Wipro’s stock tanks 4.5%, as Capco buy fails to impress investors

Wipro’s stock price dropped about 4% mid-Friday, failing to impress shareholders with the announcement of its largest ever acquisition. On Thursday, the company bought British financial services consultancy Capco for $1.45 billion in an all-cash deal.

The Nifty IT, the sector index for information technology companies, stood at levels of 25,321.30 around 2 PM on Friday, down 1.21% compared to the previous day’s close.

“The markets reacted negatively as Wipro picked up a consulting firm. Even Infosys picked up Lodestone in the past, and it did not pan out well,” Sanjeev Hota, vice president of research at Sharekhan, said.

It was back in 2012 when Infosys picked up Swiss consulting firm Lodestone for $350 million, its biggest acquisition till date. 

The Bengaluru-based company expects $720 million Capco to become one of its top revenue contributors in the BFSI vertical business, one that has nudged up a marginal 0.5% to Rs 4,661.2 crore in the December quarter. BFSI had accounted for over 30% of the company’s revenues.

In a statement, Wipro said that Capco’s clients include marquee names in the global BFSI space with 5,000 employees across 30 locations. However, the company did not provide any quantifiable information on how it will leverage Capco’s clientele and services, which may have helped raise investor confidence in its stocks. 

“Wipro and Capco share complementary business models and core guiding values, and I am certain that our new Capco colleagues will be proud to call Wipro home,” Wipro CEO Thierry Delaporte said, commenting on the acquisition. 

In January, most research analysts had given a hold rating to the shares of the company, citing that the implementation of its new business model was a cause for concern. 

“We continue to see Wipro’s growth trailing v/s that of peers as we await the impact of its new strategy on growth and see limited levers on margins from current levels,” Motilal Oswal said in its January research report. Other brokerages that gave it a ‘hold’ status include Geojit BNP Paribas and ICICI securities. 

Axis Securities, however, maintained a buy rating on the company after its Q3 results. 

“With depreciation in INR, lower travel cost, lower on site expenses EBITDA margins likely to expand in the near term,” Axis securities said in its January report. 

In contrast, Bob Capital Markets remained cautious on the company’s mid-term growth. “Given Wipro’s past record of sluggish growth and pending implementation of the new business model, we remain skeptical about its mid-term prospects,” Bob Capital wrote in its result review in January. 

Capco’s consolidated revenues were at $720 million as per Wipro’s stock filing, while the number stood at $693 million in 2019 and $734 million in calendar year 2018. 

In terms of one-year returns, Wipro has been performing well, returning 84.07%, compared to the IT sector return of around 58% and the Sensex’s gain of 32%, according to Angel Broking. In comparison, Infosys returned 75.33% and TCS 43.33% in the past 12 months. 

The company’s quarterly Profit Before Depreciation Interest and Taxes (PBDIT) has also been the highest so far at Rs 4,117.40 crore, while its operating profit to net sales was the highest at 26.28% for the quarter.