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An opportune acquisition

WPRO has announced the acquisition of the Digital Transformation Solutions (DTS) business of HARMAN, a Samsung company. Total consideration for the deal is USD 375mn, including earn-outs, valuing the transaction at 1.2x CY24 sales (USD 315mn). DTS brings digital engineering and ER&D capabilities to WPRO’s already large engineering practice. The transaction follows a number of IT Services-ER&D acquisitions in the recent past (Exhibit 1), underlining the large and underpenetrated outsourcing opportunity in the space. We reckon this acquisition makes WPRO the 9th largest ER&D Service provider globally (Exhibit 2), making it a formidable competitor. Besides, HARMAN DTS’ strength in Hi-tech and Lifesciences aligns with WPRO’s, enabling easier cross-sell. We have not incorporated the numbers in our estimates yet pending details around margins etc. But our back of the envelop calculation suggests it could have a 50-60bps EBIT margin impact, led largely by a) lower margin profile (20-30bps impact); b) required investments (10-15bps); c) incremental amortisation of 10- 15bps – based on WPRO’s purchase price allocation for CAPCO. EPS impact could be marginal (c.1%). Further, purchase consideration will represent merely c.6% of cash-onbooks, not impacting future payout/buyback hopes

* The deal: WPRO has announced the acquisition of Harman Connected Services Inc. and its subsidiaries and certain other assets (collectively, “DTS”) from Harman International Industries, Inc. The purchase consideration, including earn-outs is USD 375mn. Revenue of DTS for CY24 was USD 314.5mn, flat since CY22. The transaction therefore value DTS at 1.2x CY24 revenues. This is less than what Cognizant (CTSH US; NR)-Belcan (1.6x), INFO-in tech (2.7x) or HCLT-ASAP (1.6x). DTS’ revenue mix is 85% services and 15% product. The transaction is expected to be completed by December 31, 2025.

* The rationale: DTS brings robust foundation of digital engineering and ER&D to WPRO, making it the ninth largest ER&D Service providers globally (JMFe). DTS operates in HiTech (Telecom, ISVs, Silicon and devices), Lifesciences (Pharma, CROs, Healthcare ISVs) and Industrial/consumers verticals. These align with WPRO’s strengths as well. That should enable them to cross-sell DTS’ ER&D offerings to WPRO’s clientele and vice-versa. WPRO believes the combination will offer clients “the agility and precision of a specialist provider and the reach and capabilities of a global leader”. DTS has 5,600 employees spread across 14 countries including India. This translates into Rev/Employes of USD 56k/year, which suggests that it already operates on a global delivery model. This should align the culture and enable easier integration, in our view.

* The impact: Flat revenues over the past three years are a concern. It possibly reflects the stress in DTS’ end-clients’, especially in Telecom/ISVs/Semicon sub-segment. That possibly explains relatively lower valuation paid by WPRO. We estimate that the acquisition could impact WPRO’s full year margin by 50-60bps. This could be due to a) lower EBITDA margins (20-30bps impact); b) investments/transaction charges (10-15bps); c) higher amortisation (10-15bps) – assuming 25% of purchase consideration allocated towards intangibles (Exhibit 5). Consequently, EPS impact could be c.-1%, immaterial in our view.

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