Wipro has entered into an agreement to acquire The Capital Markets Company (Capco), an end-to-end management consulting services and digital transformation solutions provider in the banking and financial services space, in a $1.45 billion all-cash deal. Capco clocked revenues of $700 million in 2020, which would increase Wipro’s BFSI revenue to $3.2 billion from $2.5 billion currently. It would also boost Wipro’s consulting and business transformation footprint. Wipro Share price today is Rs 432, down Rs 7 or 1.6%.

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Wipro management highlighted that Wipro and Capco share complementary business models, sector alignments and service offering, therefore, the deal would create a unique combination of consulting and domain led expertise with scale, digital technology and operation. As Capco is a focused management technological consultancy offering digital transformational solutions to global financial firms, this deal would enhance Wipro’s offering with integrated and end-to-end consultative digital, cloud and IT transformation solutions at scale to their customers.

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Further, the addition of 30 large global financial clients (79% of Capco’s revenue) from the acquisition would significantly enhance Wipro’s access to industry spends as there are significant synergies through cross selling opportunities by leveraging the complementary capabilities of both entities. We believe the unique combination of Capco’s consulting led expertise and Wipro’s technology offerings would help it secure large-scale transformational deals in the BFSI space.

Though Wipro’s management indicated that the acquisition will dilute Wipro IT EBIT margin by 2% in year one as a large component of which will be a non-cash charge (relating to higher charge of intangible assets in earlier years), management would fund the acquisition through cash as the company had a net cash of Rs. 45,234 crore as of Q3FY2021. Wipro highlighted that Capco’s margins are healthy, similar to its own onsite margins.

Wipro’s management also highlighted that Capco’s would improve after the acquisition as it has identified cost synergies. Further, management also highlighted that EPS would be dilutive in the first year and it would turn accretive from third year. Though the progress in consulting business needs to be eyed going ahead, the management has been aggressively looking for ways to boost revenue growth with strategic acquisition, significant people changes and external hires.

Wipro Key Risks:

Rupee appreciation and/or adverse cross-currency movements; longer duration of pandemic; constraint in local talent supply in the US and a stringent visa regime to adversely impact earning.