Wipro: Inorganic strategy positive

Weak overall revenue growth, however, continues to eclipse undemanding valuations

Wipro’s recent acquisition of Germany-based cellent  (the company doesn’t capitalize the first letter of its name) is part of its inorganic growth strategy. It will enable Wipro to expand its footprint in Germany, Austria and Switzerland, relatively under-penetrated markets for Indian IT services companies.

cellent had revenues of $92 million in CY14 and it caters to marquee clients such as Daimler, Zeiss, Robert Bosch, Hugo Boss, among others. Given that the top 10 clients form half its revenues, cellent seems to have strong client-mining track record. While cellent’s earnings before interest, taxes, depreciation and amortisation (Ebitda) margin is below Wipro's at mid-single digit levels, the company’s aim of scaling them up in the medium term looks achievable.

The deal valuations are also reasonable. At €73.5 million or 0.85 times cellent’s CY14 revenues, it could be earnings neutral with a slight upward bias in the immediate term, say analysts. This is Wipro's third acquisition in 2015 following the buy-out of Denmark-based Designit in July (for €85 million) and US-based Drivestream in March. Even though these companies form a small percentage of Wipro’s revenues, they are strategic in nature and can prove to be a key growth lever in the long run.

While most analysts cheer this buy-out, they believe integration will be a key monitorable, given the strict labour laws in Germany. The scrip fell by a per cent on Thursday to Rs 572.

Wipro has been growing below industry for the past many quarters due to client specific issues, insurance and energy verticals. The firm’s guidance, too, appears lacklustre with the December 2015 quarter dollar revenue growth pegged at 0.5 per cent to 2.5 per cent sequentially. A sustained pick-up in growth and convergence with industry performance is a pre-requisite for any re-rating of the stock. Analysts at Kotak Institutional Equities believe the firm needs to ensure these acquisitions do not affect Wipro’s client-mining efforts and organic growth.

Although Wipro’s stock has outperformed most of its large peers in the past one, three and six months, analysts say it’s partly due to the profit warnings/guidance cut by some of its competitors.  Since Wipro has significantly underperformed on the bourses since 2013, valuations too were still undemanding. At Thursday's closing price, it trades at 14 times FY17 estimated earnings, which is lower than its historical average one-year forward price/earnings ratio of 15 times and at a good discount to peers such as Tata Consultancy Services (17 times) and Infosys (16 times). Nevertheless, going ahead, analysts say this discount will continue till Wipro’s growth rates pick up.