Wipro's small buys good only in long run

Under-performance vis-a-vis peers is a concern. Eye on successful integration

Wipro’s acquisition of US-based BPaaS (business process-as-a-service) provider Viteos is likely to boost its capabilities in BPO (business process outsourcing) business, particularly in the capital market domain. This is because Viteos caters to clients on the buy side while Wipro caters to clients on the sell side in the markets.

The acquisition will beef up Wipro’s presence in the banking, financial services, and insurance vertical. “Given Viteos has a platform-based revenue generation, it will increase non-linearity for Wipro, with cross-selling opportunities,” said analysts at Antique Stock Broking. But, given its small size ($26.5 million revenue in FY15), the acquisition will add just 50 basis points to Wipro’s overall growth.

While Wipro has paid $130 million for the buyout, analysts believe it will marginally dilute FY17 earnings for the firm.

This is Wipro’s fourth acquisition in 2015. The company has been making small acquisitions. The acquisition of Germany-based Cellent AG will enable Wipro to expand its presence in Germany, Austria and Switzerland. The buyout of Denmark-based Designit in July and US-based Drivestream in March will beef up its digital capabilities. Though these firms form a small percentage of Wipro’s revenues, the nature of the deals can boost growth in the long run.

The Wipro stock has risen 1.45 per cent in the past one year and continues to trade at a discount compared with its peers Tata Consultancy Services, Infosys, and HCL Technologies. Wipro trades at 13.6 times FY17 estimated earnings. This is not only below peer valuations of 13.8 to 17.7 times FY17 estimated earnings, but also lower than its own historical average one-year forward PE of 15 times.

Analysts believe this discount is likely to continue till Wipro’s growth rates pick up. Consistent under-performance vis-a-vis peers on revenue and profitability has been a key concern. Wipro has been growing at a slower pace than the sector for many quarters.

The company’s forecast appears lacklustre, with December quarter dollar revenue growth pegged at 0.5 per cent to 2.5 per cent sequentially. Apart from being a seasonally weak period for the sector, Wipro’s revenues in the quarter will be hit due to the Chennai floods.