Mutual Funds Commodities Research Tax Planning IPO Our Team Contact Us  

| More

Wipro - Beware of integration / impairment risks! - ICICI Securities

Posted On: 2021-03-06 22:32:26 (Time Zone: Arizona, USA)

Several earlier attempts by Indian IT (including Wipro) to buy or build sizeable consulting practices have not been successful. However, learning from HCLT's then bold bet on software products (similarly adjacent to IT) suggests there can always be a first! Keeping Capco as a separate entity should address branding, GTM and culture conflict issues to an extent. Successful cross-selling / integration of offerings will likely depend on the incentive structure promoting the same. Capco's revenue stagnancy is of concern as it can be a further drag on the already low growth of Wipro. Given its onsite / consulting heavy nature, the acquisition should weigh on IT services' margins (by 110bps, proforma, excl. amortisation). Our IRR scenario analysis pegs best case / worst case IRR of +8% / -4%. Implied 1-year forward P/E for Capco could be 35-45x (vs 21x of Wipro). Given its large size and lofty valuations, risk of integration challenges / future impairments (e.g. in HPS) cannot be ruled out. As in HCLT, this bold bet should remain an overhang on multiples till the time street finds comfort in integration. Our FY22E-FY23E EPS witness 6%-8% downgrade as we adjust for the acquisition. We reduce our target multiple to 17x FY23E EPS (vs 19x earlier).

- Large acquisition at lofty valuations! Wipro acquired Capco - a global management and technology consultancy - for a cash consideration of US$1.45bn. Capco provides consulting, digital and technology services to financial institutions in the Americas (55% of sales), Europe (41%) and the Asia-Pacific (4%). The transaction is expected to close by Jun'21. As part of the acquisition, Wipro will get access to 30 marquee BFSI clients and over 5k consultants of Capco. Post acquisition, Wipro plans to operate Capco as a separate entity.

Revenues of Capco have been largely stagnant for the previous three years. EBIT margins are hinted to be close to the onsite margin profile of Wipro. Including amortisation of the intangibles, Wipro expects its IT services margins to be diluted 2% in the first year with the acquisition turning EPS-accretive from third year.

- Cautious on integration challenges / impairment risks. Based on a basket of such onsite / consulting heavy entities (e.g. Appirio etc), we assume PAT margins in the range of 4.5%-6.0%. We build-in stable margins for our IRR scenario analysis as he company is non-committal about a material margin expansion. Despite stagnant revenues over the previous three years, we build three scenarios of 0%/5%/10% CAGR each. Our scenario analysis suggests best case / worst case IRR of +8%/-4%. Implied 1-year forward P/E could be 35-45x (vs 21x of Wipro) - very much on the higher side as the timing is coinciding with lifetime peak valuations of technology assets!. Given its large size / lofty valuations, risk of integration challenges / future impairments (e.g. in HPS) cannot be ruled out. This should remain an overhang on multiples of Wipro.

- Downgrade the near term-earnings / target multiple: As we adjust for FY22E-FY23E projections for Capco acquisition w.e.f. 1st Jul'21, earnings witness 6%-8% downgrade. To factor-in for the elevated risks, we reduce the target multiple to 17x FY23E EPS (vs 19x earlier). We downgrade the stock to SELL (from Reduce earlier).

Shares of WIPRO LTD. was last trading in BSE at Rs.420.4 as compared to the previous close of Rs. 438.85. The total number of shares traded during the day was 2173436 in over 39865 trades.

The stock hit an intraday high of Rs. 440 and intraday low of 417. The net turnover during the day was Rs. 925588902.

Source: Equity Bulls

Click here to send ur comments or to

Disclaimer:The article above is a gist / extract of the original report prepared by the research firm / brokerage firm. This article is not to be considered as an offer to sell or a solicitation to buy any securities. This article is meant for general information only., its employees or owners or the research firms, its employees or owners won't be responsible for any liability that may arise from information, errors or omissions in these articles. or its employees or owners / the research firms or its employees or clients or owners may from time to time hold positions in securities referred in this article. For detailed research reports, please contact the concerned research firm directly.

Other Headlines:

Banks & NBFCs 4QFY21 Results Preview - HDFC Securities

ADD on Tata Consultancy Services - Strong progression - HDFC Securities

YES SECURITIES on Tata Consultancy Services Q4 FY21 results

Suman Chowdhury, Chief Analytical Officer - Acuité Ratings, on IIP data released on April 12, 2021

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research, on March 2021 CPI Data

Q4FY21 Result Preview - Retail - ICICI Direct

Q4FY21 Result Preview - Auto and auto ancillary - ICICI Direct

Monetary Policy Update - April 2021 - ICICI Direct

Q4FY21 Result Preview - Banking & Financial Services - ICICI Direct

It would have helped if the sector received benefit from MPC: Realtors

Views on RBI Policy - April 7, 2021 - Ms. Bekxy Kuriakose, Head - Fixed Income, Principal Asset Management

Mr. Rajiv Sabharwal, MD and CEO, Tata Capital on the RBI's Monetary Policy announcement today

Realtors expected more from RBI MPC

Comments on RBI MPC announcement from Muthoot Finance, Creditas Solutions, Kotak Mahindra Bank

MPC announcement - April 7, 2021 - Acuité Ratings & Research

Views on RBI Policy - April 7, 2021 - Mr. Dhiraj Relli, MD &CEO, HDFC Securities

Dr. Samantak Das, Chief Economist and Head of Research & REIS, JLL India on RBI monetary policy

RBI Monetary Policy - April 7, 2021 - Views of Mr. Amar Ambani, YES SECURITIES

Views on RBI Monetary Policy from experts - April 7, 2021

IPO Review - Macrotech Developers Ltd - ICICI Direct

Quant Pick - Apr 6, 2021 - Godrej Consumer Products - ICICI Direct

Quant Pick - Torrent Pharmaceuticals - ICICI Direct

Sobha Ltd - Record quarter for sales bookings - ICICI Securities

ICICI Securities - Telecom - Bharti Airtel's superior execution likely to continue...

Q4FY21 Result Preview - Telecom - ICICI Direct

ICICI Direct - Company Update - Time Technoplast

ICICI Direct - Sector Update - Banking and Financial Services

NTPC - Excellent performance in a challenging environment; sustainable growth ahead - ICICI Securities

Cement - Prices hiked as demand improves; upgrades to continue - ICICI Securities

Automobiles (wholesale) - Wholesales push on lower base as retails remain soft - ICICI Securities

Metals - Expectations of an extended cyclical recovery on hyperbole as steel prices resume strength - ICICI Securities

Power - Discom liquidity infusion scheme ends FY21 with disbursal of >Rs750bn - ICICI Securities

ICICI Direct - Q4FY21 Result Preview - Logistics

ICICI Direct - Monthly Auto Volumes - April 2021: Strong end to FY21, MoM improvement across segments

Auto Numbers - March 2021 - Acuité Ratings & Research

Gladiator Stocks - Ratnamani Metals and Tubes - ICICI Direct

Initiating Coverage - HG Infra Engineering - ICICI Direct

Banks: Sector Credit Trends - Uptick to sustain? - HDFC Securities

Information Technology Sector Q4FY21 Results Preview - HDFC Securities

Monetary Policy Expectation - April 2021 - Acuité Ratings & Research

NHPC - Approvals to expedite project works - ICICI Securities

GSK Pharmaceuticals - Sale of Vemgal plant - ICICI Securities

I-direct Instinct - Pricol Ltd

Initiating Coverage - V-Mart Retail - ICICI Direct

Stock Tales - Siemens Ltd - ICICI Direct

Q4FY21 Result Preview - Information Technology - ICCI Direct

Quant Pick - UPL - ICICI Direct

Company Update - VST Tillers Tractors - ICICI Direct

Initiating Coverage - Neogen Chemicals - ICICI Direct

Core Sector Data - Feb 2021 - Acuité Ratings & Research

Website Created & Maintained by : Chennai Scripts
West Mambalam, Chennai - 600 033,
Tamil Nadu, India

disclaimer copyright © 2005 - 2020