Mutual funds and foreign institutional investors have taken a keen interest in acquiring a stake in Indian IT firm Coforge after promoter-investor Baring PE Asia (Baring PE) divested its entire shareholding.
The promoter-investor firm had sold the remaining 26.63% stake on August 24 in a single block deal for Rs 7,683 crore.
Aditya Birla Mutual Fund, HDFC Mutual Fund, ICICI Prudential Mutual Fund, SBI Mutual Fund, Morgan Stanley Asia and Societe Generale were some of the buyers in the block deal.
Baring PE, which has approximately $20 billion (Rs 1.66 trillion) in funds under management, acquired a majority 70% stake in the company in May 2019. The shares of the company rallied from the lowest levels of Rs 864 per share in 2020 to Rs 5,600 in 2023.
It purchased a total of 43.72 million shares of Coforge, about 70%, at a price of Rs 1,394 apiece, aggregating to Rs 6,095 crore. However, the average selling price per share was Rs 4,146, totaling to Rs 17,650 crore.
This gave the PE firm a return of close to 197% at a CAGR of 43.74 in four years. The global PE firm made a profit of nearly Rs 12,000 crore in the last four years.
Compare this with Coforge’s (earlier NIIT) share price growth since listing at 16.43% over 15 years and Baring PE has made handsome profits.
No wonder, mutual funds have been lapping up this stock. As of August 31, 2023, mutual funds had a total shareholding of Rs 14,366.33 crore in Coforge – 43% of their market cap of Rs 32,942 crore.
Baring PE improved the company’s financials over the course of the last four years. The average revenue growth of the company stood at 11.8% from FY16-FY19, while its average profit growth was 46.31%, owing to a low base. After Baring took ownership, the company logged an average revenue growth of 21.95% from FY20-FY23 and an average profit growth of 15.92%.
Now, with the promoter investor exiting the company, it leaves room for a potential new buyer, according to market experts. “Coforge is a very good takeover target for any prospective company and that is why you are seeing the re-rating and the rally in the stock,” Sanjiv Bhasin, director of IIFL Securities, said.
A core strength for the company has been the conversion of deals, Omkar Tanksale, senior research analyst-IT of Axis Securities, said. “For six quarters in a row, the company has converted deals worth $800 million; the deal pipeline for the next one year stands at $900 million,” he said, adding that the company estimates a margin expansion of 50 bps for FY24, at a time when supply chain constraints are not easing for other IT peers.
As a result, he said, Coforge has been the best-performing mid-cap IT stock. Riding on the strong revenue growth backed by high deal wins, he pointed out that the company has provided a 13-16% guidance for FY24, and is focusing on enhancing the partner ecosystem.
The market capitalisation of the company reached Rs 32,420 crore on September 22, 2023 from Rs 9,849 crore in the beginning of 2020.
According to a fund manager, some are bullish on Coforge as a contra bet in the IT space. “Some active managers might be taking a contra bet and even if they want to build up some position these kinds of blocks become powerful sources,” the fund manager said on the condition of anonymity.