Business

Wipro Rating: Reduce; Vara buy to serve as inorganic booster

Wipro’s inorganic strategy has been able to create a niche for the company in select few verticals and service line over the last decadeWipro’s inorganic strategy has been able to create a niche for the company in select few verticals and service line over the last decade

Wipro is to acquire Vara Infotech, which provides a comprehensive range of services to the BFSI vertical. The acquisition is an all-cash deal for a consideration of Rs 3.21 bn at a valuation of 1.45x EV/Sales (FY19).

Expanding BFSI presence in India

Wipro’s inorganic strategy has been able to create a niche for the company in select few verticals and service line over the last decade. However, the company could not manage to scale up the niche. Vara acquisition would strengthen its capabilities in Digital for the BFSI vertical. However, the exposure of Vara is largely restricted to ICICI Bank offerings in multiple services. Hence, a strategic seven-year deal valued at $300 mn signed with ICICI Bank. Due to the concentrated exposure to select few clients, we remain watchful of its abilities to cross-sell. Retain Reduce.

About Vara Infotech – strong services offering for BFSI vertical

Vara Infotech is a Mumbai-based IT Services company with ~3,800 employees that provides a comprehensive range of services catering to the Banking, Financial Services and Insurance (BFSI) segment. It provides diverse solutions that include BPO, Application Services and Infrastructure Management services (IMS). The company provides end-to-end application development, maintenance & support for 400+ applications including mission critical applications for ICICI Bank. Hence, Wipro bagged a $300-mn deal from ICICI Bank. The company reported revenue of Rs 2.215 bn in FY19.

Indian BFSI vertical fragmented

Indian BFSI companies are strong in digital adoption and ahead of global peers as their IT spend accelerated in the last 15 years adopting newer technologies. However, the market remains fragmented with Indian IT companies having shares across the Indian BFSI vertical and it would be tough to cross-sell services.

Valuation & recommendation

Inorganic booster but no growth acceleration: Wipro’s inorganic strategy remains a key growth driver to bridge the gap in offerings. We like their tuck-in acquisition in newer technologies. The leadership team at Wipro has always managed to identify the next growth driver through their inorganic strategy. However, the acquisitions have failed to accelerate the growth momentum. Vara Infotech acquisition would be completed during the quarter ending September 30, 2019 (Q2FY20). We remain cautious on organic growth of Wipro. We expect 4.2% revenue CAGR over FY19-21E. We reiterate our Reduce rating with a target price of Rs 260 (15x FY21e), implying ~2% upside from CMP of Rs 256. The stock trades at 15.7x/ 14.8x FY20/ FY21e EPS of Rs 16.3/17.3.

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