Hold Wipro Ltd For Target Rs.450 - Emkay Global
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Capco acquisition to bolster BFSI capabilities
* Wipro has signed an agreement to acquire Capco, a global management and technology consultancy to the BFSI industry, for a cash consideration of USD1.45bn (~2x EV/Sales on a trailing basis).
* This acquisition will strengthen Wipro’s positioning in the BFSI sector with integrated, endto-end consulting and digital transformation capabilities. It will create significant crossselling opportunities and aid wallet share expansion across existing clients.
* Integration of a low-margin business (Capco operates at mid to high single-digit margins; similar to Wipro’s onsite business) and higher non-cash charges are likely to impact EBITM by ~200bps in the first year. Margins will improve on revenue and cost synergies from the second year. The acquisition is expected to be EPS accretive in the third year.
* Capco acquisition reflects Wipro’s aspiration and bold bet to accelerate revenue growth and augment capabilities. Most of the Consulting business acquisitions across the industry failed to deliver anticipated revenue synergies in the past. We maintain the Hold rating with a revised TP of Rs450 at 20x FY23E earnings (earlier 18x). The target multiple was revised to negate the impact of non-cash charges and directionally positive acquisition.
Acquisition to boost Wipro’s BFSI capabilities: This acquisition will make Wipro one of the largest end-to-end global consulting, technology and transformation service providers to the BFSI sector. It will provide access to marquee BFSI clients (addition of over 30 large BFSI clients) and create a large global financial services practice for Wipro (revenue will grow to ~USD3.2bn from current ~USD2.5bn), with a strong footprint in consulting and business transformation. Capco’s BFSI-focused consulting capabilities and Wipro’s digital transformation capabilities will position the combined entity well for large-scale transformation deals in BFSI. The transaction will create significant cross-selling opportunities and aid wallet share expansion across existing clients.
Acquisition to be EPS accretive from Year-3: Integration of a relatively low-margin Capco business (mid-to-high single digit margins; similar to Wipro’s onsite business) and higher noncash charges are likely to impact EBITM by ~200bps in the first year. Margins will improve on revenue and cost synergies from the second year. The deal is expected to be EPS dilutive in the first year but it will be cash EPS positive. It should be EPS accretive from the third year
Transaction details: Wipro has inked a deal to buy Capco for a cash consideration of USD1.45bn. Capco will continue to operate independently as a wholly-owned subsidiary of Wipro under the leadership of current CEO Lance Levy. The transaction is expected to close during Q1FY22, subject to customary closing conditions and regulatory approvals.
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