Hold Coforge; target of Rs 2740: Emkay Global Financial

Emkay Global Financial's report on Coforge

Coforge has agreed to acquire a 60% stake in SLK Global Solutions Private Limited (SLK Global) for a cash consideration of ~Rs9.2bn (~2.8x P/S on FY21E sales). Deal structure: Coforge shall initially acquire a 60% stake in SLK Global, with SLK Global’s founders completely exiting the firm. Fifth Third Bank’s stake in the company will be reduced to 40% and will remain at that level for the next two years. Coforge will acquire an additional 20% stake from Fifth Third Bank after two years. Deal Rationale: With this acquisition, Coforge will add Fifth Third Bank as one of its Top5 clients, substantially scale up its current BPM operations business, strengthen its presence in the Financial Services vertical, and expand its footprint in the US geography. Additionally, Coforge sees significant synergies across its Automation practice (USD100mn run rate) and SLK Global’s BPM business. This acquisition will also add an Indian Tier-3 city location capability and enable Coforge to compete for large deals with a material BPM component. The deal also provides for a minimum revenue commitment from Fifth Third Bank for five years.

Outlook

We retain our estimates currently, pending clarity on purchase price allocation (amortization charges) and funding mix (interest costs). We have a Hold rating on Coforge with a TP of Rs 2,740 at 23x FY23E EPS.

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