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Wipro (WPRO)
Technology
Confident of strong growth – preparing to grab its fair share. Two key takeaways
from our recent set of meetings with Wipro management – (1) macro uncertainty aside,
demand environment continues to be buoyant; demand fulfillment is the only
constraint, and (2) recent revenue underperformance versus peers has driven a lot of
soul-searching and the company is taking initiatives to grab its fair share (if not more) of
industry growth. We remain positive on the Tier-I Indian IT services pack.
Acknowledges relative underperformance; mostly a mis-read of demand recovery strength
As also highlighted in one of our earlier notes, Wipro attributes its recent revenue
underperformance versus the peer group (TCS, Infosys, and Cognizant) to three factors:
` Poor/late assessment of the strength, pace and nature of demand recovery. Even as
Wipro was amongst the first to assess the downturn correctly, taking the lead on cost-reduction
initiatives, the company remained skeptical about pace and sustainability of the demand
downturn for a few months too long. This resulted in the company losing out on or at times
letting go of the short-term tactical projects at the beginning of the uptrend; competitors, who
participated more actively, are reaping the benefits of flow-through business.
` Delayed course correction on the supply side. A direct consequence of the above was that
Wipro continued to manage its bench with a slow path to demand recovery in mind. Sharp
demand recovery, however, led to a sudden and sharp increase in attrition rate across the
industry, making immediate bench correction difficult.
` Relatively weak ‘real estate’ (top client base). The initial phase of growth was nearly
completely driven by large BFS clients, and M&A opportunities, areas of relative weakness for
Wipro. The presence of Telecom OEM accounts in the top-10 did not help either. Even as the
company does not agree completely with our assessment, we also attribute revenue
underperformance to weaker-than-peers account mining at Wipro.
Corrective steps underway; corroborates buoyant demand environment
Even as the company is questioning certain structural issues like its bench philosophy (absolute
versus percentage bench) and account mining weakness, immediate corrective actions on the
supply side have been taken. Wipro also corroborated our view on continued strength in the
demand environment for offshore IT services, while also indicating strong possibility of a pricing
uptick. Most importantly, Wipro expects to compete on an even keel and grab its fair share (if not
‘more’) of demand in CY2011E. While we do not subscribe to the ‘more’ view (and hence have
Infosys and TCS as our top picks), we believe the current valuation gap amply reflects the same.
Other highlights from our meetings
` Wipro has kicked off its campus recruitment program earlier this month. While the
company did not share further details, it did indicate that it is looking at hiring a crop of
~100 engineers from Tier-I institutes (IITs and the like) with a view of creating a crop of
future leaders from this pack.
` Three top priorities for the company’s HR – (1) drive retention; attrition rates have
started trending down in the past couple of months but the company remains cautious
on this front, (2) focus on talent supply chain – looking closely at its hiring forecast engine
as well as bench philosophy (absolute versus % bench), and (3) strengthen front-end key
accounts sales organization – as highlighted earlier, one of Wipro’s major areas of relative
weakness as compared to peers has been the performance of its top clients.
` Positive outlook on margins – expects margins to trend north after the weak Sep 2010
quarter; benefits from better Re/US$ realization (as proportion of old hedges at 41
reduces further) to provide an additional fillip (to the extent of 100 bps, in our view) on
FY2012E margins.
` Wipro termed the pricing environment as stable with an upward bias and indicated
instances of out-of-turn price increases in the recent months.
` Expects ETR for FY2012E to be ~200 bps higher than FY2011E; this would translate
into an ETR of ~19% for FY2012E, versus our current estimate of 21%.
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