execution intensity, we were able to maintain EBIT margin at 13.2%. EBIT for the quarter was $58.3 million, reflecting a 9.2% increase quarter-on-quarter. The EBIT margin remained flat, primarily due to higher amortization of intangibles from the recent acquisitions as well as increased depreciation related to the AI-powered data center deal, increased subcontractor expenses because of the acquisition and a ramp-up in the largest deal that we had signed in last quarter, and increased visa cost, which typically comes up in quarter 1 for renewals. EPS for the quarter is INR 9.5 per share. It is important to note that this EPS is post split of shares that happened during the quarter. This includes a onetime gain of $1.8 -- sorry, this includes onetime gain of $8.4 million from the sale of Advantage Go Business. This one-off gain of $8.4 million was set up by 2 transactions: one, exceptional expenses on account of legal cost related to the cybersecurity breach that had happened 2 years ago. While we maintain innovation insurance coverage and continue to engage with our insurers regarding this matter, a provision has been made in the profit and loss statement on a prudent basis. This provision will be reversed upon settlement of the claim with the insurer in due course. Additionally, there was a onetime broad-based bonus provision for employees, amounting to INR 55.5 million. Adjusting for one-off gains and losses, normalized EPS stands at INR 9 per share as against a reported EPS of INR 9.5 per share. Capital expenditure for the quarter stood at $65 million with $58 million allocated to an AI data center project. Over the last 2 quarters, approximately $85 million have been invested in developing an AI-powered data center. Of this total investment, $62 million has been received as advance from the client and has been recorded as deferred revenue on the balance sheet. The balance $23 million has been funded through a term loan at an interest rate of 3.5%. The assets have a useful life of 5 years, resulted -- resulting in an increase in depreciation. OCF for the quarter stood at $43.8 million, which is 115% of the reported PAT. SCF for the quarter was negative because of the CapEx incurred in the data center deal. Bill DSOs stood at 64 days, unbilled at 24, and contract assets at 13 days, reflecting a total working capital cycle of 101 days. Update on our merger. Exchange approvals have received -- have been received for the proposed Coforge and Cigniti merger. And now we're in the process of filing the first motion filing to NCLT. With that, I'll hand over the call back to Sudhir.

Thank you, Saurabh. Thank you for those comments. Summing up in outlook, and I'll do this very quickly, the 9.6% sequential dollar growth in quarter 1; next 12 months signed order book, which is 46% higher Y-o-Y; sales execution engine that signed 14 large deals last year and aims to close at least 20 large deals in the current fiscal; a potential pathway to 14% EBIT in fiscal year '26; one of the lowest employee attrition rates across the industry, that set of metrics are all pointers to what we believe will be yet another exceptional year for the firm. We remain committed to turning in the ninth consecutive year of robust growth despite the uncertain macro swirling around our industry. To conclude, we remain very strongly committed to setting performance and capability benchmarks for the industry. As our industry pivots, there will, over time, be a new set of leaders and winners. It is our intent to be at the head of that select pack. With that, ladies and gentlemen, I conclude my prepared remarks. And all of us look forward to hearing your comments and to addressing your questions. Thank you.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We take the first question from Prateek Maheshwari of HSBC Securities.

Am I audible?

Yes.

So I had a couple of questions. First of all, congratulations on strong execution on the revenues and strong deal wins. I had some question on the margins. So could you -- so again, on your reported margins as per SEBI format, it declined 50 basis points quarter-on-quarter, while you guys have shown adjustments, which draw to a conclusion that there is some improvement that happened quarter-on-quarter. So I just wanted to understand the walk that you have explained on the slide or Page 23 about what's the nature of the discount income that you guys report on long-term contracts and the -- and this recurring income on mortgage business. I wanted to understand that. And what is your guidance on when we'll see the convergence between the reported margins and SEBI format margins?

So Prateek, let me take that up. So number one, discounting income and long-term contracts is an accounting interest entry. So what happens is if you have a long-term contract and if you bill $100 to a client, 90% goes to top line and 10% goes to other income. So it's more of a notional accounting entry, and that's why it's been reclassified as part of EBITDA, point number one. Number two, income from mortgage business is something very similar. So these 2 will continue. Apart from that, I've already called out that integration expenses on account of Cigniti acquisition merger, the merger is going on have become insignificant. Acquisition expenses that we have done -- the acquisitions that were done in the previous quarter, again, only close to INR 24 million and which is $300,000. And then we're only left with onetime bonus, which you already called out is a quarter event. And because of which, we have seen that getting reflected in the P&L. So otherwise, there are only 2 line items, which is discounting income and income from mortgage business, which is part of the contracts that we have signed, and it will continue. Apart from that, nothing else will be there.

Saurabh, just some more color. So on the discounting income, it was about $24 million last quarter. It has quadrupled this quarter. So just wanted to understand like if somebody has to think how should be the -- basically the trajectory of this going forward?

So this -- see, as and when the unwinding of the discount is happening, I mean, it's more of an accounting entry. As and when the unwinding of the discount is happening, the amount keeps going up. So if we build the quarter in the first quarter, the amount will be low. As and when you keep the time getting lapsed and you're coming closer to the bill, the amount goes up and then it crashes down. So it's coming more from that perspective. It's an accounting notional interest entry. Otherwise, the corresponding value in the balance sheet is sitting as part of receivables.

Okay. Can I ask you one question on the -- so we just wanted to understand the CapEx as well. So over the last 5 years, CapEx has increased from some 2% of revenues to 5% revenues. CapEx was, I think, based on what is shown on the fixed assets, CapEx or again, how you have called out some data center investments. So just wanted to understand, overall, what's happening with the CapEx. It has increased by 300 basis -- 350 basis points over the last few years.

So CapEx, as I mentioned, is part of -- the increase in CapEx in Q4 and Q1 was specific to 2 particular deals for a particular deal that we have signed. And out of which, as I mentioned in my prepared remarks, out of $85 million, $62 million have been received. So it's a data center deal wherein we set up a data center, and that's why you also see the increase in the depreciation.

And Saurabh, for the prior years, last year you're expecting [ 5% ].

I think, can we go to the next question, Saurabh, and then we'll come back to the gentleman asking the questions over time.

Yes, sir. Thank you. We'll move to our next question. That's from Vibhor Singhal of Nuvama Equities.

And congratulations to the entire Coforge for a very solid quarter. Sudhir, my question -- we got 2 questions. One is, I know our performance has -- be independent on the macro environment, which remains quite volatile. But any color that you can provide as to how is the environment that you are looking at from the industry point of view? It's been quite volatile. We've seen the red line go and now we're looking at August 1. Is the tariff uncertainty still looming large? Are the clients still hesitating? I know we have a very good pipeline in terms of orders and order book. But on the overall environment, some insight would be helpful.

We were -- if it's to run the enterprise budget that one is looking at, that budget continues to escalate and move around basis the macro uncertainties given the overhang of the tariff-related discussions and decisions that are likely. But more importantly, the change the enterprise budgets are the budgets where, given the proliferation of AI, we see that the discretionary nature of the spend has ebbed, and those spends from our brand has continued unabated. The large deals that we structure and the ones that we talked about, the Coactiv large deals, are also aimed solidly and the change the enterprise budget. And the enterprise is under pressure given the macro uncertainties.

Got it. Got it. Got it. In terms of our own performance, though I think it was -- it didn't leave any quarters which was not met, but the banking industry, banking as well as insurance, both were a tad soft in this quarter. Any specific reason to call out? Or just the quarterly variation and it could be back next quarter itself?

It will be back. It'll be back. There's nothing that's going to hold back to growth. Banking is still growing year-on-year at 32% for us. Insurance at 20% for us. The pipeline is very strong. So we're not concerned around short term, medium-term or long-term growth across BFSI. It will be robust.

Got it. Got it. And if I can just dwell on the banking industry yet again. You talked a lot about how our gen AI products are basically helping clients and how we are trying to create an edge for us in that. Any insights that you would be able to provide us to how the AI adoption is looking like in the banking industry, especially the BFS part, not the insurance part -- maybe insurance part as well, if you have time for that. And how -- and what are the kind of solutions that we are looking at? Are there basically core banking systems also been looking at, being modernized? And what are the different things that we are looking at in the sector or, let's say, for the next 2 years?

So banking institutions are under pressure to improve ROE amidst the macro uncertainty that you talked about, the higher interest rates and the intensified regulatory scrutiny. This is, to your immediate question, driving technology investments focused on cost efficiency, product innovation, product compliance and customer retention. From our vantage, business demand is healthy across commercial banking, lending, wealth management and risk and compliance, and that's driven in turn by the margin pressure, the need for product innovation and changes in rec frameworks. Operational resilience, cloud-native architectures have become mission-critical for banks at this time, and that's also an area of investment. And as you said, we are empowering banks to move beyond AI experimentation towards enterprise-scale adoption with a strong emphasis on intelligent automation and advanced risk analytics. Finding core modernization efforts at banks to your immediate question are also gaining momentum, and that's been driven by the need for simplification, for agility, for the strategic retirement, of course, the legacy infrastructure.

And you believe we have a very good presence in all of these opportunities that you talked about, which should hold us in good stead over the next years in the entire banking space?

It should hold us in very good stead, not just good stead going forward.

Great. Just one question for Saurabh. Saurabh, I think our margins in this quarter, just if I were just to basically take a step back. This quarter, we had a very strong growth, which was helping us. So if you could basically walk us through the puts and takes for this quarter that despite that there's some of the operating leverage coming through the growth, how the margins going to charter this quarter? And going forward, in the next 2 to 3 quarters, I know there is one ESOP cost, which is going to come down. What are the other levers that we are looking to expand margins towards Sudhir said, we're targeting 14% for this fiscal year itself?

So we got 2 things. Number one, historically, quarter 1 has been a quarter wherein margins get depressed. And even without wage hike, it used to come down by 100 bps or so. This quarter, wherein we were ramping up one of the largest deals, and we all understand that when you're ramping up a deal of that scale and size, some 1000-odd people in an account, there are expenses that will come and hit you because the billing doesn't start at the same time. Despite that, we were able to maintain EBIT margins. And I'm talking about EBIT because that's what the guidance is going forward. It will still remain flat. And as we move forward, we've always seen that historically, we've expanded margins post quarter 1 performance. So quarter 2, quarter 3, because of the ramp that we had expected to see in quarter 2 as well, a similar kind of ramp is going to now help us on margins because whatever has to happen from a ramp-up standpoint has already happened. There is no headwind, no other headwind in quarter 2. So we will see that thing ramping up from a margin perspective. Leverage will start playing out. In quarter 3, the ESOP cost will start coming down. There will be a headwind of wage hikes in quarter 3, but a lot of that be compensated by ESOP cost reduction that is expected to in the period. So that is why we are confident that we have had a good start to -- from an EBIT margin standpoint for the year and not drop the margins in quarter 1. And historically, as you've ramped up in future in quarter 2, quarter 3, we'll continue to see that.

Got it. Got it. If I could just squeeze in last thing. What is the time line that we are looking for the final integration of Cigniti? I know you mentioned that we're now going to NCLT. Earlier, you had mentioned December '25 is probably the target. Do you think that the time line could be met? Or do you think there could be some spillover from that?

I think it's more with regulators, so it would be minus a month or 2, but December, January should be the time line. And in case whenever the approval comes in, as I had mentioned earlier, the effective date of the merger is 1st of April.

1st of April. Got it. Got it. Got it.

1st of April '26.

We take our next question from Abhishek Pathak of Motilal Oswal.

Am I audible?

Yes.

Yes. I think, congrats on execution on revenues. A couple of questions. Firstly, we expect the Sabre deal to ramp up sequentially from here on? I mean, sequentially, should we be expecting the TTH vertical to continue to grow over the next 3 quarters? That's the first question. And the second question is on a steady-state basis, where do we see our OCF to EBITDA ratio is settling? I understand that the deal ramp-up in Sabre may have some investments that might maybe skew that ratio, but over the steady state, where should we be modeling that number? And if you could talk a bit about the BFSI dealer outlook that you were referring to earlier. There's been some mixed remarks around BFSI. The bank results have been good, but the numbers are still a little bit of a mixed bag. So do you see any hesitation from clients over there? Or do you see our offerings still sort of resonate well and we should expect the vertical to grow?

Thanks, Abhishek. I'll take #1 and 3 and Saurabh's going to address the steady state OCF. Sabre deal will continue to ramp up sequentially in quarter 2 as well. And quarter 3 onwards, we would expect the resource loading, the total headcount to stabilize. So quarter 2, the quarter that we are now beginning in should, again, see a sequential growth on the Sabre side. On the BFSI piece, as I said, we are seeing healthy demand across commercial banking, across lending, across wealth management, across risk and compliance. And structurally, the demand is being driven by margin pressures and the need for product innovation and also for -- because of the reasons of trying to stay in line with the changes in direct frameworks. Technical point of view, banking, again, there is high confidence because we believe operational resilience. We believe cloud-native architectures have become mission-critical for banks, and that's going to be a secular, longer-term nondiscretionary, nonfluctuating demand spend that we are going to be looking at. And I think banking, in general, our confidence continues to be high. Our performance over the last 4 to 5 years has been very robust. We see absolutely no reason given the fact that the banking sector continues to be driven by the need for simplification, by the need for agility, by the need for the retirement of legacy infrastructure for our growth rates to waiver or to taper. Saurabh?

On OCF to EBITDA, we maintain that until the time we continue to grow 65% to 70% OCF to EBITDA is what we would like to maintain because the rest will be needed for increased working capital requirement that is needed for the growth business.

Understood. Understood. Saurabh, and if I could just follow up, what's the CapEx outlook for FY '26? Do we expect it to be at similar levels or taper down from here on?

No, it will taper down. It will come down to our original levels.

Understood. So 2%, 2%, 3% odd or 5%?

Yes, yes. Correct.

Thanks, Abhishek. And if you could, going forward, just make sure that we have 2 questions per person who speaks and then we can keep putting them back in the queue, please.

[Operator Instructions] We'll move to our next question. That's from Sandeep Shah with Equirus Securities.

Just on the EBIT margin, the first quarter run rate being closer to 13 and full year being 14, so the exit has to be 15 where we expect some tailwinds, but there would be a wage hike effective 3Q. So in that scenario, what will pull out such kind of a 200 bps margin improvement in the next 3 quarters?

So Sandeep, 2 things. One, quarter 1 to quarter 2 to quarter 3, you've always seen impact of operational efficiencies coming in and margins going up historically. That is point number one. Number two, the wage hike impact is going to be very, very limited in Q3, which will largely get set up by the lower ESOP cost. We are looking at a 90 bps reduction, probably 80 to 90 bps reduction on the account of ESOP cost going down. So I think from that perspective, historically, what we have delivered and from a quarter-on-quarter margin ramp, we believe that 14% is doable.

Okay. And just a related question, what could be the depreciation amortization amount going forward? And just an observation and a suggestion, this onetime bonus of INR 458 in my view, should not be treated as nonrecurring because that is one of the catalysts in terms of your -- one of the reasons for higher growth, which is execution intensity. What I'm saying is that as a percentage to last year's revenue has been closer to 40 bps.

So 2 things, Sandeep. So this was not something which was part of the bonus plan -- existing bonus plan. And this was one-off that was decided during the quarter, and that's why we put it like that. It is not going to get incurred next quarter or through the year or next year. And that is why it's been reflected like that. Anyways, whether we included or excluded, reported EPS for the quarter is 9.5, and normalized, as I said, is 9. And we'll continue to ramp from there.

Yes. And the question on depreciation amortization.

It will normalize from here. There is no increment happening on that front.

So it can continue at current level?

Yes.

Mr. Shah, may we request you to return to the queue, please. Thank you. We will now move to our next question. That's from Dipesh Mehta of Emkay Global.

Two questions. First about if you can give some sense about the 5 large deal, which you have signed. If you can give some more detail around those deals. Second question is about the [indiscernible].

Mr. Dipesh Mehta, I think the management is not able to hear you clearly. Could you hold the microphone a little closer to you?

Yes. Is it better now?

Yes.

Yes.

First question is about the 5 large deal, which we announced. If you can provide some more detail around those deals? Second question is about the 14 percentage margin, which you indicated for the year. Is it as per the BSE reported? Or the as per our presentation kind of format which you gave? If you can provide that little bit of something.

Just answer number two, Saurabh, with comment and then I'll...

Yes. So see, the margins that we're reporting right now as part of the management fact sheet, 14% EBIT is a like-for-like of a 13.2% that has been reported in the current quarter.

Right. And moving on to question number one, 5 large deals. The first large deal, Dipesh, was from what was 1 of the top 3 clients of Cigniti, and this is an AI-infused app modernization $30-plus million TCV win delivered by GitHub Copilot was our accelerators and through Intelligent DevOps. This was a U.S. based -- is a U.S.-based client. Second one, again, is a North America-based client, involves digital transformation to scale up various customer and enterprise processes on Pega Cloud. And our domain expertise and the Pega engineering capabilities are responsible for this. Number 3 was yet again a North America-based client; transformation of the workplace workforce platform and integration with AI-enabled Microsoft services. And differentiations here why we won were Microsoft Workplace capabilities and the architecture, which was centered around AI-enabled Microsoft services. Number 4 came from the Middle East, where we have secured a mandate to build GCC to help the customer transform their exchange operations. This was driven by our BPS and GCC horizontals working together. And finally, the fifth one came from Asia, which is a transformation of technology infrastructure to enable scaling up of tax services. I do want to point out, you would have noticed last quarter that we closed a large deal with one of the clients that came with the Cigniti acquisition more than a year back. That was a top 3 client. This is another one. This is a different client, but it's another top 3 clients. And the third top 3 client interestingly is where we are pursuing one of our largest opportunities. So as a quick sec back to that acquisition announced last year May and the effectiveness of cross-sell that we've indicated many times has been in the works. You are now seeing it in announced. Thank you. Thanks for the question, Dipesh.

Our next question is from Rishi Jhunjhunwala of IIFL.

Yes. So maybe just wanted to understand the amount of deals that we have won over the past 2 to 4 quarters, and that has gone up significantly. Can you give some color in terms of how much of those would be as a result of market share gain where we are displacing some of our similar or bigger sized peers versus those where it is incremental work, which is potentially coming out of some of the newer technologies that we are pushing.

On the way we run the sales execution cycle, the -- what we referred to at the beginning of our call, Rishi, is we give credit to our sales teams only for deals that are not renewal. We believe that renewal should be table stakes. A large deal from an internal evaluation perspective is a large deal where the net new revenue being recognized as part of that deal, even if it is a hybrid of existing business, has to be more than $20 million TCV. So the focus from an execution perspective is not to compensate sales teams for any piece of renewal that is embedded as part of a large deal and to not call out a deal as a large deal internally at least from a sales operations perspective, unless the new component is, at a minimum, a TCV of $20 million. Almost all of these -- and this is because 19 out of our top 20 clients, our principal competition is a large-scale SI, have been won against the large-scale SI.

Got it. The other thing is, while we have -- of course, our top 5 clients have grown stupendously. Our non-top 10 have also grown pretty strong. There is some bit of weakness in the top 6 to 10. Just wanted to understand the nature of that weakness. It is something which is purely temporary. Do we expect it to recover back during the course of the year?

You'll see a correction immediately. You'll see a correction in quarter 2 itself, Rishi. It has absolutely no structural weakness there.

Our next question is from Abhishek Bhandari of Nomura.

Sudhir, I just wanted to understand the near- to medium-term business outlook on your BFS vertical. When do you think this business starts coming back to a reasonable growth number from a sequential side? And also in the medium term, what are your plans to go deeper into this vertical on the BFS as a $2 billion and beyond company?

So the near-term outlook and the medium-term outlook, both are positive and very positive. And I say this off the back of the best estimate that we have for quarter 2 and off the back of the large deals pipeline, high-probability large deals pipeline that we're looking at for banking. As I said at the outset, banking for Coforge is growing on a Y-o-Y basis by 32%. On a go-forward basis, we would expect banking as a percentage of our revenue to continue to hold where it is because we expect banking and more broadly, financial services to continue to almost pace ahead at the same pace as the rest of the rest of the firm.

We'll take our next question. That's from Ashwin Mehta of Ambit Capital. Mr. Ashwin Mehta, could you please unmute your microphone and ask your question now.

Are you able to hear me?

Yes, sir.

Yes. So I just wanted to understand this nature of the data center CapEx. So is it more like we own this asset effectively on behalf of the client? And over a period, the client pays for it? Any, say, additional color here in terms of how this is structured would help.

Yes, Ashwin. So we own the asset, and we control the asset. It is in our -- we have placed them in the location where we identified that location. And that is why it's been capitalized, and we're providing services on this data center. So client isn't -- client is not concerned about how much is the CapEx behind it. And client is not concerned about what we do with it. So it's in our books and we are in control of these assets. You're right.

And we can use this asset for any other client or is it a dedicated one for the client?

It is not dedicated. It is not dedicated. We can use it for whomever we want.

Okay. Okay. And the second question was in terms of like there's a more broader question. Like if I look at your free cash flows over the last 5 years, your free cash flows have been largely flattish despite the fact that EBITDA has gone up by 2.6x. So revenue has gone up by 2.5x. So why have you given a CFO to EBITDA outlook of 65% to 70%. What are we looking at from an FCF from that perspective because of the fact that the nature of deals is coming in with a much higher CapEx versus earlier.

So 2 parts to it, Ashwin, CapEx is something which has only happened in this kind of a data center deal only over the last 2 quarters, and that's about it. And hence, when you look at current quarter, it's a blip and not reflective of the FCF of the company, number one. Number two, FCF is also -- we have been acquisitive. So FCF is a function of whether you do an acquisition or not. And that is why, when we look at investment in clients, it gets reflected in OCF and how the OCF is progressing. Until and unless we are investing in a client in form of a CapEx, which is getting reflected in the current quarter while building a data center. So I guess when we're comparing 5-year FCF, I don't know which -- which is the base year being taken, but it could be a function of because the current quarter is heavy on the CapEx investment, and that's why we're talking about it.

So just to clarify, I was looking at FY '21 to FY '25, excluding this quarter, and this is the FCF before the acquisition, which also appears to be more flattish.

No, say that again?

So I'm looking at FY '21 to FY '25. And the FCF is before acquisition. And on that also, it appears flattish.

I will look at FY '21 versus FY '25 because FY '20 was a stressed year, and that's why FY '21 cash flows went up. It's a point in time view. And probably, if there is any more detail that we need around it, you can reach out to me separately.

We take that as the last question. Over to you, Mr. Sudhir Singh for closing comments.

Just one second, we can take one more question.

Yes, we got another 8 minutes in case we have questions or maybe a last question or 2. That's it. Yes.

We will now invite Mr. Ankur Rudra from JPMorgan. Could you please unmute your connection, Mr. Morgan -- Mr. Rudra?

I think just a broader question, Sudhir and team. How are you thinking about overall balance sheet investments and intensity as you go after this opportunity? You've laid out a lot of differentiation that you have, but are not specific to this data center deal, but would you be able to do a lot more of this? And what are the different types of asset-intensive or balance sheet-intensive deals that you would be open to doing as you look to capture more market share?

We don't plan to go any further into the data center space. Data center space, as Saurabh has talked about in the past, the total CapEx was $85 million, $62 million of which has already been realized by the firm. And it's a shared data center where we're offering services to one and over time, more clients. The balance sheet leverage is largely going to be for acquisitions that fit the evaluation and the capability profile of assets that we're looking at. But you will not see more by way or anything material by way of data center place in the short to medium term.

Then second question. Overall, it has been a fantastic start to the year, and growth momentum has been very strong. Do you see -- because environment is somewhat uncertain, in your own business momentum, do you see growth in the second half on a year-over-year basis, equally strong or stronger or weaker? Because we've had different comments by some of your larger and smaller peers. I just wanted to know what you are seeing in your business?

Second half has to be much stronger than the first half. That's axiomatic from a sales execution perspective that underlies the budgeting planning that we do, and that stems off the fact that we approach sales execution from a large deals mindset. Everything that we are going to close in quarter 2 by way of large deals. A lot of what we've already closed in quarter 1 has to start translating in the second half as new revenue. So H2, Ankur, will be -- has to get -- will be -- has to be much stronger than H1, and that's how we're looking at things. So thank you for that question.

And if I can just clarify that one. Does that mean that on a year-over-year growth perspective, constant currency like-for-like, the growth will be similar or better than first half?

I mean I don't want to put a hard number to this, but all I can tell you is, as I said, quarter 1 has been a robust growth year, a growth quarter. Saurabh talked about the fact that we've grown organically, excluding acquisitions by almost 6% CC. I would expect quarter 2 also to be an equally robust quarter. And H2, just using that term for a third time, should also be a robust second half for us. We feel very confident on -- I mean, if that's the question, we feel very confident. We see with the advent of AI clients trying to optimize their own budgets, but being extremely open to proactive business case led large solutions, and that is a place that's playing out at this point in time, incredibly well for us.

Mr. Singh, there are no further questions from the participants. Over to you for closing comments.

Thank you, [indiscernible]. Thank you, ladies and gentlemen. These are very exciting times. The industry has pivoted. The opportunities on the change the business, we transform the business size -- side are many, and clients are increasingly open to having conversations which are grounded and led through workshops and a solution-based approach. We aim to stay very closely connected with you for your advice, for your comments and for your insights, and we thank you once again for having joined us today for what was, once again, for us, a very insightful set of questions that we were able to address. Thank you. See you next quarter. Bye-bye.

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