On Friday, shares of Wipro were trading at Rs 440, down 1.79 per cent. JP Morgan said it remains ‘underperform’ on the stock with a target of Rs 370. Nomura retained its Reduce rating on the stock with a target of Rs 410.
Phillip Capital, which has a target of Rs 420 on the stock said: “Prior to this, HCL Tech and TechM have made similar bold moves in the M&A space – with mixed outcomes. We would hate if Capco acquisition by Wipro, turns out to be similar to what LCC turned out to be for TechM. We maintain ‘neutral’, as awaits early signs of successful integration of Capco,” it said.
The deal size is nearly two times Capco’s FY20 revenues of $720 million. Analysts noted that the acquisition will dilute Wipro IT services EBIT margins by 200 bps in the first year, a large component will be a non-cash charge. It would be EPS dilutive in the first year , though cash EPS is positive. EPS is expected to turn accretive from the third year after acquisition. The acquisition is expected to close in the June quarter.
As far as Capco is concerned, its Calendar 2019 revenue declined 6 per cent due to cutting back of spending by some clients. In Calendar 2020, the company got hit by Covid-19 and still grew by 4 per cent. Had Covid been not been there, revenue growth would have been 12 per cent.
With the deal, Wipro will join a select league of service providers that brings an integrated and end-to-end consultative digital, cloud and IoT transformation solutions at scale to customers.
Nirmal Bang said that the logic of the acquisition seems fairly clear, which is to build an end-to-end BFSI practice that encompasses business consulting, design, architecting, development, implementation, maintenance and business process management.
“Capco is in the right vertical – BFSI, largest at 30 per cent of Wipro revenue – poised for better revenue and profitability in a steeper yield curve environment in the days ahead. It brings with it entry into 30 new large global financial customers where Wipro would have had a tough time gaining a foot in the door if done organically. Our estimates indicate that even after the Capco acquisition, Wipro’s BFSI practice will be just one third the size of Accenture and TCS’. The key will lie in execution and value extraction,” it said.
Wipro’s track-record on that score from acquisitions over the last two decades has been less than average.
“Despite doing the most M&As among India heritage IT players, Wipro has not been able to record industry-matching growth in each of the last 10 years, and has therefore slipped in revenue ranking within the industry, Nirmal Bang said, adding that “The 175 per cent stock price run-up from 52-week bottom already prices in a strong pick-up.”
Antique Stock Broking has a hold rating on the stock with a target of Rs 450. Nomura expects a neutral reaction on Wipro shares. It said that valuations at 2 times FY20 sales appear a bit higher for a consultancy business compared with past acquisition of IT peers.
“The acquisition is revenue accretive by ~600-700 bps, however leads to ~300-500 bps EPS cut due to lower margin profile and amortisation expenses. We stay hold on Wipro for now and continue to believe that a catch up to peers on organic growth in 1HFY22 remains critically important in Wipro’s catch up thesis,” JM Financial said, while suggesting a target of Rs 415.