Acquisitions, strong growth outlook likely to limit downside for Wipro

Prior to the recent rally, the stock had been an underperformer

The rally in information technology (IT) stocks following Accenture’s strong outlook and a recent acquisition were the key triggers for the 5 per cent gain in Wipro’s share prices over the past week. The recent gains helped the stock outperform the BSE IT index over this period. 

Wipro, after market hours on Monday, had announced that it acquired US-based Edgile, a cybersecurity consulting provider focused on risk and compliance, information and cloud security, and digital identity. The $230-million acquisition is the company’s second in the cybersecurity space in this financial year and follows the $117-million acquisition of Australian firm Ampion. 

Before Ampion, the company had made its largest-ever acquisition of Capco, an IT service consultancy in the financial services space in Europe and the US. The $1.5-billion acquisition included the cybersecurity practice at Capco. 

Wipro through its strategic investment arm, Wipro Ventures, is also investing in innovative cybersecurity start-ups to strengthen its cybersecurity practice capabilities. 

Given the size of the acquisition (about 0.5 per cent of Wipro’s FY21 revenue), Dipesh Mehta and Monit Vyas of Emkay Research do not expect any meaningful revision to earnings estimates. But the acquisition that should strengthen the company’s cybersecurity services would address the fast-growing demand for cybersecurity consulting among Global 2000 enterprises. 

The cybersecurity market size is pegged at $150 billion and is expected to grow at a compound annual growth rate of 11 per cent over 2021-25, according to technology research and consulting firm Gartner. This is higher than the broader IT services market, which is projected to grow at 8 per cent over the same period.

While the deals are positive for Wipro, analysts at Jefferies believe the valuation of the acquisition at 5.2 times its enterprise value to sales is expensive. They further say Wipro’s valuation at 27 times one-year forward earnings estimates appear rich as compared to peers. Jefferies has a target price of Rs 600, which indicates a downside of 13 per cent from the current levels. 

Though valuation is on the higher side, the stock on the back of higher growth expectations for the sector may continue to find support. 

JM Financial’s Manik Taneja says: “We continue to expect a strong Q3FY22 earnings season for Indian IT companies, which is likely to mirror the strength reflected in recent Accenture results. While there are growing concerns on increasing supply-side pressures, we see Indian IT enjoying a repeat of the ‘2004-08 phase’ with underlying demand strength providing both volume and pricing leverage and hence, the ability to defend margins at the industry level.”

Growth expectations not just in the December quarter but also for FY23 are thus expected to support the valuation. 

Growth hopes, according to the Nirmal Bang Research, could imply upward revisions in earnings estimates for the Indian players and maintenance of the current elevated price to earnings multiples which are over two standard deviations of the 10-year mean for almost all players.