Hold Wipro; target of Rs 605: Religare

Religare's research report on WiproWPRO has announced the acquisition of HealthPlan Services (HPS) for US$ 460mm in an all-cash deal valued at ~2x FY15 sales. HPS is the leader in the US individual consumer payer space (24% share) and connects payers to over 40 public and 150 private exchanges in that market. While the acquisition strengthens WPRO’s position in a growing US healthcare space, the deal is likely to be margin dilutive (50bps-80bps) in the first year. We maintain that Indian IT capital allocation has been weak, and amid slowing growth we expect inorganic activity to remain high among large-caps.Valuations at 2x FY15 sales seem slightly expensive considering HPS’s low EBIT margins and limited offshore ability. We expect the deal to be largely EPS-neutral in the first year. Typically, Indian IT acquisitions have been conservative (and EPS accretive); however, this deal focusses on growth over margins. Further, it exhibits the pressure on WPRO for searching newer growth verticals/drivers, even at the cost of margins. Successful integration will be the key, in our view. HOLD.

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