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Coforge Gets RBI OK for $2.35B Encora Acquisition on March 31

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AuthorAnanya Iyer|Published at:
Coforge Gets RBI OK for $2.35B Encora Acquisition on March 31
Overview

Coforge Ltd. achieved a significant regulatory milestone on March 31, 2026, receiving Reserve Bank of India approval for an overseas direct investment exceeding $1 billion, clearing a major hurdle for its $2.35 billion acquisition of Encora. This approval, crucial for the transaction, propels Coforge's strategy to bolster its AI, cloud, and data engineering capabilities. The move comes as the broader Indian IT sector navigates AI disruption fears and macro uncertainty, positioning Coforge's aggressive expansion against a challenging backdrop.

RBI Gives Green Light to Coforge's $2.35 Billion Encora Deal

This significant clearance, granted under India's foreign exchange regulations, marks a crucial step for Coforge's $2.35 billion plan to buy Encora. The approval helps reduce the financial and execution risks for this deal, which is Coforge's largest overseas investment and a key part of its global expansion. The news comes as Coforge's stock closed at ₹1,114.70 on March 30, down 2.62%, indicating broader market sentiment tied to sector challenges.

Building a $2.5 Billion AI and Cloud Giant

The acquisition aims to make Coforge a leader in AI-driven engineering, data, and cloud services. The combined company is expected to achieve around $2.5 billion in revenue. Coforge forecasts AI offerings alone will contribute $2 billion by fiscal year 2027. Encora, which is projected to add $600 million in revenue with a 19% EBITDA margin in fiscal 2026, offers expertise in AI-native software engineering. This move is designed to help Coforge meet growing demand for advanced digital solutions and achieve strong growth.

IT Sector Faces Headwinds Amid AI Fears

Coforge's strategic move comes as the Indian IT sector faces significant challenges. The Nifty IT index has dropped about 25% this year, driven by concerns about Generative AI's impact and broader economic uncertainty. Analysts anticipate that AI efficiencies could lead to a 2-3% annual decrease in revenue for traditional IT services over the next few years. Despite these industry-wide pressures, Coforge's determined push into AI through acquisition highlights its unique strategy. Its price-to-earnings (P/E) ratio, around 32-35x, is higher than larger rivals like TCS (18x) and Infosys (18x) but similar to specialized firms like Persistent Systems (44x). This valuation indicates investor expectations of substantial future growth.

Deal Risks: Dilution and Integration Challenges

However, the acquisition is not without significant risks. The high $2.35 billion price, partly funded by issuing new shares, has led to concerns about diluting existing shareholder value. Encora shareholders are expected to own about 20% of the enlarged Coforge. Previously, market sentiment was cautious due to worries about this potential dilution from Coforge's funding plans. The large size of the Encora deal also brings considerable challenges in execution and integration, including retaining key leadership and realizing expected cost savings and revenue growth. Furthermore, the sector's ongoing struggle with AI-driven revenue declines could affect traditional IT services. Some analysts have called the deal 'steeply priced' and raised questions about Coforge's balance sheet strategy and integration execution.

Analysts Positive, Cautious on Execution

Analysts generally hold a positive view, with most rating Coforge a 'Buy'. Average 12-month price targets suggest a potential upside of 60-75% from current trading prices. However, opinions differ, with some analysts issuing 'Hold' or 'Sell' ratings due to concerns about dilution and execution risks. Coforge's success will depend heavily on smoothly integrating Encora and adapting to the rapidly changing AI landscape. Other required regulatory approvals in different countries are also being closely watched.

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