Coforge's ambitious acquisition of Encora, a U.S.-based AI and digital engineering firm, for $2.35 billion has sparked considerable debate among analysts and investors: Will this be India's largest IT acquisition to reward investors?. The all-stock deal, one of the largest in the Indian IT sector, signals Coforge's strategic pivot towards AI-led technology services.
Deal Details and Strategic Rationale
Coforge will acquire 100% of Encora from Advent International, Warburg Pincus, and other minority investors. The transaction will be funded through equity issuance of $1.89 billion via preferential allotment, giving Encora shareholders approximately 21% ownership of Coforge. Additionally, Coforge plans a bridge loan/QIP of up to $550 million to retire Encora's debt. The deal implies a valuation of roughly 3.9 times Encora's FY26 estimated revenue and 20.6 times its FY26 adjusted EBITDA.
The acquisition aligns with Coforge's ambition to deepen its presence in high-value, AI-driven engineering services. Encora brings capabilities in product engineering, cloud, data, and AI, bolstering Coforge's position in the high-tech and healthcare verticals. The combined platform could generate close to $2 billion in revenue from AI-led engineering, data, and cloud services by FY27.
Mixed Reactions and Concerns
While most analysts acknowledge the strategic rationale, concerns remain regarding execution risks, valuation, and integration challenges. Emkay Global has an 'Add' rating with a target of ₹2,000 per share, citing the potential uplift to Coforge's AI-led engineering, cloud, and data capabilities, but considers the acquisition valuation rich against Encora's recent growth profile. Motilal Oswal Financial Services retained a 'Buy' rating, reducing the target to ₹2,500 from ₹3,000, valuing the stock at 32x FY28E EPS, considering potential dilution. Elara Capital downgraded Coforge stocks to 'Reduce' from 'Accumulate,' cutting the target to ₹1,720 from ₹2,120, citing valuation concerns and emerging margin pressures. ICICI Securities is also cautious in the near term, as the transaction is large relative to Coforge's scale, implying higher integration risks.
Some analysts highlight the large equity issuance and concerns around balance sheet strategy, execution, and integration. The success hinges on seamless integration, leadership retention, margin management, and amortization.
Potential Benefits and Synergies
The acquisition is expected to boost Coforge's FY27 top line by 28%, adding approximately $600 million in revenue. Encora reported $516 million in revenue in FY25, with guidance of around $600 million for FY26 and an adjusted EBITDA margin of about 19%, higher than Coforge's current margin profile. The combined entity is expected to operate at a 14% EBIT margin post amortization of intangibles, with management indicating the deal should be EPS-accretive from FY27, driven by margin improvement at Encora, cost and revenue synergies, and the equity raise.
Coforge expects its North America business to expand by 50% to exceed $1.4 billion post-acquisition. The deal also enhances nearshore delivery capabilities in Latin America and strengthens the company's footprint in the U.S. West and Midwest regions.
Investor Outlook
Coforge shares opened higher following the acquisition announcement, but analysts remain skeptical. The long-term success depends on Coforge's ability to integrate Encora effectively, realize synergies, and maintain financial discipline. Investors will closely monitor the company's execution in the coming quarters to determine if this bold move will indeed reward them. Overall, the Indian IT sector is seeing increased M&A activity, and Coforge's Encora acquisition is a prime example of this trend.
