Analyst Corner| Wipro bets big on Capco; reduce fair value to Rs 450

Bets big on Capco. Wipro announced a fairly large acquisition of Capco, a financial services focused management and technology consulting firm for US$1.4 bn. The acquisition builds strength in financial services vertical by adding US$720 mn revenues to existing US$2.5 bn of revenues of Wipro and provides access to 30 large clients of Capco.

The acquisition comes at a cost and will dilute FY2022E EDIT margin by 200 bus and drag ESP by 9%. ESP hit will reduce in subsequent years as synergy benefits kick in. We cut Fair Value to Rs 450. A big bet for sure but Wipro has overpaid for the acquisition and carries integration risks. Capco is Wipro’s largest acquisition. Headquartered in London and set up in 1998, Capco is a global management and technology consultancy firm to the financial services industry.

Capco works with Boards, C-Suites and business leaders across the banking, capital markets, wealth, asset management and insurance sectors.

The transaction will be funded through cash balance of ~US$3.7 bn in December 2020. Revenues grew 4% yoy in CY2020 to US$720 mn but are still lower than US$734 mn reported in CY2018. Capco has over 5,000 people and derives 48% of revenues from consulting, 38% from digital and 14% from technology services. Geo spread is 55% of revenues from North America, 41% from Europe and 4% from Asia. Revenue of Capco is concentrated with top 30 clients contributing 79% to revenues (US$569 mn). EDIT margin is north of 10% in our view. Valuation paid for the acquisition is ~17X trailing EBITDA, stiff in our view and captures huge revenue synergies hope.

Capco has over 5,000 people and derives 48% of revenues from consulting, 38% from digital and 14% from technology services.