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Information technology (IT) services provider Wipro Ltd has been on an acquisition spree. The latest addition to its portfolio is cybersecurity consultant Edgile LLC. Last week, Wipro announced that it would acquire Edgile for $230 million in cash. This move is in line with the company’s strategy to maximize growth via the merger and acquisition route. As such, the Edgile acquisition is a small piece in the overall scheme of things for the company.
At its analyst meeting in November, Wipro’s management said that cybersecurity is its focus area as far as acquiring and retaining cybersecurity talent is concerned. Of course, it helps that growth expectations from cybersecurity are high. Wipro has also acquired Australian cybersecurity company Ampion to expand its presence in the Asia-Pacific market. Wipro’s largest acquisition to date was in March when it acquired Capco for $1.5 billion, which is also focused on the cybersecurity business and has a presence in Europe and the US.
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While Wipro is walking the talk on acquisitions and its intention to capture the growing cybersecurity market, this inorganic growth comes with risks of poor execution. “We know that under the new CEO, the company has been trying to reorganize at various levels. They are moving from their core low-growth business to the high-growth business vertical of cybersecurity. We see recent acquisitions to take about a few more quarters to start showing on the deal wins front,” said an analyst with a multinational brokerage house requesting anonymity. “We do not see any particular risk from Edgile acquisition; however, since there are too many moving parts with a slew of acquisitions in the last one year and internal reorganization, we see execution as a risk for the stock,” he added.
To be sure, Wipro’s valuations are rich, given the stock has appreciated 81% in 2021, beating the Nifty IT index, which has gained nearly 57%. Based on Kotak Institutional Equities’ FY23 earnings estimates, Wipro’s shares trade at a price-to -earnings (PE) multiple of around 28 times. Larger peers Infosys Ltd and Tata Consultancy Services Ltd trade at PE multiples of 31 times each.
Wipro’s stock has seen a re-rating over the past year, indicating investors are largely capturing the positives of its management’s efforts to diversify from struggling verticals such as healthcare. However, analysts reckon Wipro’s valuations are pricey given that potential acquisitions in future could lead to margin dilution. Plus, execution risks persist.
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