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Wipro: Acquisitions to drive growth

Jan 4, 2007

The Indian IT stocks are getting a lot of attention these days, though for a reason that seems detrimental to their growth - the rupee's appreciation against the US dollar, in which these companies bill a large part of their receivables. However, despite the correction in these stocks, we believe that the fundamentals of the sector remain strong and we continue to favour selective stocks from the sector. In the previous articles, we outlined our views on 3i-Infotech, i-Flex and Geometric Software. In this article we shall focus into Wipro, which is India's third largest software services exporter.

We last recommended Wipro in April 2007 at Rs 571 with a March 2010 target of Rs 760. Since then, the stock is down almost 18% and we have been receiving queries from our subscribers regarding our latest view on the stock. At the outset, we would like to state that we firmly maintain our long-term positive view on the stock.

Here are the factors in support of our view.

  1. Acquisitions to drive growth: Wipro, on a whole, has acquired 18 companies since July 2002 with 11 of them coming in the last 21 months. We believe that perhaps markets have given thumbs down to these acquisitions in additions to rupee appreciation on the concerns of integration issues. But investors need to understand here that Wipro, in the past, has successfully integrated the acquired companies with itself. With execution capabilities and management as strong as Wipro's, we do not see any reasons as to why the company will not be able to successfully integrate the newly acquired companies. More importantly, these acquisitions are positive at the net level and we believe that profitability of these companies will improve going forward and will act as an important margin driver for the consolidated entity.

    Wipro's Acquisition
    Name of the company Date Target Country Business Description Payment
    Wipro Technologies Jul-02 GE Medical Systems Info Tech   Healthcare information systems 5.73
    Wipro Technologies Jul-02 Spectramind India BPO 83.04
    Wipro Technologies Sep-02 Ericsson's Indian R&D Center India Software development resources Not disclosed
    Wipro Technologies Nov-02 AMS Global Energy Practice USA IT services - Energy and Utilities 26.00
    Wipro Technologies Apr-03 Nerve Wire USA IT services - BFSI and Hi-Tech 18.70
    Wiro Consumer care and Lighting 2003 Chandrika India Bath Not available
    Wiro Consumer care and Lighting 2003 Glucovita India Energy drink Not available
    Wipro Technologies Dec-05 mPower and MPACT USA Payments gateway 28.00
    Wipro Technologies Dec-05 New Logic Austria Chip (SoC) design 56.00
    Wipro Technologies Feb-06 cMango Inc USA Technology infrastructure consulting 32.00
    Wipro Technologies May-06 Quantech Global Services USA Mechanical engineering design and analytics 10.00
    Wiro Consumer care and Lighting May-06 North-West Switches India Switches, Sockets, MCBs 23.00
    Wipro Technologies Jun-06 Saraware Oy Finland R&D (Services) 32.70
    Wipro Technologies Jun-06 Enabler Portugal Retail Solutions 52.30
    Wipro Infrastructure Engineering Sep-06 Hydrauto Group AB Sweden Hydraulic Components 31.00
    Wipro Infotech Oct-06 3D Networks and Planets PSG Singapore Infrastructure Management Services 73.00
    Wiro Consumer care and Lighting Jul-07 Unza Singapore Personal products 246.00
    Wipro Technologies Aug-07 Infocrossing USA Infrastructure Management Services 600.00
              1,317.47
    Source: Company

  2. Good clients and services traction: Wipro has shown good traction in large clients segment in the past two years and this is evident in the increasing number of US$ 50 m clients. The company had 8 US$ 50m client at the end of FY07 compared to 3 in FY06. Further, it bagged a US$ 130 m deal from an European utility company in 1QFY08. All these large deals give us confidence in terms of the company's revenue visibility. Secondly, the company is focusing more on testing services and technology infrastructure services. These two services now contribute to 22% of its Global IT revenues. More importantly, these two services have grown at an average QoQ rate of 14% over the last 8 quarters. With the acquisition of Infocrossing, Wipro is all set to get more of high value deals in the TIS space as such deals across the US are awarded to companies that have a good onsite presence.

  3. Consumer care and lighting: When people talk about Wipro they generally talk about the IT business. Wipro derives 94% of its revenues from Global and Indian IT services and balance 6% comes from consumer care and lightning. Wipro has maintained this 6% share over the past three years but more importantly this consumer care and lightning business has grown at 28% during this period when this industry was growing at only 14% per annum. Wipro has made deeper inroads into the institutional lightning segment and is a leader in software, pharma and retail outdoor lighting and energy saving devices. With the recent acquisition of Unza (its biggest in the consumer care segment) Wipro is all set to tap the personal products markets in a much larger way. Although the margins are lower compared to the global IT segment, the fact that the risk is also lower coupled with the higher than industry growth rate is one of the most important factors why Wipro cannot ignore this segment.

What to expect?
While we maintain our positive view on the stock, appreciation in rupee and any possible slowdown in US could be the main risks to our assumptions in the short to medium term. Having said that, we believe that more than appreciation in rupee it's the speed at which it has appreciated is a bigger concern. But we firmly believe that over a period of time a management as strong as Wipro will definitely come up once it gets itself adjusted to new industry dynamics.

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