Software giant Wipro final week announced the acquisition of British consultancy firm Capco for $1.45 billion, its most significant buy. Since the particulars of the deal became public, Dalal Street has not been type towards Wipro. The share value of the IT key is down 5.2% considering that final Thursday to now trade at Rs 415 per share. Analysts have raised issues about the deal and have trimmed value targets, ratings of the Information Technology firm.
The acquisition of Capco is most likely to stay an overhang on multiples of Wipro till the time street finds comfort in integration, according to analysts at ICICI Securities. “Several earlier attempts by Indian IT (including Wipro) to buy or build sizeable consulting practices have not been successful. However, learning from HCL Tech’s then bold bet on software products (similarly adjacent to IT) suggests there can always be a first,” the brokerage firm stated in a note.
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Maintain ‘buy’ on Wipro with elevated TP of Rs 550
Why are brokerages concerned
The deal will construct strength in the economic services vertical of Wipro by adding $720 million revenues to the current $ 2.5 billion of revenues of Wipro and delivers access to 30 significant consumers of Capco, according to Kotak Securities. However, some are nonetheless concerned. “Wipro has paid ~17X trailing EBITDA, expensive in our view,” stated Kotak Securities. “It is interesting to note that FIS sold down 60% stake in Capco to a private equity player in 2017 valuing the firm at US$800 mn. Capco’s revenues have declined compared to where it was in 2018, yet the valuation paid is 75% higher than the previous transaction,” they added.
Ambit Capital stated that acquisitions in the consulting space have noticed restricted accomplishment in the previous. “The issues have been in terms of lack of alignment of consulting employees to cross-sell downstream outsourcing business. How Wipro navigates the cultural differences of a high-cost partner-driven consulting outfit versus the cost-focused outsourcing outfit is a key thing to watch,” they stated. Wipro has stated that it at the moment intends to let Capco run as a separate entity.
“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,” stated ICICI Securities. With lofty valuations, they added, threat of integration challenges / future impairments can’t be ruled out.
Time to sell
Ambit Capital currently had a ‘Sell’ rating on the stock underperform peers on development, driven by weaker positioning in created markets and significant verticals. Ambit has a target value of Rs 345 per share on Wipro. ICICI Securities has now downgraded the stock to ‘Sell’ and lower their target various to 17x FY23E EPS against 19x earlier. The target value has been set at Rs 350 apiece.
Kotak Securities holds a slightly much better view with an ‘Add’ rating but has reduce Fair Value to Rs 450 per share from Rs 465. “A big bet for sure but Wipro has overpaid for the acquisition and carries integration risks,” they added.
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