Coforge shares see sharp swings on Encora acquisition; Analysts stay skeptical

Shares of Coforge Ltd., which had declined 11% in the last three sessions, gained over 2% in early trading on Monday, December 29, in response to the mega Encora acquisition that the company announced after market hours on Friday. However, the stock gave up gains soon after, only to recover those losses and see gains again.

Coforge will fund the $1.89 billion equity portion via preferential allotment of shares, giving Encora shareholders (including Advent International and Warburg Pincus) about 20% stake in the expanded company. Additional funding may include a bridge loan or QIP up to $550 million.

The company believes that AI would be a positive addition to revenues coming from the opportunity to sell more tech services, which would more than offset the deflation arising from productivity gains driven by AI.

CEO Sudhir Singh also noted that the company is unlikely to add any new vertical or geography over the next 3-5 years. The company has already said that no new investments will be made in the data center business.

Coforge is paying $2.35 billion for Encora, a company with an estimated revenue base of about $600 million. That means the acquisition is being done at ~3.9 times EV to sales.

Most of the analysts on the street tracking Coforge are worried that the acquisition, though positive over a longer-term, is expensive for Coforge. Cognizant acquired Belcan at roughly 1.6 times sales in 2024, and Infosys bought In-Tech at around 2.6 times sales.

JM Financial says the valuation looks rich given Encora’s 7% – 10% growth profile.

On the flip side, Post the deal, Coforge becomes a $2.5 billion revenue company, with EBIT margins of around 14%. Management is calling this a defining moment in Coforge’s journey.

Shares of Coforge recovered from the lows of the day on Monday, currently trading 2% higher at ₹1,707.4. The stock was down 13% so far this year, going into today's session.

Also Read: 'Conditions Apply': Coforge analysts decode the company's big and 'bold' deal