Good day, ladies and gentlemen, and welcome to the Coforge Limited Q3 FY 2026 earnings conference call. All participant lines will be in the listen-only mode. We will open the floor for questions, post management's opening comments. 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; Mr. Simon Pearson, Global Head Consulting and Solutions; 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 2026 that ended on December 31st, 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 and gentlemen. Thank you for joining us today as we share our quarter three fiscal year 2026 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 three, 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 six large deals that we've signed in the seasonally weak Q3, our next 12-month 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 2026, but in fiscal year 2027 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 four will lead us to the 14% EBIT guidance for fiscal year 2026. 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 110%, significantly ahead of our guidance of around 70%-80% FCF on a sustained basis.
We believe we are set to close a very successful fiscal year 2026, and we are headed towards an exceptional fiscal year 2027. With that, I shall now move on to the current market context. Outside the usual narrative around discretionary spends 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, resolve. While two 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 paths 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 of enterprise reinvention. 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 as separate multi-year 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 startup 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 moat for the firm. This, allied with Coforge's hyper-specialized 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. For that, let me walk you through how all of this translated into our quarter three 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 two previous quarters. At the end of quarter three, we are now growing year-to-date at 32.8% in dollar terms. On a year-to-date basis, healthcare and high-tech verticals, which now together contribute 10.5% to 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 has grown 20% year-to-date. And the other vertical buckets, which includes retail and manufacturing, have grown 23% year-to-date. Align this data with the six large deals that I talked about. Two out of the six large deals in quarter three came from banking. One came from travel. Yet another one came from insurance. A fifth came from the new healthcare vertical of the organization.
In healthcare, interestingly, that one deal was a large NN contract that we won. Our top five clients and our top ten clients grew 51% and 47% YTD, respectively, in dollar terms. They contributed 21% and 30.7%, respectively, to our overall Q3 revenue. Moving on to order intake, quarter three was yet another strong quarter, both from an order intake and a large deals closure perspective. During the quarter, and I've said this earlier, we signed six 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 headcount at the end of quarter three 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, one of the lowest attrition 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 creation. 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 systemically 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, FORGEX, 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 roadmap of more than 20 domain-specific agents to industrialize automation and governance. We have modernized the legacy architecture of one of Australasia's largest general insurance brokers, using agentic AI accelerators to automate the refactoring 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 FORGEX, our AI asset portfolio continues to grow with two further additions this quarter: Integration Studio and Extenda AI. These assets, along with the broader portfolio, are deployed at scale across 54 clients, solving complex engineering and business challenges.
Our cutting-edge GenAI-powered platform, Code Insight AI, 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. Onto our successful engagements delivered in quarter three. In banking and financial services, we have been acknowledged by a leading UK 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. At 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 governance uplift for a specialty insurer's excess and surplus casualty clearance process, reducing manual entry by about 80% and enabling straight-through processing via 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 ABM 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 two 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, NelsonHall has positioned Coforge as a leader in AI-based analytics and automation, GenAI use case capability, overall QE services, and SAP testing capability in the NelsonHall Quality Engineering 2025 NEET. And with that, I will now hand over to our CFO, Saurabh Goel.
Thank you, Simon. We are pleased to report revenues of INR 4,188,100,000 in Q3 of FY26, 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 basis points year on year and down 60 basis points quarter on quarter. The reduction in EBIT was mainly on account of wage hikes, which had an impact of 150 basis points on margins, which was partially offset by various margin initiatives that we've been delivering within the organization for the last three 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 INR 307 million in the previous quarter, reflecting an adverse impact of 26 basis points in the current reported EBIT.
As you know, we take hedge losses in the top line. The same had an impact of 90 basis points on reported EBIT margins. There were exceptional items to the extent of INR 147 crores during the quarter, out of which INR 118 crore is on account of new labor code introduced by the Government of India. There is INR 13.5 crores related to expenses for the proposed Encora acquisition, and there is INR 16.2 crore 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 the process of taking regulatory approvals, we are expecting expenses associated with the transaction, including integration funding and W&I insurance and others, over the course of the next two quarters. That would be in a range of $10-$15 million, which 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 ₹10.9 per share. EPS for nine months stands at ₹31.6 per share, which is 83% higher than the last year's same period. This is further expected to go up post-approval of Signity merger because minority interest will get added back to profits, which will be far more than the impact of increasing number of shares.
Coming on to the cash flows, we are pleased to report that FCF increased to $45.7 million, resulting in an FCF to normalized PAT of 110%. We have 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 a 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 INR 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 three years with a consortium of four to five banks. We are comfortable with the pricing that we have 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 FY27 of the combined business stays intact even after this date. 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 eight and a half years, the revenue run rate of Coforge has gone up almost five times, and the market cap has increased almost 20 times. As we've shared in the past, it remains our intent to ensure that the next eight years see us maintain and improve upon the sustained business performance of the previous eight years. 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 three quarters of this year.
Top 10 accounts growing at a 47% YTD clip, a 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 three quarters has already closed 16 large deals, a pathway to 14% EBIT in fiscal year 26. All of these factors cumulatively set us up to close a very successful fiscal year 26 and head towards what will hopefully be an exceptional 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.
Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may click on the raise hand icon from the bottom toolbar on your screen. We request participants to restrict their questions to two and then return to the queue for more questions. To rejoin the queue, you may click on the raise hand icon again. We will wait for a moment while the question queue assembles. The first question is from Abhishek Pathak from Motilal Oswal. Please go ahead.
Yeah, hi. Am I audible?
Yes, sir.
Yeah, hi. Hi, good morning. Congrats on a good, strong quarter. So a couple of questions, Sudhir. Firstly, on the vertical mix, very, very strong showing in healthcare, high-tech, transportation, etc. BFS and insurance seem to be a little bit soft on a YoY 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 transitional leadership we'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 we structuring 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 revenues long-term seem to have kind of increased a bit YoY and QoQ. If you could just explain sort of why, I mean, what's happening there and how should we kind of model that going forward? Thank you.
Abhishek, thank you for all the three questions. As you've noted, I'll take the first two, and I'll request Saurabh to take number three. Vertical mix, let me start off by saying, just reiterating, Abhishek, that we signed six large deals in quarter three, a short quarter, and 1/3 of those, two out of those six were from banking. Given the large deal momentum we've seen in quarter three and what we think is likely to happen in quarter four, we would suspect that while healthcare 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, we're very assured about where things are.
Banking, again, as you noticed, YTD is still growing 20%+ . As far as insurance is concerned, insurance is not degrown. Insurance has grown on a QoQ basis. One out of those six large deals was insurance. We expect robust growth in insurance. FY 2026 is almost done. Very robust, possibly higher growth in insurance in FY 2027 than what we registered even in FY 2026. That's the growth momentum there. We feel extremely assured. And finally, the sector that did see a QoQ decline was government outside India. We expect to close one of the largest deals that we've ever signed in that sector in quarter four. So outside the QoQ 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 you're going to see them getting stronger starting Q4 itself. That was answer to question one. Question two, pricing, delivery. We've talked about delivery. We've always talked about execution in the context of delivery and the 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, Quasar, have helped us now for almost two years to embed AI in the way we deliver value to our customers from day one. 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 subtexts around that question, Abhishek, critically, we're also willing to underwrite outcomes. Our risk-reward 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 mean it contractually as well. That was answer number two. Saurabh, I'm going to request you to take number three, please.
Sure, Sudhir. So Abhishek, the increase in whether it is details or it is long-term unbilled, 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 FCF to PAT as a ratio that is getting delivered 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.
Got it. Thank you. And all the best.
Thank you.
Thank you. Our next question is from Vibhor Singhal of Nuvama. Please go ahead.
Yeah, hi. Thanks for taking my question. And congrats to Coforge team on a 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 healthcare, high-tech, and public services are the verticals that we are focusing on going forward as basically in terms of diversifying our base. This quarter also, you mentioned that we have done a large deal in healthcare and probably another in the public service coming in the coming quarters. So if you could just take through the dynamics of these two sectors, how are we positioning ourselves in this pre-Encora? Of course, there is Encora also, which will start contributing into it. In healthcare, how are we looking in terms of payers and providers?
In public services, are we looking more at U.K. public services, or is it in the 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. 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 healthcare, high-tech public sector will grow on steroids next year, if I were to put it euphemistically. Even if you were to reflect on their performance right now, these two verticals, just healthcare and high-tech, and this is all pre-Encora. We're not factoring in everything that will happen after Encora comes in on high-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 four quarters. As I said earlier, we signed an NN large deal in Q3. In healthcare, we believe we'll sign another NN large deal in the quarter that has started Q4.
We also believe that in the allied vertical, which you referred to, UK public sector, we'll sign 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 a Q3 result call for now. In healthcare, 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 look for tactical wins. The large win in healthcare that we do expect to close in quarter four is likely to come from a provider client, an 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.
Yeah, very much, Sudhir. Thanks a lot for that. 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 six large deals, four were in our traditional segments of banking, travel, and insurance. Do you think we could see a mix of more large deals in healthcare and public services maybe going forward? Or do you believe banking, travel, and insurance will continue to remain the forte 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 really confident about the pipeline that's building up. So banking, even this time, two out of the six large deals came from banking. Banking is likely to do extremely well. Travel, we think, is likely to do exceptionally well. So out of the three core verticals, insurance, we think next year will do better than it has even in this year, fiscal year 2026. Having said that, banking and travel should outpace insurance. High-tech, healthcare, and this is all pre-Encora will, we believe, continue to grow on steroids going forward.
Got it. Got it. Thank you so much for that detailed explanation. Just one last question for Saurabh. I think this time the numbers are quite very well explained and there. Just on the timelines of the two things. So I think Cigniti shareholder approval, as you mentioned, I think we've all seen has 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 timeline that you're looking for the shares swap to be executed and thereafter the term loan to be retired?
Vibhor, two 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 is a hearing with NCLT in March. I guess we should be able to get a result in one or two hearings. Our take is that maybe by March end latest, sometime before our results for sure, we will be able to get the approval for Cigniti merger. As and when the merger notice is received, as I mentioned earlier, the effective date of the merger is 1st April 2025. This means we will, if we have not reported our numbers for Q4 and the financial year FY 2026, restate the three quarters. 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.
Got it.
That is one. So from a financial perspective, the integration would happen or the merger would get consummated by the time we report FY 2026 financials. That is point number one. Number two, when it comes to Encora acquisition, number one, we had mentioned last time, and I had mentioned that in the call as well, that we are looking at a bridge loan or a QIP. I think with the discussions that we've had with multiple banks and the rates that have got negotiated, we 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 other terms and the term sheets, the agreements with the banks are now getting finalized. And the period of the loan will be three 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 timeline 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 February. And I think by March timeframe, 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.
Got it. Got it. Great. Thank you so much for taking my questions and wish you all the best.
Sure.
Thank you. Our next question is from Manik Taneja of Axis Capital. Please go ahead.
Hi, thank you for the opportunity and 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 for us. So Saurabh, basically, is there some sort of a one-time 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 Sabre Deal.
Given we've been executing on that through the course of now, I guess, probably about anywhere between six to nine months, if you could help us understand how that is essentially shaping up. Are we on track with regards to some of the product delivery there and talk about the progress there? Thank you.
So, Manik, the other cost typically includes a cost related to either if there is any large SI deal, which includes any third-party component. So that cost is included there. And that goes up and down depending upon when a milestone is achieved. So the cost gets recorded accordingly, and then it goes up and down. It had happened the same quarter last year also when the third-party cost 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 gave 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 cost. 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 regions through the period.
Yeah. So, one is a large impact. 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 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 the Sabre deal. I think from a Sabre deal standpoint, when we look at the ramp-up that was expected to happen in quarter one and quarter two, the deliverables that had to be delivered during that timeframe, we are on track. And the cost that had to be incurred, we are less than the plan that we had to incur.
I think from a Sabre deal standpoint, we feel very, very comfortable in terms of what we have delivered so far, what our roadmap is as we move along, and we get into next calendar year, which is calendar year 2026. From a comfortable around the contractual obligation standpoint, I think we are on track. Sudhir, maybe if you want to add something on Sabre.
Thanks, Saurabh. Manik, to your question on how the Sabre project is doing, we would characterize it, and I guess John and Sunil would characterize it more appropriately, possibly aptly 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 CAO, 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 milestones again was exemplary and of the highest order. So 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. Thank you and all the best for the future.
Thank you, Manik.
Thank you. Our next question is from Kawaljeet Saluja of Kotak Securities. Please go ahead.
Hey, hi, Sudhir, Saurabh, congratulations on a good print. I have a couple of questions. First is on the nature of deals that drove strong growth in India. 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.
Sorry.
Yeah, Sudhir, go ahead.
Okay. Okay, I'll start off and please add on. Kawaljeet, at this point in time, we aren't reliant on one, two, or even three axes for growth. We referred earlier to the kind of growth that we see around healthcare, around public sector, potentially getting accelerated, post-Encora coming together around high-tech. Banking, we alluded to the fact that almost two out of the six deals came from banking itself. Banking is likely to do really well next year as is travel, given the large deal strength 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 2027 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 12-month signed order book that we talked about. It's 30% higher than where it was four quarters back. So we have a lot of prompts that give us significant confidence that what has been a very good year is likely to be followed by an exceptional year coming our way. Did we answer your question? And Saurabh, would you like to add anything else?
Absolutely. If you can just elaborate, what was the nature of contract in the India business that drove that sharp growth in the December quarter?
So Kawaljeet is calling.
In the India business. Sorry, go ahead, Saurabh. Yeah.
Yeah. So, Kawaljeet, a couple of things. One, when we look at the other direct cost, okay, so it has grown almost 4.5% YoY. And so there was a seasonality. So similar spike in quarter three 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 three, which led to increase in DSO and also increase in liabilities and also increase in direct cost.
All right. Okay. Got that. The second question that I had, Saurabh, is that what is your hedging policy? And are the hedge losses purely on account of the euro leg 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 last, I guess, a decade or so. And we look at. We take 90% of the exposure. We hedge the 90% of the exposure in a respective currency for next quarter, followed by 80, 70, 60, which is total exposure of 75% over a course of one year. And we do cash flow hedges, and our hedges are effective because of which the hedge gains or losses go 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. Yeah.
Okay, so are you going to basically pull back from hedging of cash flow sort of largely balance sheet hedges in future?
So again, nothing finalized yet. But yes, it is between cash flow and balance sheet hedging. Maybe we'll do something balanced. Maybe something to do with debt that we are taking. Maybe there'll be natural hedge that will come in. So allow us a quarter or two, and we'll be able to provide more clarity on that. But it is in the works, and there will be some update on this, if not later, but maybe next quarter for sure.
Thank you so much for answering my questions.
Thank you. A quick reminder to our participants. If you wish to ask a question, you may click on the raise hand icon again. We take the next question from Dipesh Mehta of Emkay Global. Please go ahead.
Yeah. Thanks for the opportunity. A couple of questions. I think first about you said risk-reward where we are taking a 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 optimization actions or initiative which we have taken. Can you elaborate and provide more detail around it? Thank you.
Yeah. Let me take a quick stab at it. Risk-reward, as you can imagine, has multiple flavors. Each one of those goes through our own risk assessment framework. This is something that Saurabh as 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. Decisions are taken jointly by the CFO's office along with the CDO's office, which is Sunil Fernandes, the Global Head of Delivery of the organization. These are reported three 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 one, two, or three years, but for now, eight and a half years, that this approach where we've been commercially judicious but also been open to newer 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 toll gate, which is a contractual toll 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 four of last year, we had said that we're taking 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 were looking at containing overheads.
So, I think those initiatives were on, and we have taken a lot of actions between quarter two, quarter one. And quarter three 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 headcount, but even after headcount addition and wage hikes, the salary cost has not gone up significantly. And you will continue to see this, 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 four EBIT margins as well.
Whether it partly reflects your pyramid change kind of thing?
It is a function of everything, Dipesh. It is even not just the pyramid at the same band, people getting replaced with lower cost. It's even a function of that as well.
Thank you.
Thank you. Our next question is from Rishi Jhunjhunwala of IIFL Capital. Please go ahead.
Yes. Thanks for the opportunity. Two questions. Firstly, Sudhir and Saurabh, ESOP costs have been a lever for us over the last year or so, has given us 100 basis points 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'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 headcount, right? So if we look at in the last one year, our headcount has grown at about 8%-9% 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 headcount 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 two parts. One, obviously, it is a function of the kind of contracts which are outcome-based, which are 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've almost crossed $71,000 per annum. So that is reason number one. Second, we've continued to 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 freshers, and that's why we continue to maintain lower levels of utilization. But as those freshers are getting built, that has helped us in bringing down our ARC. So that is answer number two.
Number three is that the point that Sudhir was making, that not just contracts which involve third-party cost, but outcome-based contracts, which has now become a significant portion or 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 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 headcount addition as compared to revenue growth.
Understood. Thank you. All the best.
Thank you. We take our next question from Ravi Menon of Macquarie. Please go ahead.
Hi. Thank you for the opportunity and congrats on good revenue performance. Two questions here. One is this unbilled revenue trend, as we take on more of these system integration contracts, is this likely to continue going up? And is there an absolute kind of unbilled ESO number that you'd 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 this other direct cost. So again, there is seasonality, as I understand. I mean, and this is also something that we should see going up because as you do these large system integrated contracts, this is another line item that might go up.
I'll take one by one. Ravi, when we look at our balance sheet, we look at total working capital cycle. Okay? I think today sitting around close to 48, 49 days. I think that is a number. There are two lenses. One, you look at overall working capital cycle. Second, you look at FCF to PAT. We're committed to make sure that we continue to deliver an FCF to PAT that we've already talked about and also maintain a working capital cycle which is closer to 50-odd days. If these two guardrails are kind of there in place, we will continue to sign large deals. We will make sure that, as I mentioned, FCF to PAT is getting delivered, EBIT margins are getting delivered.
Within these guardrails, we'll continue to kind of invest in the customers or sign deals which, if required, the investment in the customers upfront, we'll do that. 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 one year, the revenues have grown almost 28-odd%. If you look at year-on-year, this cost has only grown 3-4%. It's not that this line item will continue to grow. It is seasonal in nature. It will come start coming down from quarter three or quarter four or quarter one onwards. You will also see, as a percentage of revenue, even the sub-con 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 because at the end of the day, if these costs continue to go up, there is no way we can keep delivering the EBIT margins.
Thanks so much, and it's all that the salespeople cost has gone up 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.
Yeah. I mean, year-on-year, 23%, 25%. So if I look at growth, between 23% is revenue growth. year-on-year, salespeople cost is 25-odd%. So I think it's a function of the investment that we have done. But you will look at the G&A cost has gone down. So our focus has been that we make sure that the investments in the sales is there because it's not because of the commissions, but it's because of the absolute investment in the salespeople.
Thanks. And one last question on travel. 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?
Yeah. I mean, Ravi, thanks for the question. The Sabre deal has already had. It's not in the realm of the hypothetical. It's already, when we look at the post-Sabre scenario for Coforge, 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-sale 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.
Thanks, Sudhir. And with Encora, is that something that you think you can replicate in other segments too where you do more product engineering work and use that 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 at a minimum will be as good as Cigniti was. And the intent, of course, is to take it up a few notches from even the Cigniti success.
Thanks so much. And best of luck.
Thank you, Ravi.
Thank you. We take our next question from Dhanashree Jadhav from Choice Institutional Equities. Please go ahead.
Yeah. Congrats on a 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 taking off in terms of numbers during the end of the first quarter? How should we look at it? And some qualitative in terms of numbers post EBIT margins with the integration would be helpful.
So Saurabh , would you like to take that?
Yeah, yeah. So Dhanashree, 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 four. 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 are going to tie up with banks. I don't think other than that, material expense, and there will be W&I 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 four or March start coming in then when we are closer to the approvals from all the regulatory authorities or in quarter one. Right now, too early to say.
The only three line items that I can expect between now and next couple of months that I have visibility of is the line item 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 could be other expenses also. So I'll provide more details once we have more clarity. But we'll have to just wait till we get closer to the regulatory approvals, and then I'll have more details around that.
If I can just 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.
Oh, it will be around mid-single digit.
Yeah. Thank you. Yeah. That's it from me.
Sure.
Thank you. Our next question is from Manik Taneja of Axis Capital. Please go ahead. Mr. Taneja, could you please unmute your microphone and ask your question?
Hi. 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 are talking about very strong robust growth going into the next year, how should we be thinking about while you've given wage hikes only the prior quarter? But how should we be thinking about some of the supply-side factors going into FY 2027?
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% from a dollar perspective. And the other direct expenses have actually gone up only 4.5%. If you're looking at the result sheet, then it also includes the sub-con expenses, which actually shot up for us in quarter one of this year and which have now started getting contained at $50 million-$51 million levels and have started actually. This is the first quarter it has actually started coming down. So yes, there is 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 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 or on the verge of signing between now and next 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. A wage hike has just been announced. It is obviously not going to be done, at least for the next four-odd quarters, four quarters at a minimum. Therefore, the confidence around margin increase, further margin increase in FY 2027 over 2026 is also strong.
Great. Thank you, always. Appreciate it.
Thank you, Manik.
Thank you. 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 India. 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 three 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 "Leave" icon to exit the meeting. Thank you all for your participation. Goodbye.