Wipro an outperformer; target Rs 655: Kotak Securities

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Wipro an outperformer; target Rs 655: Kotak Securities

Kotak Securities has recommended an outperformer rating on Wipro with target price of Rs 655.

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Kotak Securities has recommended an outperformer rating on Wipro with target price of Rs 655.

Kotak Securities report on Wipro:

Wipro has announced an all cash acquisition of Unza Holdings, a Singapore based FMCG company, for USD 246 million. In addition Wipro would assume debt of USD 45 million. The acquisition is consistent with Wipro' s inorganic growth strategy; however utilization of funds generated from IT services business into large acquisitions in non-IT businesses may not be appreciated by investors. We however maintain our Outperform rating noting that (a) organic revenue growth of Global IT services business will likely be higher than FY2007 and ahead of street expectations (b) more levers than peers to protect operating margins and (c) faster ramp up from SEZs will likely lead to a lower tax rate increase in FY2010. Valuations are attractive; maintain end March 2009 DCF based target price of Rs 655.

About Unza

Unza is South East Asia's largest independent manufacturer and marketer of personal care products. The company has operations in 40 countries and has wide portfolio of personal care brands such as Enchanteur, safi, Romano and Izzi. The company achieved revenues of USD 166 million, operating profit of USD 20 million, and net income of USD 13 million for the year ended April 2007. The company has grown by 15% in the previous year.

Acquisition values the company at 20x ttm earnings

The acquisition price of USD 246 million, values Unza at 20x ttm earnings. Wipro will also assume debt of USD 45 million as a part of this transaction. The acquisition addresses high growth markets, especially China and presents significant opportunities for cross sell. The combined consumer care business will have revenues of Rs 15 billion (from Rs 8.2 billion in FY2007). From an overall perspective, the acquisition adds 3.6% to Wipro's FY2007 revenues and 2% to FY2007 EBIT. We believe that the transaction would be EPS neutral in the first year excluding amortization of intangibles and EPS negative including amortization.