Wipro - Under-par quarter; course correction required.:: Kotak Sec,

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Wipro (WPRO)
Technology
Under-par quarter; course correction required. Wipro’s sub-optimal account mining
versus the peer set manifested in another quarter of below-par revenue performance.
The company reported 5.7% qoq growth in US$ revenues, underperforming TCS and
Infosys, and missing our estimate by 0.8%. Revenue shortfall and lower Re realization
also impacted margin performance. We retain our ADD rating on relative valuation gap.
We remain positive on Wipro’s capabilities; execution requires improvement.


Another quarter of weaker-than-peers revenue performance; reflects account mining challenge
Wipro reported 5.7% qoq growth in US$ revenues for the Global IT services business to US$1.27
bn, falling 0.8% short of our expectations. More importantly, revenue underperformance versus
peers TCS, Infosys and CTS continues. We have highlighted Wipro’s weak account mining as a
concern several times, and the same manifested even stronger this quarter with the company
falling behind peers on this parameter even further. Also of concern is Wipro’s inability to grow
faster than peers in its leadership segments, an area of strength for peers. We dwell deeper on
both these aspects later in the note.
Revenue underperformance reflects in margin underperformance as well
Wipro’s Global IT services margins, rather unexpectedly, fell 230 bps qoq to 22.2%, versus our
expectation of an 80 bps drop. Even as a part of margin pressure can be explained by lower
Re/US$ realization qoq (an anomaly driven by Wipro’s cash-flow hedge accounting practice and
the adverse qoq swing in quantum of maturing hedges), we attribute the rest of it to sub-par
revenue growth. Revenue underperformance in a high-growth, high-attrition industry environment
has a margin bearing as companies need to keep compensation levels (rising industry-wide)
marked to the market. For example, Wipro took a 130 bps qoq RSU expensing margin hit in the
Sep 2010 quarter as it granted options to key employees to drive better retention.
Cut estimates on revenue/margin underperformance; retain ADD on valuation gap
We see Wipro underperforming Infosys, TCS and CTS on revenue growth in FY2011E; more
importantly, failure to address account mining issues could sustain revenue underperformance in
FY2012E as well. Also, with cost-reduction programs initiated during the downturn having run
nearly full-course, margin performance hereon would also be a function of revenue growth. These
factors, and a stronger Re assumption drive a 5%/5.6% downgrade in our FY2011/12E EPS
estimate to 21.1/24.3. We now build in 18% and 20% revenue growth for Wipro Global IT
services in FY2011E and FY2012E, respectively, and lower our margin assumptions by 70 bps and
40 bps. Retain ADD rating with an unchanged target price of Rs465/share; our conviction level on
Wipro is lower than that on peers, but valuation discount does not justify a rating cut.