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Acquisition of BPM company SLK Global Solutions…

Coforge Ltd (Coforge) has entered into an agreement with M/s SLK Global Solutions Pvt Ltd (SLK) to acquire a 60% stake in the company for a consideration of ~US$122 million (| 918 crore) leading to a valuation of ~3x FY20 EV/sales. The company will acquire additional 20% over the next two years. The company will fund the acquisition via debt (~| 375 crore or US$50 million) and rest through cash. The acquisition will add ~10% to the company’s topline. We believe it has robust EBITDA and PAT margin. Hence, we expect SLK to be PAT margin accretive. SLK is a business process company with ~49% of revenues generated from mortgage, 40% from banking and the rest from insurance.

Scaling up of BPM business

SLK is a business process transformation enterprise, offering BPM and digital solutions for the financial services industry. It has deep domain expertise in the banking and insurance segments in North America, enjoying multiple long-standing and scalable relationships with marquee clients, including with Fifth Third Bank, which in addition to being the largest customer is also a significant minority shareholder. The acquired entity derives its revenues from North America with delivery centres and offices in India (Pune, Kolhapur, Bangalore), the US and the Philippines. The acquisition will enable Coforge to acquire a new Top-five client, substantially scale up its current BPM operations business, strengthen its presence in the financial services vertical and expand its footprint in the US geography. This acquisition will also add an Indian Tier-III city location capability and enable it to compete for large deals with a material BPO/BPM operations component. The transaction also provides for a minimum revenue commitment from Fifth Third Bank for five years. Historically, Coforge’s revenues have grown at a CAGR of 22% to | 434 crore in FY18-20. SLK’s revenues are expected to grow 15% YoY in FY21E.

Valuation & Outlook

The acquired company has been growing at a healthy 22% CAGR in FY18- 20. Going forward, SLK is expected to further grow at a consistent pace and Coforge can also cross sell IT services to its clients. This will further boost the company’s financials. The acquisition will add ~10% to the company’s topline and is expected to be EBITDA and EPS accretive. This, coupled with consistent large deal wins, digital prowess, client mining in BFS & Insurance, healthy order book and revival in travel segment are other key positives for Coforge. However, most positives are factored in the current price. Hence, we downgrade the stock from BUY to HOLD with a revised target price of | 3,300 (27x PE on FY23E EPS) (earlier target price | 2,875).

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