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Analysts said that while Wipro’s $300-million deal with ICICI Bank is a large deal, it is still a low profitability business.
Wipro on Wednesday announced a seven-year deal with ICICI Bank for a total contract value of $300 million. The deal is expected to start delivering revenues from this month itself. As part of this strategic engagement, Wipro will absorb about 3,800 employees of Vara lnfotech along with its existing contracts, facilities and assets.
“We see this deal to be similar to the people takeover deals that have gained prominence in the sector over the recent years. It provides revenue visibility of 0.2 per cent of Wipro’s FY20E revenues and 0.4 per cent bps on annualised basis,” said Emkay global in a note to investors.
It said that while margin details have not been shared, the margins for this business will certainly be dilutive to Wipro’s native IT Services margins, given the low revenue productivity of Vara lnfotech’s business ($8.3k for Vara vs $47.3k for Wipro). Vara Infotech had revenues of ₹200 crore in FY19. Vara Infotech used to provide BPO, App Services and Infra support to ICICI bank.
Wipro plans to leverage its Automation platform Wipro Holmes to derive synergies out of this deal. “We believe that Wipro’s relative under performance is here to stay in FY20E as sectoral weakness can possibly drive a growth moderation in its Financial Services vertical, where the company did well in FY19 (up 16 per cent YoY in CC terms). Wipro’s large buybacks (7 per cent in FY18 and 5.5 per cent in FY19) have so far supported its stock price.
Impact on growth
HDFC Securities in its note said that Wipro is struggling to grow whereas larger peers are clocking double-digit growth rate. BFSI, which was the key revenue driver for Wipro is in slowdown. Issues such as completion of large projects (consumer), delay in decision making (BFSI, Manufacturing) and deferral in ramp-up of large projects is impacting growth.
The guidance for Q2 in FY20 indicates that the lag is entrenched. Margin expansion is difficult and the buyback trade is over. Wipro has underperformed in the last three months (-8 per cent vs NIFTY IT -3 per cent) and the trend will continue unless growth revives, the note said.
BOB Capital Markets in its note said that despite several strategic interventions, Wipro has underperformed its tier-I IT service peers in terms of revenues and earnings over the past seven years. Regulatory uncertainty for the healthcare business, restructuring of India and Middle East operations, and a muted outlook for the BFSI and manufacturing verticals cloud recovery prospects.
Wipro’s shares were flat at ₹255.55 at the close of trading on Thursday.
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