Wipro: Balancing M&A and shareholder returns

Wipro, India’s third largest information technology (IT) service provider, has taken an aggressive approach in acquiring companies to step up digital strengths, compared with cross-town rival Infosys, or even Tata Consultancy Services (TCS). 

Since Abidali Neemuchwala became chief executive officer (CEO), the company has made two major acquisitions — HealthPlan Services and Appirio in 2016 —worth nearly $1 billion.

It also announced a buyback worth Rs 2,500 crore in June last year. Analysts say the company has ramped up acquisitions during the past one year and allocated the free cash better through buyback last year. 

But, despite the mergers and acquisitions (M&A), dividends and buyback, the cash kitty continues to grow. It had Rs 33,155 crore of reserves in December 2016, which have weighed on its return on equity in the recent few years. 

Read our full coverage on how IT firms have used their cash pile

Worse, the performance is far from exciting, reflecting on its share price. This is down a fourth in two years (TCS and Infosys are down four to nine per cent in this period).

 

While the company’s approach towards acquisitions has been pro-active to develop digital technology strengths, market analysts say, it has not been seeing enough growth in its organic business. Dollar revenue growth has consistently been the lowest among the top three (TCS, Infosys and Wipro) in the last four years as well as in the nine months ended December 2016. “Wipro’s organic business has not been growing well during the past few quarters. It makes a bigger case for it to give better value to shareholders through the buyback route,” said Madhu Babu, analyst with Prabhudas Lilladher. 

 

While business growth has been weak, the dividend pay-out ratio has also slipped in recent times. It fell to 16 per cent in FY16, from an average 28 per cent in the preceding five years. The combined reward (dividend plus share buyback) could look elevated for FY17, given the Rs 2,500 crore buyback offer in June last year, but is still around 35 per cent. Chief Strategy Officer Rishad Premji recently said the company might evaluate options of buyback and special dividends. “We have a stated dividend pay-out ratio policy of 40-45 per cent, which we have maintained.” Hope investors see more action on this front.