Reduce rating on Wipro: Reduce Enlarging its footprint in Continental Europe

Wipro has acquired cellent AG, a Germany-based IT services company for a consideration of 73.5 million euros, valuing it at 0.85X revenues and ~17X Ebitda (CY2014). This acquisition gives Wipro access to Germany, Austria and all underpenetrated markets. We believe this acquisition is good, but making Continental European acquisitions work is invariably the biggest challenge. Wipro’s stock valuations are undemanding, but low confidence on turnaround, underpins our cautious stance. REDUCE.

cellent AG is an IT services firm with offerings in ADM, SAP and Infrastructure services spanning manufacturing, automotive and Hi-Tech verticals. This acquisition gives Wipro access to cellent’s 45+ clients and 800 German speaking IT professionals. cellent has a presence in 11 locations across Germany, Austria and Switzerland (DACH countries). Continental Europe is an underpenetrated market for Indian IT. Local presence is critical to penetrate the market; cellent acquisition would help in that direction.

Integration is the key: Acquisition of cellent AG would nearly double Wipro’s headcount in the DACH region. Wipro intends to cross-sell its service offerings and offshore capabilities to cellent’s customers. We note that cellent has several long-standing client relationships across public and private sectors. A few marquee clients are Daimler, Robert Bosch and Zeiss. While this approach has merits, the real challenge lies in successfully integrating such acquisitions, given the stark differences in culture and labour laws. The track record of Indian companies in such acquisitions is not encouraging.

Wipro striking a good balance between acquisition for capabilities and geographical footprint: Earlier this year, Wipro acquired Designit, a Denmark-based creative agency for design capabilities. The management has indicated that it is scouting for acquisitions: (i) Nordics (geo expansion), (ii) engineering services (a mix of digital engineering and data analytics capabilities) and (iii) a niche player in the US healthcare player/provider market (geo + capabilities). We like Wipro’s two-pronged approach on acquisitions. But a good acquisition is only half the job done; the more important part is successful integration and reaping its full potential. Acquisitions take a toll on management bandwidth and can often impact organic growth momentum. Wipro needs to ensure that these acquisitions do not affect its account mining efforts and organic growth at large.