Key points
Wipro's acquisition of US-based Infocrossing in an all-cash deal of USD 600 million is important strategically as it would considerably boost the company's capabilities in the infrastructure management service business. The acquisition would enhance Wipro's positioning in terms of bagging large-sized total outsourcing deals.
On the flip side, the deal appears to be expensive and would also dilute the earnings per share (EPS) over the next couple of years. Infocrossing has been valued at over 70x CY2006 reported net income and 52.2-55.6x CY2007 guided net income. Moreover, the incremental contribution to the consolidated earnings would be much lower than the yield on cash (USD 600 million outgo) and consequently result in a net negative impact of Rs 22 crore and Rs 81.5 crore in FY2008 and FY2009 respectively.
To factor in the impact of the acquisition of Infocrossing, we have revised downward the earnings estimates for FY2008 and FY2009 by 0.6% and 2.1% respectively. At the current market price the stock trades at 20.1x and 16.7x FY2008 and FY2009 earnings estimates. We maintain our Buy recommendation on the stock with a price target of Rs 648.
Wipro acquires Infocrossing for USD 600 million
In the biggest overseas acquisition by an Indian information technology (IT) service company, Wipro has signed an agreement to acquire Nasdaq-listed Infocrossing in an all-cash deal worth USD 600 million. The deal would be funded through cash on Wipro's books and would be effective from Q4 of FY2008. Infocrossing is a US-based IT outsourcing firm with five state-of-the-art data centres and an employee base of 900 professionals. Apart from its expertise in infrastructure management services, it offers integrated IT and business process outsourcing (BPO) services in the healthcare segment. In the last twelve months ended March 2007, Infocrossing reported revenues and net income of USD 232.4 million and USD 9.3 million respectively.
Acquisition rationale and benefits
The acquisition would significantly boost Wipro's technology infrastructure service (TIS) practice in terms of providing expertise and established client relationships in data centre management (server management) and managed service (hosting of applications) businesses. Moreover, the five data centres in the USA (four covering 65,000 square feet each and one spanning 33,000 square feet), and the ability to address the mainframe outsourcing segment would provide the required edge to Wipro. That's not all. With Infocrossing in its fold, Wipro would position itself as one of the largest Indian vendors (with combined revenue base of around USD 500 million) in the infrastructure management service space. Consequently, the acquisition of Infocrossing should considerably enhance Wipro's ability to bag large-sized total outsourcing deals.
but deal is expensive
Notwithstanding the strategic importance of the deal, the valuation appears to be expensive at 52.2-55.6 times the guided net income for the current calendar year and over 70 times the reported net income in CY2006.
and EPS dilutive
Even after assuming a 30% growth in the net income of Infocrossing in FY2008 and FY2009 (on a base of USD 9.3 million for twelve months ended March 2007), and taking into account that Infocrossing would get consolidated from Q4FY2008, the net impact would be of negative Rs 22 crore and Rs 81.5 crore in FY2008 and FY2009. This essentially means that the yield on the free cash on the books (related to the outgo of USD 600 million) would have been higher than the incremental earnings from the consolidation of Infocrossing's financials with effect from Q4FY2008. Moreover, the acquisition would drain out a substantial portion of the free cash of around USD 750 million on its books post acquisition of Unza, the Singapore-based consumer care company recently. This essentially means that the company would have to resort to debt in case of any more big-ticket acquisition in the near future.
Valuation
To factor in the impact of the acquisition of Infocrossing, we have revised downward the earnings estimates for FY2008 and FY2009 by 0.6% and 2.1% respectively. At the current market price the stock trades at 20.1x and 16.7x FY2008 and FY2009 earnings estimates. We maintain our Buy recommendation on the stock with a price target of Rs 648.
Wipro's acquisition of US-based Infocrossing in an all-cash deal of USD 600 million is important strategically as it would considerably boost the company's capabilities in the infrastructure management service business. The acquisition would enhance Wipro's positioning in terms of bagging large-sized total outsourcing deals.
On the flip side, the deal appears to be expensive and would also dilute the earnings per share (EPS) over the next couple of years. Infocrossing has been valued at over 70x CY2006 reported net income and 52.2-55.6x CY2007 guided net income. Moreover, the incremental contribution to the consolidated earnings would be much lower than the yield on cash (USD 600 million outgo) and consequently result in a net negative impact of Rs 22 crore and Rs 81.5 crore in FY2008 and FY2009 respectively.
To factor in the impact of the acquisition of Infocrossing, we have revised downward the earnings estimates for FY2008 and FY2009 by 0.6% and 2.1% respectively. At the current market price the stock trades at 20.1x and 16.7x FY2008 and FY2009 earnings estimates. We maintain our Buy recommendation on the stock with a price target of Rs 648.
Wipro acquires Infocrossing for USD 600 million
In the biggest overseas acquisition by an Indian information technology (IT) service company, Wipro has signed an agreement to acquire Nasdaq-listed Infocrossing in an all-cash deal worth USD 600 million. The deal would be funded through cash on Wipro's books and would be effective from Q4 of FY2008. Infocrossing is a US-based IT outsourcing firm with five state-of-the-art data centres and an employee base of 900 professionals. Apart from its expertise in infrastructure management services, it offers integrated IT and business process outsourcing (BPO) services in the healthcare segment. In the last twelve months ended March 2007, Infocrossing reported revenues and net income of USD 232.4 million and USD 9.3 million respectively.
Acquisition rationale and benefits
The acquisition would significantly boost Wipro's technology infrastructure service (TIS) practice in terms of providing expertise and established client relationships in data centre management (server management) and managed service (hosting of applications) businesses. Moreover, the five data centres in the USA (four covering 65,000 square feet each and one spanning 33,000 square feet), and the ability to address the mainframe outsourcing segment would provide the required edge to Wipro. That's not all. With Infocrossing in its fold, Wipro would position itself as one of the largest Indian vendors (with combined revenue base of around USD 500 million) in the infrastructure management service space. Consequently, the acquisition of Infocrossing should considerably enhance Wipro's ability to bag large-sized total outsourcing deals.
but deal is expensive
Notwithstanding the strategic importance of the deal, the valuation appears to be expensive at 52.2-55.6 times the guided net income for the current calendar year and over 70 times the reported net income in CY2006.
and EPS dilutive
Even after assuming a 30% growth in the net income of Infocrossing in FY2008 and FY2009 (on a base of USD 9.3 million for twelve months ended March 2007), and taking into account that Infocrossing would get consolidated from Q4FY2008, the net impact would be of negative Rs 22 crore and Rs 81.5 crore in FY2008 and FY2009. This essentially means that the yield on the free cash on the books (related to the outgo of USD 600 million) would have been higher than the incremental earnings from the consolidation of Infocrossing's financials with effect from Q4FY2008. Moreover, the acquisition would drain out a substantial portion of the free cash of around USD 750 million on its books post acquisition of Unza, the Singapore-based consumer care company recently. This essentially means that the company would have to resort to debt in case of any more big-ticket acquisition in the near future.
Valuation
To factor in the impact of the acquisition of Infocrossing, we have revised downward the earnings estimates for FY2008 and FY2009 by 0.6% and 2.1% respectively. At the current market price the stock trades at 20.1x and 16.7x FY2008 and FY2009 earnings estimates. We maintain our Buy recommendation on the stock with a price target of Rs 648.
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