Wipro risks falling behind peers in a strong recovery phase :: JPMorgan

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Wipro Ltd.
▼ Neutral
Previous: Overweight
WIPR.BO, WPRO IN
Inconsistent revenue patch resurfaces; Wipro risks
falling behind peers in a strong recovery phase



In a quarter (Sep 2010) in which TCS and Infosys grew revenues at a doubledigit
sequential rate (Q/Q), Wipro’s revenue growth for global IT Services
was only 5.7% Q/Q, about half that of peers. This is disappointing, as the
demand environment is robust and we believe growth for larger companies is
limited only by their goals, planning, and ability to execute. We think Wipro
needs to improve on all three dimensions to draw level with peers.
Despite repeated pronouncements and investments in its mega/gamma strategy
intended to increase spending from its marquee clients, the contribution from key
clients is still low and significantly trails that of peers, pulling down growth. We
reduce our estimates and downgrade our rating to Neutral. We expect the
stock to trade sideways until Wipro takes care of some of its systemic issues.
• Disappointing metrics at first glance: Global IT revenue of US$1,273MM, or
US$1,261MM (4.8% growth Q/Q) in constant currency revenues terms, was in
line with guidance, but in the context of peer performance was disappointing.
Margins for global IT declined by 230bp Q/Q to 22.3% from 24.5% - again
a performance that is below expectations. We believe that during the
downturn, Wipro optimized costs (including through involuntary attrition) and
that has run its course as salary increases have rebounded to pre-recession
levels, and the company has had to correct this impacting margins. Hereon,
margins will depend on revenue growth; we believe that Wipro’s progress on
this score needs to improve.
• Client metrics – still one step forward and two steps back: Wipro has lost
one US$100MM+ customer and now has just one customer in this bracket
(Infosys by comparison has 10). Infosys derives 63% higher revenues from its
top 10 clients than does Wipro, which explains 75% of the overall revenue
difference between the two. Results of Wipro’s execution of its mega-gamma
client strategy towards its strategic clients have been inconsistent, in our view.
• Investment view: downgrade to Neutral: By our estimates, Wipro’s revenue
growth will be significantly lower than that of Infosys/TCS in FY11 by 8-9%
points. We expect the discount in Wipro’s valuations relative to peers to widen
further to 15%. We roll forward our Mar-11 price target to Sep-11 and raise our
price target slightly to Rs470 (time adjustment). We see the stock trading
sideways (or absolute upside being limited) over the next 12 months. We
prefer TCS (OW) and Infosys (Neutral), in that order and recommend
making a switch to these two names.