Thursday, August 9, 2007

Merrill Lynch neutral on Wipro

Merrill Lynch has recommended neutral rating on Wipro due to slower growth than peers' on sluggish telecom OEM clients.

Strategic acquisition, cross-selling to be key

Wipro is to acquire Infocrossing (NASDAQ:IFOX) by tender offer (USD 18.7 per share) in an all-cash USD 600 million deal at a reasonable CY06 EV/sales of 2.6x, in our view. Company expects it to be EPS accretive from day one post debt redemption. Unlikely to impact our FY08E EPS, could lend marginal <5% upside to our FY09E. We think value creation lies in leveraging IMS/BPO assets and crossselling other services. Deal closure likely in Dec qrt.

To add to IMS/BPO; Sticky non-linear revenue streams

Infocrossing derives over 60% revs from IMS, 20% from healthcare BPO. It brings expertise in hosted & managed IT infra services, mainframes and healthcare BPO platform. It takes high growth IMS revs to 20% up from 11% in FY07. Key clients like Ford, CBS, Novartis present cross-sell potential. 25% clients have over USD 5 million run-rate. About 90% revs likely annuity. It also adds non-linear revs through element based and transaction pricing.

Revs/margins to grow on higher utilization/cross-sell

Organic rev growth sub-15%, EBIT margins at 11% and net margins at a mere 3.7% in CY06. In 2-3 years, Wipro expects IMS revs to be over USD1billion and EBIT margins to trend to Wipro Global IT's levels of 20% (MLe), led by higher capacity utilization, currently at only 50%. Net margin to improve from lower interest outgo post debt redemption and lower taxes as offshore picks up.

Neutral rating given concern on telecom OEM outlook

Our Neutral is due to slower growth than peers' on sluggish telecom OEM clients.

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