Coforge, Persistent clocked IT's best show. Here's why the shares crashed still

Mint

2 days ago

Coforge Ltd and Persistent Systems Ltd grew faster than their larger peers in the June quarter that was marked by macroeconomic turbulence and demand uncertainty, but each one is grappling with issues of its own.
Eighth-largest IT services firm Coforge reported $442 million in revenue in the first quarter, up 9.6% sequentially, whereas ninth-largest Persistent Systems reported $389.7 million, up 3.9% from the preceding three months. Sixth-largest LTIMindtree Ltd was the slowest among the mid-caps, reporting a 1.97% increase in revenue to $1.15 billion.
In contrast, three of the largest homegrown information technology (IT) outsourcers including Infosys Ltd, HCL Technologies Ltd, and Tech Mahindra Ltd reported revenue growth between 0.97% to 4.46%. Largest IT outsourcers Tata Consultancy Services Ltd and Wipro Ltd reported a revenue decline of 0.59% and 0.35%, respectively.
Billion-dollar club
Both Coforge and Persistent are the latest Indian IT companies to clock annual revenue over $1 billion, and grew the fastest among the country's 10 largest tech services firms. Both are expected to grow faster than their larger peers in the current fiscal as well.
A common thread is their stable leadership—Sudhir Singh, a former Infosys executive, has been Coforge CEO since May 2017, whereas Sandeep Kalra has been CEO of Persistent since October 2020. In contrast, three of India's top five software services companies underwent a change in CEOs in the past 18 months.
For now, much of Coforge's growth came from clients in the travel and hospitality segment, which made up more than three-fifths of the company's incremental revenue of $38 million. Coforge got $101 million from companies in the travel, transport and hospitality space, up 31% sequentially.
Notably, this jump in revenue came from the mega deal it won in March. Coforge won a 13-year contract valued at $1.56 billion with Sabre, a Texas-based travel technology company. Coforge is expected to handle the software product delivery for Sabre and will also execute artificial intelligence-led tasks for the company.
Discretionary ebb
'Given the proliferation of AI, we see that the discretionary nature of the spend has ebbed," said Sudhir Singh, chief executive of Coforge, during the company's post-earnings interaction with analysts on Thursday. He added that the 'Sabre deal will continue to ramp up sequentially in quarter 2 as well."
Singh expects the second half to be better.
'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," said Singh, adding that with the advent of AI, clients are trying to optimize their own budgets, 'but are being extremely open to proactive business case-led large solutions."
Static sentiment
At Pune-based Persistent Systems, the sentiment on the overall environment was unchanged.
'All I can say is the environment has been cautious. Decision-making has been slow," CEO Kalra said during the post-earnings interaction with analysts on 23 July.
This caution reflected in the company's revenue growth, which has been declining since June last year. For now, 73% of the company's $15 million incremental revenue came from banks and financial institutions even as clients in the healthcare space dragged down overall growth. Persistent got $99 million from clients in the healthcare and life sciences space.
Still, the Persistent management is hopeful.
Hoping for better
'If the environment becomes a little bit better and not just for us, for everyone, I think things will be easier," said Kalra.
However, at least one brokerage is not.
'Persistent witnessed slower organic growth during 1QFY26, impacted by a slowdown in the Healthcare vertical. For the vertical we build in client-specific impact to weigh in on growth in the near term, leading us to cut our FY26 revenue growth estimate by 2%," said Antique Stock Broking analysts Vikas Ahuja, Rhea Baid, and Divija Parekh, in a note on Thursday.
Both companies were profitable last quarter. Coforge and Persistent reported net profits of $38 million and $50 million, up 24.5% and 8.5%, respectively.
Profitability gloom
However, there was not much cheer on the profitability front. Coforge and Persistent Systems reported operating margins of 13.2% and 15.5%, respectively. While Coforge's margins were flat sequentially, Persistent's margins fell 10 basis points. One basis point is a hundredth of a percentage point.
'At what cost is Coforge's revenue growing, because its profitability has taken a hit on a yearly basis, and is down about 200 basis points now," said a Mumbai-based analyst on condition of anonymity.
A looming concern for the company is its free cash flow, or the cash left after operating expenses and capital expenditure. Coforge spent more money than it earned through its operations as negative free cash flow for the quarter totalled $21.5 million.
Investors took notice. Coforge and Persistent's shares fell 9.4% and 7.7% at the end of trading hours on Thursday to ₹1,674.95 and ₹5,171.25, respectively. The BSE Sensex fell 0.66% to 82,184.17 points.
Headcount
Both companies added people last quarter. While Coforge added 1,164 people to end with 34,187 people, Persistent added 746 people in the quarter to end with 25,340 employees. This is in contrast to three of the big five including HCLTech, Wipro and Tech Mahindra, which cut headcount by 597 last quarter.
The mid-caps' strong performance comes as larger peers have struggled to post strong growth in the previous quarter amid delayed decision-making and uncertain demand environment.
TCS, Infosys, Wipro, and Tech Mahindra called out a murky spending environment and blamed macroeconomic uncertainties for delayed decision-making and project implementation by Fortune customers. On the other hand, HCLTech's management said the macroeconomic environment is stable, with some sectoral variations.
Persistent Systems was set up in 1990 by Anand Deshpande, a former Hewlett-Packard employee. He currently owns 29.35% of the company, making him the single-largest shareholder of the company. The company has a market capitalization of ₹80,931.53 crore.
Coforge, formerly NIIT Technologies, started as an independent firm in 2004. It was acquired by Baring Private Equity in 2019. It is owned entirely by the public and has a market capitalization of ₹56,031.15 crore.