Wipro's share price has outperformed its peers in the last year — but analysts are still cautious about giving it a 'buy' rating

• Wipro’s share price is down more than 3.5% after the Indian IT services major announced its acquisition of London-based consultancy firm Capco.
  
• Analysts are wary that integrating the company may prove to be a challenge for Wipro in the near-term and long-term.
  
• So far, Wipro has been top performing IT stock compared to its peers over the last one year.
  

Even though Wipro has been the best performing IT stock on Nifty over the last one year, nearly doubling in value, analysts are still treading on the side of caution. And, its latest acquisition has just added to the street’s anxiety about the Indian IT services giant.

Source: Nifty IT

Wipro’s rally in the last one year can be attributed to the switch in the company’s strategy after its new chief executive, Theirry Delaporte, came in. “While everything appears perfect on paper, we do realise the strategy is easier formulated than implemented,” said analyst firm Phillip Capital in its report dated November 2020.

Source: Respective reports

With the Capco deal, Wipro’s share price went for a dive after its largest ever acquisition worth $1.45 billion. “The execution risk is further aggravated by a weak growth performance from Capco over the last two years – even after adjusting for the drag due to COVID-19,” said Motilal Oswal in its report dated March 4. Its share price is down over 3.5% at 1:00 pm on March 5.

According to Nomura, even though the Wipro-Capco deal adds presence in the consulting businesses, it has typically been a less successful venture for Indian IT services companies.

The global brokerage is also wary that the valuation of the deal is a bit on the higher side and will impact margins in the long run since consulting requires heavy onsite presence. “Ongoing restructuring and investments would take a toll on margins in the near term, eating away at gains from operational efficiency. Even lower margins from acquiring Capco would further put pressure on the bottom line,” added Motilal Oswal.

The deal between Wipro and Capco is likely to be finalised by June 2021, subject to regulatory approvals.

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