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Wipro
Good fit; marginally EPS accretive
Wipro's acquisition of SAIC's Global Oil and and Gas Information Technology
Services business would be marginally EPS accretive (<0.5%). However it would
strengthen Wipro's positioning in Energy & Utility vertical with its contribution to
IT services increasing to 12.9% from 9.9% besides other business synergies.
Acquisition details
! Wipro has signed an agreement to acquire the Global Oil and Gas Information Technology
practice of the Commercial Business Services business unit of Science Applications
International Corporation (SAIC), for an all cash consideration of approximately US$150
million, subject to adjustments.
! Based on our interactions with the management, acquired unit generated US$188mn
revenues in last reported fiscal (Feb’10-Jan’11) with EBITDA margins of around low double
digit. Based on our assumptions we expect PAT margin of mid-high single digit. This implies
acquisition price of 0.8xFY11 revenues and 12-13xFY11 PAT
! Acquired unit provides Consulting, System Integration and Outsourcing Services to Global Oil
majors with significant domain capabilities in the areas of Digital Oil Field, Petro-technical
Data Management and Petroleum Application Services addressing the upstream segment.
! Top-10 clients of the acquired unit accounts for 90% of the revenues. Within top-10 clients, 6
clients are in Fortune-500/Global-1000 list. US account for 68% of the revenues while Europe
accounts for 31% of the revenues.
! As a result of the transaction, ~1,450 employees are expected to transition to Wipro across
North America, Europe, India and Middle East. Around one-third of these employees are in
India.
! Based on our interaction with Wipro management, SAIC sold this business unit due to its
immateriality to their total revenues (less than 2% of revenues). Acquired unit is part of the
Commercial segment of SAIC which contributes around 3.4% of the SAIC’s total revenues.
Commercial segment had lackluster top-line growth and volatile margins. It has registered
revenue decline of 17.5% in FY11 and 5.9% in FY10 with its segmental operating margins
declining to 4.7% in FY11 from 7.3% in FY09.
Business Synergies
! Organically Wipro gets 9.9% of its IT services revenues from Energy and Utility (E&U
vertical). Within E&U, one-third of the business is coming from energy vertical. Within Energy
vertical, 85% of the business is coming from downstream clients and 15% of the business is
coming from upstream clients. Acquired unit would materially increase Wipro’s exposure to
upstream clients besides high organic presence in downstream.
! Secondly Wipro’s organic energy business is largely focused on Europe while this acquired
unit derives 68% of its revenues from US.
! Wipro and the acquired unit have one common client, who would contribute over US$100mn
in combined revenues post acquisition.
! This acquisition leads to addition of 5-6 Fortune 500/Global 1000 clients, helping Wipro to
cross sell its other services including BPO/IMS and also increase its penetration within energy
vertical.
! This acquisition will increase the revenue contribution of E&U vertical from current 9.9% to
12.9% of IT services revenues, while revenues from Energy vertical alone to increase from
3.3% to 6.5% of IT services revenues. TCS currently derives 4.4% of its revenues from E&U
vertical, while Infosys derives 6.1% of its revenues from utilities.
! Outsourcing opportunities in E&U vertical are likely to improve considering lower IT/BPO
services outsourcing from this vertical and higher demand to optimize operational costs.
Impact on Wipro's financials
! Based on our first cut calculations, the acquired unit would add close to around US$5-6mn
incremental PAT to Wipro (post considering the loss on treasury income), which is less than
1% of the FY12E EPS.
! Over the next three years, the management expects the cost synergies to push EBIT margins
of the acquired business from low-double digit levels currently to levels close to Wipro’s IT
services business (c.22%).
! Overall, we believe that this acquisition is marginally EPS accretive (<0.5% currently and
even assuming margin improvement, it would add less than 2% to EPS at current revenue
scale).
Good fit; marignally EPS accretive
! We believe that this acquisition is marginally EPS accretive as explained above and therefore
we do not expect any material stock price impact through this acquisition.
! However this can lead to material business synergies for Wipro within Energy vertical over
medium to long term.
! Secondly we also believe that this acquisition will narrow Wipro’s IT service’s growth rate lag
versus peers by 3-4% (despite marginal EPS accretion). Peers including Infosys and TCS are
likely to outgrow Wipro by 8-11% in FY11E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro
Good fit; marginally EPS accretive
Wipro's acquisition of SAIC's Global Oil and and Gas Information Technology
Services business would be marginally EPS accretive (<0.5%). However it would
strengthen Wipro's positioning in Energy & Utility vertical with its contribution to
IT services increasing to 12.9% from 9.9% besides other business synergies.
Acquisition details
! Wipro has signed an agreement to acquire the Global Oil and Gas Information Technology
practice of the Commercial Business Services business unit of Science Applications
International Corporation (SAIC), for an all cash consideration of approximately US$150
million, subject to adjustments.
! Based on our interactions with the management, acquired unit generated US$188mn
revenues in last reported fiscal (Feb’10-Jan’11) with EBITDA margins of around low double
digit. Based on our assumptions we expect PAT margin of mid-high single digit. This implies
acquisition price of 0.8xFY11 revenues and 12-13xFY11 PAT
! Acquired unit provides Consulting, System Integration and Outsourcing Services to Global Oil
majors with significant domain capabilities in the areas of Digital Oil Field, Petro-technical
Data Management and Petroleum Application Services addressing the upstream segment.
! Top-10 clients of the acquired unit accounts for 90% of the revenues. Within top-10 clients, 6
clients are in Fortune-500/Global-1000 list. US account for 68% of the revenues while Europe
accounts for 31% of the revenues.
! As a result of the transaction, ~1,450 employees are expected to transition to Wipro across
North America, Europe, India and Middle East. Around one-third of these employees are in
India.
! Based on our interaction with Wipro management, SAIC sold this business unit due to its
immateriality to their total revenues (less than 2% of revenues). Acquired unit is part of the
Commercial segment of SAIC which contributes around 3.4% of the SAIC’s total revenues.
Commercial segment had lackluster top-line growth and volatile margins. It has registered
revenue decline of 17.5% in FY11 and 5.9% in FY10 with its segmental operating margins
declining to 4.7% in FY11 from 7.3% in FY09.
Business Synergies
! Organically Wipro gets 9.9% of its IT services revenues from Energy and Utility (E&U
vertical). Within E&U, one-third of the business is coming from energy vertical. Within Energy
vertical, 85% of the business is coming from downstream clients and 15% of the business is
coming from upstream clients. Acquired unit would materially increase Wipro’s exposure to
upstream clients besides high organic presence in downstream.
! Secondly Wipro’s organic energy business is largely focused on Europe while this acquired
unit derives 68% of its revenues from US.
! Wipro and the acquired unit have one common client, who would contribute over US$100mn
in combined revenues post acquisition.
! This acquisition leads to addition of 5-6 Fortune 500/Global 1000 clients, helping Wipro to
cross sell its other services including BPO/IMS and also increase its penetration within energy
vertical.
! This acquisition will increase the revenue contribution of E&U vertical from current 9.9% to
12.9% of IT services revenues, while revenues from Energy vertical alone to increase from
3.3% to 6.5% of IT services revenues. TCS currently derives 4.4% of its revenues from E&U
vertical, while Infosys derives 6.1% of its revenues from utilities.
! Outsourcing opportunities in E&U vertical are likely to improve considering lower IT/BPO
services outsourcing from this vertical and higher demand to optimize operational costs.
Impact on Wipro's financials
! Based on our first cut calculations, the acquired unit would add close to around US$5-6mn
incremental PAT to Wipro (post considering the loss on treasury income), which is less than
1% of the FY12E EPS.
! Over the next three years, the management expects the cost synergies to push EBIT margins
of the acquired business from low-double digit levels currently to levels close to Wipro’s IT
services business (c.22%).
! Overall, we believe that this acquisition is marginally EPS accretive (<0.5% currently and
even assuming margin improvement, it would add less than 2% to EPS at current revenue
scale).
Good fit; marignally EPS accretive
! We believe that this acquisition is marginally EPS accretive as explained above and therefore
we do not expect any material stock price impact through this acquisition.
! However this can lead to material business synergies for Wipro within Energy vertical over
medium to long term.
! Secondly we also believe that this acquisition will narrow Wipro’s IT service’s growth rate lag
versus peers by 3-4% (despite marginal EPS accretion). Peers including Infosys and TCS are
likely to outgrow Wipro by 8-11% in FY11E.
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