Add Coforge Ltd for the Target Rs.2,000 by Emkay Global Financial Services Ltd
Bold move; execution crucial
Coforge has signed a definitive agreement to acquire 100% stake in Encora from Advent International, Warburg Pincus, and other minority shareholders, for an enterprise value of USD2.35bn. This implies 3.9x EV/FY26E revenue and 20.6x EV/FY26E adjusted EBITDA. The acquisition accelerates Coforge’s shift toward higher-value, AI-led engineering services, with Encora adding deep engineering talent and complementary digital and AI capabilities, particularly strengthening BFSI and Travel. The transaction structure, which includes a share-swap all-stock deal, aligns the interests of incoming investors with existing shareholders, while the proposed Board representation is expected to further strengthen governance, in our view. The management expects the transaction to turn EPS-accretive in FY27, driven by anticipated margin improvement at Encora, synergy benefits, and an expected equity raise. While we acknowledge the strategic rationale, we view the acquisition valuation as demanding, given Encora’s high single-digit organic revenue growth over the past two years. That said, it represents a strategically positive albeit executionintensive step, with potential to enhance Coforge’s AI-led engineering, cloud, and data capabilities over the medium term. We expect the stock to see nearterm overhang due to execution risks inherent in a transaction of this scale (>30% of Coforge’s revenue and >25% of employee base), along with potential further equity dilution. However, Coforge’s historical execution track record provides some comfort. Pending closure, the transaction has not been included in our estimates, and we expect no significant change to the EPS as of now. We retain ADD on the stock, with TP of Rs2,000 at 32x Dec-27E EPS.
Transformational opportunity; execution crucial
The Encora acquisition is expected to drive significant synergies by 1) creating a scaledup AI-led platform with AI-led engineering (>USD1.25bn), data (>USD250mn), and cloud services (USD250mn) alone likely to deliver ~USD2bn revenue in FY27; 2) scaling up of the Hi-tech and Healthcare verticals to ~USD170mn revenue run-rate each immediately post-acquisition; 3) strengthening nearshore delivery in LatAm; 4) expanding footprint in North America by driving up NA revenue by ~50% to USD1.4bn; and 5) increasing scalable client relationships (over USD10mn accounts) to 45, adding 11 tenured clients. While we perceive the opportunity as significant, execution would be crucial for driving sustained revenue acceleration and synergy benefits.
Transaction contours
Coforge has entered a definitive agreement for acquiring 100% of Encora from Advent International, Warburg Pincus, and other minority shareholders, at enterprise value of USD2.35bn. The transaction will be funded through 1) equity issuance of USD1.89bn via preferential allotment, resulting in Encora shareholders owning ~21% of Coforge, and 2) a bridge loan/QIP of up to USD550mn to retire term loan in Encora. The deal is an allstock transaction, with sellers rolling over into Coforge at an implicit share-swap consideration price of Rs1,815.91/share.
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
