MUMBAI: Wipro Ltd has been among the most acquisitive companies among Indian IT service providers. But it hasn’t had much to show in terms of benefits accrued from all its mergers and acquisitions, with growth rates still far behind peers such as Tata Consultancy Services Ltd and Infosys Ltd. Now, it has gone ahead with a much larger acquisition, worth as much as $1.45 billion. Wipro has said it will buy Capco, a consultancy firm in the banking and financial services space, in an all-cash deal.
Given the chequered history of past acquisitions, investors have naturally welcomed the news with cold shoulders. Some analysts are also worried about the premium valuation paid for Capco. Wipro shares were down about 3% at the time of writing.
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“The key will lie in execution and value extraction. 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,” domestic brokerage house Nirmal Bang Securities Ltd said in a report on 4 March.
Analysts at Jefferies India Pvt. Ltd note that the consultancy’s ownership had changed hands at a valuation of $795 million in 2017. “Since Capco’s revenues have been flattish at US $700m over 2018-2020, an 80% premium to its 2017 valuation seems rich,” they said in a 4 March note to clients.
They added that to get a 15% return on capital employed, Wipro will need to strike 7-8 large deals with Capco’s 30 key clients, implying a 25-30% success rate. “This is a tall ask given the vendor churn in the BFSI vertical is limited.”
Analysts at Nomura said that valuations of two times Capco’s sales appear to be on the higher side for a consultancy business, when compared to past acquisitions by IT services providers.
Banking and financial services account for about 30% of Wipro’s revenues, and prima facie an acquisition in the space makes sense, as it may help create cross-selling opportunities even across existing clients. But the high cost of acquisition and the usual challenges of integrating large acquisitions may play spoilsport in terms of generating decent returns.
In a conference call with analysts, the company’s management said it expects EBIT margins to be impacted by 2% in FY22 and this transaction to turn earnings per share (EPS) accretive in FY24. Ebit is short for earnings before interest and tax.