Wipro, one of the leading software exporters, on March 4 announced that it has signed an agreement to acquire Capco, a global management and technology consultancy providing digital, consulting and technology services to financial institutions in the Americas, Europe and the Asia Pacific.

IDBI Capital has maintained Reduce on Wipro with new target price of Rs 415.

Key Highlights and Investment Rationale:

Capco has a strong presence in the BFSI vertical: Over the last 20+ years, Capco has established strong presence for management and technology consultancy solutions across the banking, capital markets, wealth, asset management and insurance sectors. It has over 100 clients with long-standing relationships with many global financial institutions. It has 5,000+ consultants across 300 locations in 16 countries. It reported revenue of USD 734 million / USD 693 million /  USD 720 million for CY18/CY19/CY20.

Capco would significantly enhance WPRO's presence in BFSI vertical: WPRO's BFSI revenue would increase to USD 3.2 billion from current run-rate of USD 2.5 billion. WPRO would also get access to 30+ pre-eminent financial services clients. Combination of WPRO's technology solutions and Capco's consulting capabilities would position WPRO well for large-transformational deals. Capco would continue to operate as a separate company.

Revenue gain but EBIT margin and EPS to decline for FY22/23: WPRO has guided for -200bps impact on IT services EBIT margin in the first year, though largely due to non-cash charge and EPS to turn accretive from Year 3. We increase our FY22/23 consolidated revenue (in USD) forecast by 6.1%/7.9%, cut EBIT margin forecast by 206bps/129bps to 16.8%/17.5% and cut EPS forecast by 6.1%/3.8%.

Commenting on the investment rationale, the brokerage firm IDBI Capital said, "Wipro's (WPRO) has announced its biggest acquisition till date. It has announced acquisition of Capco - a global management and technology consulting company focused on the BFSI vertical. WPRO would pay USD 1.45 billion in cash at an implied CY20 revenue multiple of ~2x.

The acquisition is expected to be completed in Q1FY22. While the acquisition increases our FY22/23 IT services revenue forecast by 6.3%/8.2%, it would weigh on EBIT margin and thus on consolidated EPS. We cut our FY22/23 consolidated d EPS by 6.1%/3.8%.

While we believe that Capco’s acquisition is a bold move by WPRO, it would have meaningful impact on profitability amid WPRO’s target to accelerate organic growth. We maintain 'Reduce' with new TP of Rs 415 (vs. Rs 431) based on PER of 20x FY23E."

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