Wipro: Street positive on Designit buyout

Wipro's plan to acquire Denmark-based strategic design firm Designit was seen positively by the Street. The acquisition will enable Wipro to strengthen its presence in the promising digital segment. Notably, most Indian IT companies believe digital is the next big growth driver for the sector and are stepping up their efforts to bag deals in this segment.

Wipro targets revenues worth $1 billion from its digital arm - 'Wipro Digital' and this acquisition will be a key step to achieve this. The deal is priced between 60-89 million euros and values Designit at 2-3 times its CY14 Enterprise Value to Sales, estimate analysts. Most analysts believe these valuations are inexpensive when viewed in the context of the synergies.

Not surprisingly, Wipro scrip surged upto 2% to an intra-day high of Rs 554.35 on Friday before ending up about three-fourths of a percent to Rs 548.6 versus a flattish S&P BSE Sensex. At Friday's closing price, the stock was trading at 14.6 times its FY16 estimated earnings, slightly lower than its historical average one-year forward price/earnings ratio of about 15 times. However, Wipro's financial performance has been lagging that of peers over the past few quarters. This under-performance is likely to continue in the June 2015 quarter as well as for the year ending March 2016, believe analysts.

Weakness in oil and gas sector (about 15% of revenues), media & telecom (13% of revenues) and softness in a large banking and financial client are key factors impacting Wipro's revenue growth. As a result, most brokerages have a cautious view on the stock. Consistent improvement in quarterly results is a pre-requisite to any re-rating in the stock going forward.

With regards Designet, it employs over 300 employees globally, has annual revenues of about $30 million and counts Audi, Harman, Cisco, Oslo Uni Hospital, Jyske Bank, Brussels Airlines, L’Oreal, Vodafone, Jabra, Actavis, EU Commission, amongst others as its key customers. While Designet is largely into providing project-based services (hence limited customer stickiness), Wipro can extend these services to its existing client base. Designit provides design, user experience (UX), interaction design (IxD) and product innovation services.

For the June 2015 quarter, Bloomberg consensus estimates peg Wipro's consolidated revenues at Rs 12,067 crore, down 0.9% sequentially and net profit at Rs 2,183 crore, down 3.9% sequentially. EBIT margin is likely to contract 10 basis points sequentially to 19.9% as benefits of favourable rupee will be largely offset by impact of one-month wage hike. Street will keenly watch out management commentary around FY16 client budgets, large deals and outlook on the energy vertical.