Wipro: Street positive on Designit buyout

Deal valuation is inexpensive and this will aid digital growth

The Street is positive on Wipro’s plan to acquire Denmark-based strategic design firm Designit. The acquisition will enable the Bengaluru-based company to strengthen its presence in the segment which most Indian information technology companies believe is the next big growth driver for the sector, and are stepping up their efforts to bag deals in this segment.

Wipro targets $1-billion revenue from its digital arm, Wipro Digital, and this acquisition will help achieve this. The deal is priced at euro 60-89 million and values Designit at two-to-three times its 2014 enterprise value to sales, estimate analysts. Most analysts think these valuations are inexpensive, given the synergies of the acquisition.

The Wipro scrip surged two per cent to touch an intra-day high of Rs 554.35 on Friday before ending up three-fourths of a per cent at Rs 548.6, versus a flattish S&P BSE Sensex. At Friday’s closing price, the stock traded at 14.6 times its FY16 estimated earnings, slightly lower than its historical average one-year forward price/earnings ratio of 15 times. However, Wipro’s financial performance has been lagging that of peers over the past few quarters. This under-performance would continue in the June quarter, as well as in the year ending March 2016, say analysts.

Weakness in the oil & gas sector (15 per cent of revenues), media & telecom (13 per cent of revenues) and softness in large banking and financial clients are key factors impacting Wipro’s revenue growth. Most brokerages have a cautious view on the stock. Consistent improvement in quarterly results is a pre-requisite to any re-rating in the stock.

Designet employs 300 employees globally and has annual revenue of about $30 million. Its customers include Audi, Harman, Cisco, Oslo Uni Hospital, Jyske Bank, Brussels Airlines, L’Oreal, Vodafone, Jabra, Actavis and the EU Commission. While Designet is largely into providing project-based services (hence, limited customer stickiness), Wipro can extend these services to its existing client base. Designit provides design, user experience, interaction design and product innovation services.

For the June quarter, the Bloomberg consensus estimates peg Wipro’s consolidated revenue at Rs 12,067 crore, down 0.9 per cent sequentially and net profit at Rs 2,183 crore, down 3.9 per cent sequentially. Ebit margin is estimated to contract 10 basis points sequentially to 19.9 per cent, as benefits of a favourable rupee will be largely offset by the impact of a one-month wage hike. The Street will keenly watch the management commentary on FY16’s client budgets, large deals and outlook on the energy vertical.