What does Coforge's Encora acquisition mean for investors? Analysts weigh

Brokerages see the acquisition as aligned with Coforge's stated ambition to shift more deeply into higher-value, AI-driven engineering services

Coforge’s planned $2.35 billion all-stock acquisition of US-based Encora has divided the Street, with a few brokerages terming it a “strategically positive” but execution-heavy bet while others raising valuation concerns.

 

At close, shares of Coforge were up 0.55 per cent at ₹1,682.45 per share. In comparison, BSE Sensex was down 0.41 per cent at 84,695.54.

 

Deal contours

 

Coforge has entered a definitive agreement for acquiring 100 per cent of Encora from Advent International, Warburg Pincus, and other minority shareholders at an enterprise value of $2.35 billion. The transaction will be funded through equity issuance of $1.89 billion via preferential allotment, resulting in Encora shareholders owning 21 per cent of Coforge, and a bridge loan/qualified institutional placement (QIP) of up to $550 million to retire the term loan in Encora. The deal is an all-stock transaction, with sellers rolling over into Coforge at an implicit share-swap consideration price of ₹1,815.91 per share.

 

 

Brokerages’ view

 

Motilal Oswal Financial Services | Buy | Target cut to ₹2,500 from ₹3,000

 

The brokerage believes Coforge’s strong executable order book and resilient client spending across verticals bode well for its organic business. This acquisition expands Coforge’s presence in the hi-tech and healthcare verticals, though it has not yet incorporated Encora's numbers into the valuation.

 

“We continue to view Coforge as a structurally strong mid-tier player well-placed to benefit from vendor consolidation/cost-takeout deals and digital transformation,” Motilal Oswal said.

 

However, analysts noted that the scale of the transaction is large; therefore, execution remains critical. Integration, leadership retention, margin management post-integration, and amortisation will be key monitorables.

 

Emkay Global Financial Services | Add | Target: ₹2,000

 

Emkay reckons that the acquisition accelerates Coforge’s shift toward higher-value, artificial intelligence (AI)-led engineering services, with Encora adding deep engineering talent and complementary digital and AI capabilities, particularly strengthening BFSI (banking, financial services, and insurance) and travel.

 

The acquisition of Encora is expected by the brokerage to create powerful synergies by building a massive, AI-focused platform. Specifically, the combined strengths in AI-led engineering, data, and cloud services are projected to generate approximately $2 billion in revenue by 2026-27 (FY27). Additionally, the deal will immediately scale up Coforge’s presence in hi-tech and healthcare sectors, with each vertical expected to reach a revenue run-rate of about $170 million right after the merger.

 

Further, 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 strengthen governance, according to the brokerage.

 

While the brokerage acknowledges the strategic rationale, it views the acquisition valuation as demanding, given Encora’s high single-digit organic revenue growth over the past two years.

 

Encora reported revenue of $414/481/516 million in FY23/FY24/FY25, respectively, with organic growth of 7-8 per cent over the last two years. It is expected to deliver revenue of $600 million, with an adjusted earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin of 19 per cent for FY26E (E stands for estimate).

 

“We expect the stock to see near-term overhang due to execution risks inherent in a transaction of this scale (representing more than 30 per cent of Coforge’s total revenue and adding over 25 per cent to its global workforce), along with potential further equity dilution. However, Coforge’s historical execution track record provides some comfort,” the brokerage noted.

 

Elara Capital | Reduce from Accumulate | Target cut to ₹1,720 from ₹2,020

 

From FY21-FY25, Coforge delivered strong high-teen revenue growth, driven by stable management, a solid order book, and focus on BFSI and travel. Encora, by contrast, has grown more slowly at about 7-10 per cent organically. Even so, Coforge is buying Encora at a relatively rich valuation of 3.9x enterprise value (EV)/sales and 21x EV/Ebitda, broadly in line with Coforge’s own multiples, which looks expensive to Elara Capital.

 

Because of this higher valuation concern, the brokerage has cut Coforge’s target P/E (price-to-earnings) multiple from 39x to 34x. Some of Coforge’s own costs have also risen in recent quarters, which could pressure margins, according to analysts. As a result, they have reduced their earnings estimates for Coforge by 7-8 per cent for FY27E and FY28E.

 

Centrum Institutional Research | Buy | Target: ₹2,179

 

The acquisition of Encora, according to the brokerage, would provide it with the much-needed scale ($2.5 billion of revenue run-rate) and, at the same time, help it to gain entry into new verticals and new geographies in the US.

 

Disclaimer: View and outlook shared on the stock belong to the respective brokerages/analysts and are not endorsed by Business Standard. Readers discretion is advised.