Prabhudas Lilladher has given Buy recommendation for Wipro with a target price of Rs. 474 in its research report issued on Mar 05, 2021

Prabhudas Lilladher’s research report on Wipro

Wipro announced acquisition of Capco, a global management and technology consulting firm in BFS industry for $1.45 Bn, valued at 2x EV/Sales. The transaction is likely to close by 1QFY22. Wipro paid ~70-75% higher vs the previous transaction (FIS sold down 60% stake in Capco to a PE guy in 2017 valuing the firm at US$800 mn), we believe this might be on account of margins improving in Capco. Wipro has $5bn cash, acqn will consume 26% of cash. Wipro expects the transaction to dilute FY22E EBIT margins by 2% & will become EPS accretive by FY24. Capco must have EBIT margins of 10-11%. This acquisition will enable Wipro to become a large scale BFSI player with end-to-end consulting, technology and operations capabilities. Wipro’s expertise as a digital transformation player plus Capco’s BFSI focused consulting capabilities will propel expansion of wallet share within existing clients in both the organizations. Wipro will realize significant revenue synergies through cross selling opportunities, access to 30 new large BFSI clients of Capco and winning more integrated transformation deals. Capco has strong presence in Europe as compared to Wipro. Management anticipates FY22 revenue addition from Capco to be around ~700Mn.

Outlook

Wipro new CEO is taking right steps towards the transformation journey, however we believe integration benefits may take time to showcase. We believe cross selling will also require very a focused & tight integration at execution levels. Historically, Indian IT services have a very limited success story in creating a consulting base organically or inorganically. This acqn will impact our EPS estimates by ~7% for FY22E. Acquisition will dilute FY2022E EBIT margin by 302 bps We reduce our target multiple to 20X (from 21X) & arrive at a changed TP of INR 474. Wipro is currently trading at 21.7X/18.4X for FY22/23E earnings of INR 20.2/23.7 respectively with EPS CAGR of 13.6% for FY21-23 respectively. Maintain BUY.

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