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Published on 14/04/2021 9:30:52 AM | Source: Motilal Oswal Financial Services Ltd

Neutral Coforge Ltd For Target Rs.2,735 - Motilal Oswal

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SLK Global acquisition to help scale up BPS capability

Coforge announced the acquisition of SLK Global, a BFSI-focused business process transformation enterprise, for USD195m on 12th Apr’21.

 

High growth and profitable business

* We view Coforge’s aspiration to strengthen its BPS capability in the critical BFSI vertical (50% of revenue) as a positive, as this should boost its offerings.

* While we don’t see a material impact on FY22E PAT from this acquisition (due to amortization costs), this deal should add to Coforge’s revenue growth and profitability. It also adds a large client to its top five list.

* The management commentary of single-digit FY21E EV/EBITDA indicates a high margin profile in the 25-30% range. With SLK adding a significant workforce in recent months, it should continue to deliver strong YoY revenue and PAT growth in FY22E, which should further moderate the acquisition valuation.

* Coforge’s ability to fund a large part of the acquisition from internal sources without changing its capital allocation policy should alleviate any near-term concerns on the large payout.

 

SLK Global to add to Coforge’s BFSI capabilities

* SLK Global (incorporated in CY01) is a business process transformation enterprise offering BPM and Digital solutions to the Financial Services industry.

* It has deep domain expertise in the Banking and Insurance segments in North America. It enjoys multiple long-standing and scalable relationships with marquee clients including Fifth Third Bank, which is its largest customer and also a significant minority shareholder.

* Its global capabilities in the BFSI BPM space should provide synergies to Coforge and strengthen its position as well as accelerate growth in the latter’s core vertical.

* This acquisition comes with a five-year minimum revenue commitment (MRC) from Fifth Third Bank and adds to the top five clients of Coforge.

 

Coforge to pay 2.6x revenue for the acquisition

* Coforge would acquire 80% of SLK Global for USD195m (using cash + debt). Of this, 60% would be acquired now and the balance would be acquired after two years, i.e. in CY23.

* The company acquired SLK Global at a reasonable valuation of 2.6x revenue.

* SLK Global posted a revenue of USD62m in FY20 and is expected to report a revenue of USD73m in FY21, indicating 15% growth despite the COVID-19 outbreak.

* The management stated that the acquisition would be EBITDA margin accretive from Day 1 of the integration. It is confident of FY22 EBITDA and PAT margins exceeding that of FY21.

* Coforge intends to raise USD40-50m via NCDs, subject to the board’s approval.

 

Coforge to take on 7k employees of SLK Global

* Coforge will take on 7k employees of SLK Global as part of this acquisition. Except for the founding promoter, the rest of the team of SLK Global would continue alongside Coforge.

* This acquisition has enabled Coforge to tap supply from Tier III cities as well, with SLK Global having one of its delivery centers in Kolhapur. This has allowed the company to operate in a low-cost scenario.

 

Valuation and view

* Strong deal wins, a robust deal pipeline, and good consistency in deal wins, despite the COVID-19 pandemic, has been encouraging. This, coupled with the SLK Global acquisition, should ensure further strengthening of the company’s core vertical.

* The recent rally in the stock price indicates industry-leading growth and margin have been priced into current valuations.

* The stock is currently trading at 27x FY23E earnings. We value the company at 24x FY23E EPS. We maintain our Neutral stance.

 

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