Will Encora acquisition cement Coforge’s AI leadership in healthcare and hi-tech?

ET Intelligence Group: The acquisition of California based Encora will strengthen Coforge‘s artificial intelligence (AI) capabilities in the healthcare and hi-tech verticals while increasing its presence in the US market over the long term. In the medium term, merger of the two entities will be a major challenge with the focus on talent retention and identifying synergies.

Coforge has reported a strong business momentum over the past few years through organic and inorganic routes- its revenue grew at a compounded annual rate (CAGR) of 27% and nearly 24% over the past three and five years respectively. Encora’s acquisition will enable Coforge to deliver AI led IT engineering, data and cloud solutions, which are expected to be the next growth drivers for software service providers. Therefore, Encora is a strategic acquisition for Coforge in a bid to stay future ready.

Encora’s revenue is expected to grow at a three-year CAGR of 13% to $600 billion (around ₹5,340 crore) in FY26. Coforge reported ₹7,674 crore of revenue in the first half of FY26, implying an annualised top line of ₹15,348 crore. The combined entity therefore may have an estimated revenue of ₹20,688 crore for FY26. That will likely allow it to replace Mphasis to become India’s seventh largest software exporter.

The deal implies Encora’s enterprise value (EV) to be four times FY26 estimated revenue. It is at a premium given the typical EV/sales of 1.5-3 in the sector, reflecting the high growth potential of the combined entity, which is expected to report $2.5 billion in revenue by FY27 compared with $1.4 billion revenue reported by Coforge in FY25.

On Friday, Coforge announced plans to buy 100% stake in Encora for a consideration of $2.35 billion from existing shareholders, Advent International and Warburg Pincus. It is the largest acquisition in the Indian IT services sector in terms of the deal value, surpassing the earlier major deals including the purchase of select IBM products by HCL Technologies for $1.8 billion in December 2018 and Wipro’s $1.45 billion acquisition of Capco in March 2021.

Coforge will pay $1.89 billion in the form of share swap thereby giving over 21% stake to Encora’s investors. The balance amount will be raised through either an institutional placement or a loan to repay Encora’s debt. Coforge expects the transaction to be earnings accretive given that Encora runs a profitable business.