06 March 2021: Why Wipro Stock is Falling? Reasons behind Wipro Stock Fall

If you have invested your money in Wipro, today might have had come in as a real shocker for you. It sure is strange for a company that has been consistently providing great returns to fall all of a sudden but this fall seems to have been thought of by the company, anticipated, calculated in an attempt of a long-term benefit.

 

Why Wipro Stock is Falling? Reasons behind Wipro Stock Fall

Wipro very recently acquired a London-based company, Capco for $1.5 Billion. Although it seems great to see Wipro taking efforts for the expansion of its business, the market seems to reflect its concern upon Wipro’s new ventures. Wipro had a 52 week-long run of being consistently on the rise which ended today with a fall of approximately 10%.

 

Wipro very recently in July 2020 appointed a new CEO, Mr. Delaporte who was also a Cap Gemini COO and has a Consultancy background. The $700 Million revenue company Capco is also majorly focused on consultancy services. However, for the price that Wipro has paid for the acquisition, Capco contributes less than 10% as its annual revenue when compared to that of Wipro which is $8.4 Billion. The question here being raised is that was it wise for Wipro to acquire this company being aware of what it costs and how much it’ll contribute.

 

Companies mainly depend on two kinds of growth for the expansion of their business. The first one is organic growth where the company itself acquires clients and grows its business. The second type is inorganic growth where a company acquires another company hence indirectly acquiring its clients too. In recent years the scope of organic growth has been on a decline because of a lot of competition and a lot of bigger companies already having their acquisition of the market. On the other hand, inorganic growth is a win-win situation for both sides as the company acquiring acquires newer clients for a price whereas the company being acquired trades its gained clients for a price.

 

The funding for this $1.45 Billion acquisition done by Wipro will come partly from its Equity side and partly from its debit side. The company hasn’t made the percentage of contribution to the funding yet but Wipro right has Cash and Cash Equivalent assets of $5.2 Billion, so funding a part of $1.45 Billion makes sense as well as is doable. The concern that still remains intact is how much debt will the company be able to raise for the debt part payment of the acquisition.

 

The market however looks at this trade from a different point of view and has its own concerns. Capco’s Optimum Profit Margin (OPM) right now lies in the range of 11-14% which when compared to that of Wipro are 18-21%. Since the margin of difference between Capco and Wipro’s annual revenue is large and this resulting in less than 10%

Contribution in the total revenue from Capco is lesser than 10%, so the Operating Profit Margin (OPM) of Capco might affect the Operating Profit Margin (OPM) of Wipro diluting it by a factor of 0.5-1%.

 

Although Wipro played it’s turn anticipating a long term benefit in the business looking at the similarities between Capco and that of Wipro’s CEO Mr. Delaporte, market in the real life the scenario sees it as a concern. Being majorly focused on consultancy services, Capco should have had been having a better Optimum Profit Margin which turned out to not be the case here, the only boon of this trade seems to be synergy that will be developed amongst these companies which will amplify the growth by a deciding factor.

 

For this trade to be successful, the integration of these two companies needs to work out smoothly. With both companies having CEOs from similar consulting backgrounds, this seems to be working out for the benefit of the company and might eventually be the breakthrough Wipro had been looking for. The long term PE ratio of Wipro is 16-17 and currently it is at 24, which tells that this is a very premium valuation. In a short term, acquiring an English company seems to be the only hurdle in the way of developing a synergy which the market also sees as a concern but once that gets dealt with, this trade shall turn out in favor of the development and expansion of the companies.

So these was the reasons behind Wipro Stock Fall what you guys think comment and let us know your thoughts on this