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Wipro Ltd. Overweight
WIPR.BO, WPRO IN
New management shows urgency - makes an
acquisition in a lesser penetrated space
Wipro announced the acquisition of SAIC's Oil & Gas (O&G) IT Services
business. While this signifies the urgency the new management promises in
handling Wipro’s affairs, we note that Wipro’s track record of past acquisitions is
mixed. To make this acquisition count, Wipro's cross-selling and up-selling efforts
have to show improvement over such efforts in past acquisitions. We believe that
the management is seized of the imperatives to capture value from its latest
acquisition. The company’s revamped organization structure improves the
likelihood of such value-capture. We view this acquisition as making strategic
sense from a longer-term perspective.
• Acquisition consideration is fairly reasonable for Wipro: The acquisition
consideration is $150 million in an all cash deal. The LTM revenues for the
business are $188 million and about 1,450 employees would get transitioned to
Wipro from SAIC. Currently, EBITDA margins of the target are low double
digits. Valuation at 0.8x LTM revenues, 6-7x EBITDA (based on adjusted
EBITDA margins of about 11-12%) is reasonable from Wipro's perspective.
• Acquisition of a domain intensive business in a growing vertical with
upstream capabilities. Energy and utilities (E&U), which contributes about
10% of the company's total revenues, is traditionally a less-penetrated vertical in
Indian IT. Only about 5% of Wipro’s current E&U revenues (primarily
exploration centric) are upstream and 95% downstream (O&G retail centric).
The acquired business' upstream to downstream mix is about 50:50, which
would increase Wipro's upstream contribution to about 17.5% of E&U revenues
post integration. Upstream business includes work related to exploration and
transportation of petrochemicals and involves solutions like petroleum data
analytics, which are relatively high-end in nature, in contrast to more retail side
of the downstream business involving sales and marketing, and distribution. The
innovation potential and domain intensity is relatively higher in upstream work.
• Brings in an attractive set of large clients. SAIC’s O&G business' top 10
clients contribute about 90% of revenues, 6 of them are Fortune 500 companies.
Most of these clients are the ones whom Wipro either does not service currently
or the size of the account is not significant. Moreover, about two-third of the
acquired business’ revenues come from the US and about one third from
Europe. Wipro's penetration in the US oil and gas IT services market is weak
compared to Europe. Hence, the business provides Wipro access to a new set of
sizable customers and penetration into a lesser exploited geography, along with
vertical-based solutions from SAIC. This also presents cross-sell opportunities.
Big players like Exxon Mobile, Chevron do not offshore meaningfully, if at all.
• The deal is marginally EPS accretive, but margin dilutive in the near term.
This acquisition is not likely to impact financials in FY12. The all cash deal
would be only nominally EPS accretive for Wipro. However the company
expects to increase the target’s margins to Wipro’s company-average level in
three years time by increasing offshore mix of the acquired business. Currently,
this stands at 30% versus the company average (70% offshore effort).
• Maintain OW on Wipro. We maintain our OW rating on the stock. However,
the measure of success from this acquisition will be seen in how much of a boost
it gives to Wipro’s revenue-trajectory from the E&U vertical over time.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro Ltd. Overweight
WIPR.BO, WPRO IN
New management shows urgency - makes an
acquisition in a lesser penetrated space
Wipro announced the acquisition of SAIC's Oil & Gas (O&G) IT Services
business. While this signifies the urgency the new management promises in
handling Wipro’s affairs, we note that Wipro’s track record of past acquisitions is
mixed. To make this acquisition count, Wipro's cross-selling and up-selling efforts
have to show improvement over such efforts in past acquisitions. We believe that
the management is seized of the imperatives to capture value from its latest
acquisition. The company’s revamped organization structure improves the
likelihood of such value-capture. We view this acquisition as making strategic
sense from a longer-term perspective.
• Acquisition consideration is fairly reasonable for Wipro: The acquisition
consideration is $150 million in an all cash deal. The LTM revenues for the
business are $188 million and about 1,450 employees would get transitioned to
Wipro from SAIC. Currently, EBITDA margins of the target are low double
digits. Valuation at 0.8x LTM revenues, 6-7x EBITDA (based on adjusted
EBITDA margins of about 11-12%) is reasonable from Wipro's perspective.
• Acquisition of a domain intensive business in a growing vertical with
upstream capabilities. Energy and utilities (E&U), which contributes about
10% of the company's total revenues, is traditionally a less-penetrated vertical in
Indian IT. Only about 5% of Wipro’s current E&U revenues (primarily
exploration centric) are upstream and 95% downstream (O&G retail centric).
The acquired business' upstream to downstream mix is about 50:50, which
would increase Wipro's upstream contribution to about 17.5% of E&U revenues
post integration. Upstream business includes work related to exploration and
transportation of petrochemicals and involves solutions like petroleum data
analytics, which are relatively high-end in nature, in contrast to more retail side
of the downstream business involving sales and marketing, and distribution. The
innovation potential and domain intensity is relatively higher in upstream work.
• Brings in an attractive set of large clients. SAIC’s O&G business' top 10
clients contribute about 90% of revenues, 6 of them are Fortune 500 companies.
Most of these clients are the ones whom Wipro either does not service currently
or the size of the account is not significant. Moreover, about two-third of the
acquired business’ revenues come from the US and about one third from
Europe. Wipro's penetration in the US oil and gas IT services market is weak
compared to Europe. Hence, the business provides Wipro access to a new set of
sizable customers and penetration into a lesser exploited geography, along with
vertical-based solutions from SAIC. This also presents cross-sell opportunities.
Big players like Exxon Mobile, Chevron do not offshore meaningfully, if at all.
This acquisition is not likely to impact financials in FY12. The all cash deal
would be only nominally EPS accretive for Wipro. However the company
expects to increase the target’s margins to Wipro’s company-average level in
three years time by increasing offshore mix of the acquired business. Currently,
this stands at 30% versus the company average (70% offshore effort).
• Maintain OW on Wipro. We maintain our OW rating on the stock. However,
the measure of success from this acquisition will be seen in how much of a boost
it gives to Wipro’s revenue-trajectory from the E&U vertical over time.
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