UBS: Wipro -SAIC to boost revenue, profit by 3.5%/1.0%

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UBS Investment Research
First Read: Wipro
SAIC to boost revenue, profit by 3.5%/1.0%
􀂄 Event – Wipro to acquire SAIC’s oil&gas IT practice for US$150m
Wipro is set acquire the oil and gas IT practice of the commercial business unit of
Science Applications International (SAIC) in an all cash deal worth US$150m.
This unit, with revenue of US$188m on an LTM basis, provides consulting,
systems integration and outsourcing services to major global oil & gas companies.
􀂄 Impact – SAIC to impact revenue by 3.5%, profits by 1%
The acquisition, which is expected to be concluded by June 2011, will add
US$188m in revenue, an impact of 3.5% on consolidated revenue. The impact on
net profit will be lower at 1% (UBS estimates) since operating margins are in the
low double digits vs. 21.4% for Wipro (9M FY11).
􀂄 Details – could help boost US$100m+ accounts, add 1,450 employees
Currently over two-thirds of SAIC’s revenue comes from the US, and the top 10
clients accounts for over 90% of revenue. SAIC does have some overlap with
Wipro’s clients, the management indicated that SAIC would help boost revenue for
at least of one its existing clients to over US$100m. The deal will also add 1,450
employees (one-third based in India) to Wipro’s existing base of 119,490.
􀂄 Valuation: valuations reflect upside from organisational restructuring
We are confident that Wipro’s revenue growth will pick up due to the benefits of
the ongoing organisational restructuring. However, we remain concerned about the
margin impact of investments to accelerate revenue growth as well as hiring costs
as revenue picks up. We maintain Sell with a DCF based target price of Rs440