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Wipro Ltd.
Acquisition to strengthen Oil &
Gas industry group
Acq. to broaden offerings in Energy vertical; Rate Neutral
After the India market close, Wipro announced an all-cash acquisition of the
Global Oil and Gas IT Services unit of SAIC. In our view, the deal strengthens
Wipro’s offerings in the Energy and Utility space which forms ~10% of Wipro IT
Services’ revenues and adds key customers in the upstream oil and gas industry.
We estimate the acquisition likely to be EPS neutral for FY12 and valuations
appear fair at 7x EV/EBITDA (trailing). The key risk in our view is employee and
client retention post acquisition. We have a Neutral rating for Wipro as we believe
it is less favorably positioned than peers in an environment where discretionary IT
spend is picking up, and there may be employee churn post the recent change in
top management.
Penetration into upstream oil and gas clients
The acquisition adds ~4% (LTM basis) to Wipro’s IT revenues and six new fortune
500 companies to its client base. Rev / employee of the acquired entity is
significantly higher than company average on account of higher value services
like domain consulting and systems integration for upstream Oil and gas
companies and lower offshore mix. It derives majority of its revs from the US with
the top 10 clients constituting ~90% of the revenue stream.
Valuation appears fair at ~7x trailing EV/EBITDA
Deal consideration of USD150m (cash) implies a ~7x EV/EBITDA (trailing) and is
comparable to valuations of mid-tier vendors like Mphasis, Patni. EBITDA margins
for the company (slightly higher than 10%) are below those for Wipro IT given
lower offshore mix (30%) and have a potential to gradually improve as Wipro
seeks to improve the offshore mix. We estimate the deal is likely to be neutral to
marginally accretive for FY12 EPS.
Price objective basis & risk
Wipro (WIPRF / WIT)
Our Price Objective of Rs500 is set at 17x FY13e EPS, at a 20% discount to our
target multiple for Infosys. This is higher than the average P/E discount of about
15% in past 3 years due to slower earnings growth trajectory. Downside risks to
our price objective are delays in recovery of IT spending by technology and
telecom verticals apart from macro risks relating to IT spending and Rupee.
Upside risks are faster than expected success of new CEO in the rebuild process
and mining top accounts.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro Ltd.
Acquisition to strengthen Oil &
Gas industry group
Acq. to broaden offerings in Energy vertical; Rate Neutral
After the India market close, Wipro announced an all-cash acquisition of the
Global Oil and Gas IT Services unit of SAIC. In our view, the deal strengthens
Wipro’s offerings in the Energy and Utility space which forms ~10% of Wipro IT
Services’ revenues and adds key customers in the upstream oil and gas industry.
We estimate the acquisition likely to be EPS neutral for FY12 and valuations
appear fair at 7x EV/EBITDA (trailing). The key risk in our view is employee and
client retention post acquisition. We have a Neutral rating for Wipro as we believe
it is less favorably positioned than peers in an environment where discretionary IT
spend is picking up, and there may be employee churn post the recent change in
top management.
Penetration into upstream oil and gas clients
The acquisition adds ~4% (LTM basis) to Wipro’s IT revenues and six new fortune
500 companies to its client base. Rev / employee of the acquired entity is
significantly higher than company average on account of higher value services
like domain consulting and systems integration for upstream Oil and gas
companies and lower offshore mix. It derives majority of its revs from the US with
the top 10 clients constituting ~90% of the revenue stream.
Valuation appears fair at ~7x trailing EV/EBITDA
Deal consideration of USD150m (cash) implies a ~7x EV/EBITDA (trailing) and is
comparable to valuations of mid-tier vendors like Mphasis, Patni. EBITDA margins
for the company (slightly higher than 10%) are below those for Wipro IT given
lower offshore mix (30%) and have a potential to gradually improve as Wipro
seeks to improve the offshore mix. We estimate the deal is likely to be neutral to
marginally accretive for FY12 EPS.
Wipro (WIPRF / WIT)
Our Price Objective of Rs500 is set at 17x FY13e EPS, at a 20% discount to our
target multiple for Infosys. This is higher than the average P/E discount of about
15% in past 3 years due to slower earnings growth trajectory. Downside risks to
our price objective are delays in recovery of IT spending by technology and
telecom verticals apart from macro risks relating to IT spending and Rupee.
Upside risks are faster than expected success of new CEO in the rebuild process
and mining top accounts.
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