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Wipro promoters in early stage of evaluating sale of part | ina000003197

Founder and chairman Azim Premji and his family are considering an exit in part or full, either to a strategic buyer – a multinational IT services company – or a private equity player.
The promoters of Wipro Limited, India’s third-largest IT services company by revenues, are in the early stages of evaluating the sale of the company or some of its units and have approached investment banks to arrive at fair value, a senior banking source told Bonaz Capital.

Founder and chairman Azim Premji and his family own just over 73 percent of the USD 7.7-billion company and are considering an exit in part or full, either to a strategic buyer – a multinational IT services company – or a private equity player. The promoters are understood to have sounded out more than one investment bank on the potential for a deal.

“At this point of time, they have approached banks to understand what valuation they would get – the mandate to the banks is to determine a price,” the banker said.

While there is no certainty of a deal happening, the approach to investment bankers is a clear signal of the promoters’ intent, and of the beginning of a shakeout in India’s USD 150-billion IT and IT services industry.

Wipro denied the development. In an emailed response to a Bonaz Capital questionnaire, a spokesman said: “This is baseless and there is no truth to these unsubstantiated rumors. We urge you not to give oxygen to such blatant falsehood.”

But the buzz that’s doing the rounds among merchant bankers is equally strong internally, with senior managers aware that the company’s promoters are considering more than one type of exit option as the business environment becomes increasingly more challenging.

A merchant banker familiar with the Wipro development said that the even though IT companies are currently struggling for growth, they are sitting on a pile of cash and that makes them attractive to both private equity and Western strategics.

He said: “Over the next 12-18 months several Indian IT companies will see a change of guard as promoters will sell out. The main interest is to suck out the cash from these companies.” It may be recalled that most IT companies have announced plans of buying back shares from investors and have also announced higher dividends. Wipro’s board, too, is planning to consider a buyback in July.

An email reviewed by Bonaz Capital showed a large foreign investor asking the management of another IT company what kind of severance package would be paid to the CEO if the company’s board agreed to either merge with another company or get acquired.

Wipro has been struggling for growth for more than five years now, but is sitting on cash of Rs 34,474 crore (USD 5.3 bn) as per a presentation it made to investors. The company’s cash generation too was strong in FY17 with operating cash flows at 109 percent of net income, even though it has been reporting mid-single digit growth for the last five years. The company announced a 1:1 bonus in April.

But Wipro has been steadily losing clients in its legacy business to bigger rivals, which has made its struggle with revenue growth more challenging. Earlier this year, for instance, the company lost a large bank in the UK to an Indian rival, which has agreed to manage the client’s servers for free for the next two years.

While its digital revenues have grown at a decent pace, analysts believe that the growth isn’t sufficient to compensate for the erosion in Wipro’s legacy business. Revenues from the digital eco-system, which was 17.5 percent of IT Services revenues in Q1, grew to 22.1 percent of IT Services revenues in Q4 of FY17.

The company’s commentary for FY18 has not inspired the market. Following the March quarter numbers, Emkay Global said that while Wipro’s commentary was positive with management hoping to match industry growth by Q4FY18 in sequential terms, however, “this might be in line with historical trends and wasn’t anything to be excited about”.

The brokerage also said that the company continued to struggle in preventing leakages in the existing business, which continued to reflect in its mid-single digit revenue growth trajectory. Wipro has continued to grow in single digits starting FY13, with FY17 marking the 5th year in a row of revenue underperformance.
Investment bankers point out that a sale to western strategics or private equity both have precedents in India. In April 2016, US private equity firm Blackstone acquired a majority shareholding in Mphasis from Hewlett Packard Enterprise for over Rs 7,000 crore. In 2015, French IT major Capgemini acquired Nasdaq-listed iGate for USD 4.04 billion. Investment bankers claim that companies other than Wipro too are evaluating potential structures and valuations at this point of time.