Wipro -Examining the upside case post recent underperformance: Kotak Sec

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Wipro (WPRO)
Technology
Examining the upside case post recent underperformance. Wipro’s recent
underperformance has opened up a historically high 15-20% PE discount to larger
peers TCS and Infosys. Even as relatively subdued revenue performance has a lot to do
with relative stock price and PE movement, we examine the basic E X P/E = P equation
to see if there is a case for a relook. While we retain Infosys and TCS as our top picks,
we believe Wipro is worth considering from re-rating and earnings surprise perspective.




Earnings upgrade and absolute PE re-rating present upside; relative PE discount could sustain
Exhibit 1 looks at the stock performance of Infosys, TCS and Wipro for the past one year, while
Exhibit 2 looks at Wipro’s historical P/E relative to Infosys and TCS. In the basic price (P) = earnings
(E) X price/earnings multiple (P/E) equation, upside to Wipro’s stock price could happen in three
scenarios

` Earnings upgrade. In our recently published note (see ‘FY2012E, top-3, 30% revenue growth?
Check’, dated Dec 1, 2010 for details), we argued for a potential EPS upside risk for Infosys and
TCS on the back of revenue upside possibility. Even as we expect Wipro’s revenue
underperformance versus peers to sustain for the next 2-3 quarters, upside to Street’s revenue
estimates for Wipro cannot be ruled out either. Essentially, while the Wipro’s revenue growth
gap versus Infosys and TCS could sustain, revenue growth for the entire pack could surprise on
the upside. We note that we build in 20% US$ revenue growth for Wipro (Global IT services) in
FY2012E versus 24.6% and 23.3% for Infosys and TCS, respectively. Exhibit 3 looks at the
consensus FY2011/12E estimates for the three companies.

` P/E discount narrows – relative re-rating for Wipro. This scenario boils down to
improvement in relative revenue performance. We emphasize here again, that in the current
environment, relative margin trajectory will follow relative revenue performance and hence,
Wipro will need to bridge the recent revenue growth gap versus the larger peers for the PE
discount to narrow. Even as we assign low probability to this event in the next 1-2 quarters,
favorable demand environment shifts (more broad-based growth versus BFSI-centric for a bulk
of CY2010E) and better execution of account-mining initiatives at Wipro could change things.

` Sector re-rating takes Wipro’s P/E higher even as PE discount to Infosys and TCS sustains.
Again, as argued in our Dec 1, 2010 note, we see good probability of this scenario. EPS
upgrade potential, good visibility for FY2012E, flight to quality, and/or a Re depreciation
scenario could drive PE multiple upgrade for the Tier-I Indian IT pack. Wipro would participate in
such an event even if the PE discount to Infosys and TCS sustains. We have seen this play out in
a small manner over the past one week.