Wipro Performance Highlights:: 2QFY11 Result Update :: Angel Broking

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Languishing peers: For 2QFY2011, revenues registered dismal 6.8% qoq growth
to `7,731cr v/s our estimate of `8,130.3cr. This muted performance came on the
back of moderate volume growth of 6.6% qoq in global IT services, IT products
de-growing by 9.8% yoy and lower exchange rate realisations in out-of-themoney
cash flow hedges. Wipro continues to be an underperformer in the tier I IT
pack, which registered 7-11% qoq growth in volumes.

Margins slump: EBITDA margins slumped by 193bp qoq to 20.7% (v/s our
expectation of 30bp qoq dip) due to promotions, grant of restricted stock units
and lower exchange realisations.

Muted guidance for 3QFY2012: The company has guided IT services revenues at
US $1.32-1.34bn, a mere growth of 3.5-5.5% qoq. This is highlighted from the
fact that the company hired only 2,925 employees in 2QFY2011, much lower
than peers with net additions of 5,000-10,500 employees.

Outlook and Valuation: The company continues to be a laggard in the tier-I IT
pack because of its high exposure to the telecom, media and technology verticals
(25% of revenues). Over FY2010-12, we expect the IT services revenues to log
19.5% CAGR in dollar terms and lower in INR terms at 16.3% CAGR due to lower
exchange realisations on account of the out-of-the-money cash flow hedges than
spot. We expect consumer care and lighting products and IT products to log 21%
and 12% CAGR, respectively. We recommend an Accumulate on the stock, with a
Target Price of `465 and target multiple of 18.7x, which is at its historical
discount of 15% to Infosys’s target multiple of 22x.


3QFY2011 guidance muted
The poor net hiring and weak guidance for 3QFY2011 revenues of
US $1.32-1.34bn, a mere growth of 3.5-5.5% qoq points at muted outlook.
Outlook and Valuation
The company continues to be a laggard in the tier-I IT pack because of its high
exposure to the telecom, media and technology verticals (25% of revenues).
Pertinently, the other tier I companies are witnessing broad-based and strong
growth across clients. We expect the company’s underperformance on the volume
front to persist going forward too because of its client portfolio, which lacks an
upbeat outlook - muted guidance of 3.5-5.5% qoq for IT services while peers have
an upbeat outlook.
We expect the IT services revenues to log 19.5% CAGR (in dollar terms) and lower
16.3% CAGR in INR terms due to lower exchange realisations on account of the
out-of-the-money cash flow hedges than spot. Among the other segments, we
expect consumer care and lighting products to register 21% CAGR and IT products
to post 12% CAGR over FY2010-12.
Going ahead, we believe that the company will be able to absorb incremental
impact of grant of RSU’s on the back of margin levers like lower general and
administration expense and abating attrition helping utilisations with promotions
behind. We expect EBITDA to post 16.4% CAGR and PAT 14.7% CAGR over
FY2010-12.
On the valuation front, at current levels the stock is trading at 17.4x FY2012E EPS
of `24.8. We recommend an Accumulate on the stock, with a Target Price of `465
and target multiple of 18.7x, which is at its historical discount of 15% to Infosys’s
target multiple of 22x.