Wipro bets big on inorganic growth
Under new CEO, the IT firm has acquired 10 entities including some big ticket ones so far; Despite near-term margin pressure, Wipro hopes to push revenue growth in a higher trajectory as it relies on strategy of acquisitions
Size Matters in Acquisition Binge
- Experts believe acquisitions are necessary to plug the gaps in capabilities, expand into newer areas
- But large acquisitions or too many acquisitions can drain margin profile, drag RoIC and dilute earnings
- ICICI Securities says Wipro has chosen a bit riskier path for growth as compared to peers
- Attrition still remains high at 24%
- Cost to backfill attrition is high
- It'll impact margins
The company is building up capabilities through acquisitions. Its focus on consulting makes stands out as a distinct approach under the new CEO
- Pareekh Jain, Founder, Pareekh Consulting
Bengaluru: IT services major Wipro is increasingly looking at inorganic route to push growth and plug the gaps in capabilities. Experts, however, warned that following the acquisition route has its own set of risks though the Azim Premji-promoted firm performed well in FY22 in organic growth term.
Last month, Wipro said it would buy two companies - SAP consulting firm Rizing for $540 million and consulting and programme management company Convergence Acceleration Solutions for $80 million. Including these latest acquisitions, Wipro has now acquired 10 entities for about $2.6 billion under the new CEO, Thierry Delaporte.
"Wipro is taking a different approach in pushing growth. The company is building up capabilities through acquisitions. Its focus on consulting makes stands out as a distinct approach under the new CEO," said Pareekh Jain, an IT outsourcing advisor & Founder of Pareekh Consulting.
However, many experts also pointed out that acquisitions would have its own set of challenges to push growth.
"We believe acquisitions are necessary to plug the gaps in capabilities and expand into newer areas, but large acquisitions or too many acquisitions can drain margin profile, drag RoIC and dilute earnings," ICICI Securities said in a report.
"We believe Wipro has chosen a bit riskier path for growth as compared to peers," the brokerage firm added.
In the quarter ended March 2022, Wipro reported in-line growth in IT services at 3.1 per cent sequential growth in its revenues. For the whole fiscal, company's organic growth also remained impressive.
However, growth forecast of 1-3 per cent (in constant currency term) in revenues was seen as a tepid guidance. Also, supply side pressure and acquisitions are likely to dilute operating margin of the Bengaluru-headquartered IT firm in FY23.
"Wipro will have more headwinds on margins going forward as attrition still remains high at around 24 per cent with cost to backfill attrition is high and will impact margins. Even utilisation is high at 85 per cent. Also, Wipro's travel &facility costs are still at the lower end and are expected to increase further," ICICI Securities noted.
However, despite the near-term margin pressure, Wipro will be able to push revenue growth in a higher trajectory if its bet on inorganic route pays up.
"Each leadership has its own set of plans to drive growth. In Wipro, it seems like a lot of focus on consulting and building up capabilities," said Jain of Pareekh Consulting.