Limited upside, risks increasing
Expect Wipro to lag peer group revenue growth
Wipro has lagged its peer group in sequential revenue growth for the
past six quarters, and we expect more of the same in FY11F too — its
revenue growth of ~19% falling short of the 22-25% growth we expect
for the remaining top-4 Indian IT vendors.
Greater dependence on lagging segments
In addition to being more dependent on lagging verticals like Telecom
and Manufacturing (42% of revenue), Wipro is ceding growth to
competitors like HCL Tech in its largest service line, IMS. Its
incremental revenue in IMS has lagged that of TCS and HCL Tech for
the past five quarters. Moreover, lower revenue contributions from
BFSI – a key growth driver – are a factor in Wipro’s slower growth.
Operational efficiencies have played out, risks ahead
As we see it, Wipro runs a tight ship — it has near historical peak
utilization, no planned wage hikes in FY11F (except promotions to
20,000 people and RSUs to management), depends on contractors
significantly (which turn to permanent jobs during up-cycles) and has
raised fixed bid proportions significantly. In this scenario, we believe
high attrition could lead to delivery risks and possible out-of-turn wage
hikes in FY11F.
Limited upside triggers; downgrading to NEUTRAL
We believe slower comparative growth, greater risk amid continued
supply-side pressures and higher taxation increases (3.5pp increase
vs 1.7pp for Infosys) will translate to a lower earnings CAGR at
Wipro than at Infosys (14.7% vs 16.7%) for FY10-12F. We downgrade
to NEUTRAL and reduce our price target to Rs470, based on 18x
one-year forward earnings.
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