Comments
ICICI Securities
Wipro (sell)
Target: ₹358
CMP: ₹416.85
Several earlier attempts by Indian IT (including Wipro) to buy or build sizeable consulting practices have not been successful. However, learning from HCLT’s then bold bet on software products (similarly adjacent to IT) suggests there can always be a first.
Keeping Capco as a separate entity should address branding, GTM and culture conflict issues to an extent. Successful cross-selling/integration of offerings will likely depend on the incentive structure promoting the same.
Capco’s revenue stagnancy is of concern as it can be a further drag on the already low growth of Wipro. Given its onsite / consulting heavy nature, the acquisition should weigh on IT services’ margins (by 110bps, proforma, excl. amortisation). Our IRR scenario analysis pegs best case/worst case IRR of +8% -4%. Implied 1-year forward P/E for Capco could be 35-45x (vs 21x of Wipro).
Given its large size and lofty valuations, risk of integration challenges/future impairments (e.g. in HPS) cannot be ruled out. As in HCLT, this bold bet should remain an overhang on multiples till the time street finds comfort in integration.
Our FY22E-FY23E EPS witness 6-8 per cent downgrade as we adjust for the acquisition. We reduce our target multiple to 17x FY23E EPS (vs 19x earlier) and target price from ₹430 to ₹358.
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