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Wipro Ltd. Neutral
WIPR.BO, WPRO IN
Biting the bullet by appointing a new CEO; we
advocate patience; stay Neutral as near-term earnings
surprise unlikely
• Change of management the most striking feature of Wipro's 3QFY11
results. Wipro's 3QFY11 results made news more for its decision to replace the
joint CEOs of IT-Services (Mr. Girish Paranjpe and Mr. Suresh Vaswani) with
Mr. T.K. Kurien (who has served the company in various leadership positions)
than the results per se. We believe that the track-record of systematic underperformance
relative to peers TCS/Infosys justifies the replacement (its revenue
growth has lagged peers for the past 7 quarters). This is a secular lag.
• We expect changes ahead but advocate patience; results not likely in FY12.
To be sure, propelling Wipro to a higher-growth trajectory will take time given
its size (its revenue growth is still a good.6-7% points lower than TCS/Infosys).
There could be disruptions in the near-term (reflected in change/rotation of
management personnel/structure or both) which we must be prepared for as new
leadership decides its path and strategies. We identify some of the burning
issues herein. We believe that the new CEO must assure stability once the
envisaged changes have been made (as sustained performance cannot be
achieved when BU heads/middle-management perceive insecurity/instability).
• 3QFY11 results below expectations primarily on account of flat margin
performance (Q/Q) on IT-Services. We expected EBIT margins for ITServices
to be about 50 bps ahead of 2QFY11's levels of 22.2% as Wipro came
off a wage hump in the previous quarter (Sep-10) in which it incurred costs of
salary hikes and restricted stock/option. Low utilization (on account of low
volume growth) is the reason for the IT-Services margin miss. Revenue miss is
on account of performance of IT products (down 13% Q/Q) but this does not
affect profitability being a low-margin division.
• Consensus expectations quite moderate for FY12; stock downside seem
protected but upside still some time away. Consensus builds in lower revenue
growth expectations for Wipro than for peers (TCS/Infosys) each year through
FY11-13 (6-9% lower in FY11, 5-6% lower in FY12 and 3% lower in FY13).
Success of the change in guard can potentially reflect in FY13 upside surprise.
• Investment view: Near-term stock triggers unlikely. The issue with Wipro is
less with its margins; it is more to do with the top-line trajectory. We
believe that investors must be patient for no professional can accelerate the
growth trajectory of a company of Wipro’s size quickly; it needs time. Remain
Neutral on the stock. Valuations at 19.6x P/E 12 represent a ~15% discount to
our benchmark TCS, which we believe is deserved. TCS (OW) remains our
top pick in the sector.
A multitude of issues facing the new CEO including an
altogether different scale
First, a brief introduction to the new CEO. Mr. T.K Kurien brings a proven track
record to the role of the CEO though the scale of leadership expected of him now is
of a much greater order of magnitude than he has displayed within Wipro in the past.
Prior to his ascension, he was the president of the newly created non-IT initiative
(eco-energy) for just about 9 months. Most notably, as the head of Wipro's BPO
division, he oversaw the transformation of this practice from a low-margin voicedominated
business to a higher-value/margin, transaction-processing led one (EBIT
margins of Wipro's BPO is higher than Infosys' BPO margins). He has also headed
the telecom segments, consulting and large program management group in the past.
That said, studying the profile of Mr. T.K. Kurien’s responsibilities at Wipro in
the past, we believe that he has not had responsibility in the past for more than
10% of Wipro's revenues and that was when Wipro was smaller than now.
Clearly, the scale of the task before him is significant and altogether different.
Wipro’s underperformance in the past reflects several points to a systemic deficiency
in (a) management structures (accountability does not always get fixed in the joint-
CEO structure), (b) employee engagement (for instance, witness the much higher
attrition at Wipro's IT-Services group over a period of time and inability to expand
the pyramid) and (c) client management (account mining structure does not deliver as
well as peers). We believe that the decision is the right one though we were
surprised by the suddenness of it evidenced by the new-CEO's admission that he
is yet to deep-dive into the company's issues/difficulties; let alone formulate a
plan of action to deal with them.
We identify below some of the systemic issues (among other unlisted ones) that
the new CEO will have to contend with:
Issue no. 1: Frequent management changes disturb the
rhythm
Cognizant and TCS tell us that their business heads and senior personnel have been
largely wedded to their domains (be they vertical and horizontal) for well over a
decade and that is a factor in providing customers a sense of comfort and assurance
of continuity. Studying Infosys’ management structure over the last three years, we
note that the primary changes relate to additional responsibility for management (e.g.
members of the executive council), not a change in core responsibility with few
exceptions (likewise for TCS).
In contrast, we can identify at least ten verticals/horizontals/functions (such as
strategy) in Wipro in the past three years where leadership has changed hands either
on account of senior management departures or rotation (see table 1 for the
changes/rotations in the last one year alone). In several such cases, the leader is new
to the reassigned domain. This might be good to provide refresh to management but
we believe that this takes some getting used to both for the new person in charge as
well as for the team. In our view, what should ideally have been a period of
acceleration in certain well-functioning business units is possibly reduced to a period
of consolidation and what should have been a period of consolidation is now a period
of stability/modest uptick.
Thus, it becomes imperative for the new CEO to assure stability once the initial
round changes/rotation of personnel has been rung in. This cannot be an
ongoing exercise.
• Delay in integrating domain intensity into the relationships as opposed to
technology and seemingly poor prioritization of accounts and accordingly
allocation resources.
We think it will be difficult for Wipro to match peers on volume growth on a
consistent basis unless it addresses the issues we identify above. For a company of its
size, the quality of growth could improve only with larger sizes of client accounts.
Growth that primarily depends on primarily increasing client count of USD 30-40
mn size is decidedly inferior and less scalable to one that accrues from cultivating
much larger account sizes. Cognizant’s top-5 and top-10 clients yield 58% and 44%
more than Wipro’s top-5 and top-10 accounts despite comparable overall size. All of
Infosys’ higher revenues than Wipro in FY09 and FY10 come from the top-10
clients, whereas 50% of TCS’ higher revenues than Wipro come from top-10 clients.
Wipro’s client approach is still primarily hunting- and limited mining-led.
Essentially, its market-facing approach needs to be more intensive and in-depth
rather than expansive.
Issue no. 3: Management of the supply-side has been
shortsighted
For the year-ended FY10, Wipro’s involuntary attrition in IT-Services stood at 6.2%
(4x TCS and 2x Infosys). Also, as per our tracking, despite its size, Wipro does not
enjoy the prime slot status in several of the engineering campuses it hires from where
Cognizant, Infosys, TCS and MNCs such as Accenture/IBM also hire.
In the Dec-10 quarter, its attrition in IT-Services alone stood at 23.9% (quarterly
annualized), rather high compared to peers (Infosys’ quarterly annualized attrition
rate stood at 18.8% but that included BPO, excluding which it was ~17%; (see table
1).
Table 2: Wipro's employee attrition (in just IT) for Dec-10 is much higher than that of peers*
Wipro 23.9%
Infosys 18.8%
TCS 17.7%
*Note:.For peers this includes BPO, excluding which their attrition would have been even lower and Wipro’s gap
would be even wider (BPO attrition normally about 2x IT-Services)
Source: Company reports and J.P. Morgan estimates
Behind the curve in keeping with wage inflation; more variability in pay can be
injected to manage this. We think Wipro has also been behind the curve in giving
salary hikes and when it did (as in February 2010), the average offshore pay-out hike
was just 8-10% (as against 14-15% by peers two months later in April 2010). To
some extent, the company has corrected this with a promotion-based hiked effective
July-10 which provides another 4%. However, we note that the last offshore wage
hike prior to Feb 10 happened in Aug-08 (18 months back, 8-10% increase on that
occasion as well).
In our view, too much tightening of the supply-side in favor of margins during the
downturn has resulted in subsequent, high attrition. In the current environment
which is constrained by supply and not by demand, high attrition if unchecked
potentially results in lost revenues (though it has not happened in 3QFY11 as
utilization was sub-par). Some of the increase in wage could be made variable as
TCS has effected.
3QFY11 Highlights
• IT Services revenues were at $1,344 million, up 5.6% Q/Q. In constant
currency terms, IT services revenues grew 4.1% Q/Q to $1,325 million,
which is in line with guidance range of $1,317-1,343 million. IT Services
revenues increased 19.3% Y/Y in 3QFY11, which is significantly below
peers.
• IT services volumes showed a tepid 1.5% Q/Q increase, primarily driven by
4.0% increase in onsite volumes, while offshore volumes were up only
0.5%. On volume growth, Wipro has lagged behind peers, with HCLT,
TCS and Infosys reporting 6.5%, 5.7% and 3.1% volume growth,
respectively.
• Energy and Utilities grew 16.5% Q/Q, the only vertical reporting double
digit growth. Financial Services and Manufacturing also exhibited above
average revenue growth of 7.1% and 6.4%, respectively. Healthcare and
Services had a revenue decline of 3.6%, while Retail & Transportation and
Technology, Media & Telecom grew 5.1% and 3.1%, respectively.
Management plans to focus on specific growing verticals like BFSI,
Healthcare, Energy and Utilities and Retail in the coming quarters.
• Revenues from the top 5 and top 10 clients were up 5.6% Q/Q, in line with
non top-10 clients' revenue growth. Wipro continues to struggle in mining
top clients effectively, substantiated by the fact that the company
generates only 19.2% of total revenues from top 10 clients, compared to
25.7% for Infosys and 29.9% for TCS (in 3QFY11). Infosys derives 58%
higher revenues from its top-10 clients than Wipro, which explains more
than 60% overall revenue difference, while Infosys' revenues from non top-
10 clients are only 8% higher than Wipro.
• Pricing was strong with blended pricing expanding 3.0% on the back of
strong offshore pricing growth of 3.7%, after remaining flat/down for 4
straight quarters. Onsite pricing witnessed a modest increase of 0.6%.
• IT Services headcount increased by 3,591 (net) compared to 2,975 last
quarter. Wipro added 16,745 employees in its IT Services business in CY10.
The company expects employee pyramid to marginally shift to freshers in
the next few quarters.
• Global IT Services' attrition (voluntary and involuntary) was high at
23.9% despite meaningful wage hikes, on annualized quarterly basis.
BPO quarterly attrition was 14.2%, flat from last quarter. The high attrition
rate may translate into lost business if not contained and would continue to
pressure utilization.
• Wipro new client additions continue to be strong as the company added
36 clients in 3QFY11 following 29 clients last quarter. Happily, US$1+
million accounts increased to 433 from 425 last quarter; following a
decrease of 9 clients in 2QFY11. There was only one US$100+ million
customer on TTM basis, unchanged from last year, but management
suggested that on a quarterly annualized basis, 3 customers have crossed the
threshold and four other are close, in $95-100 million range. However, total
number of active clients decreased to 880 from 890 last quarter. Proportion
of revenues from existing customers was 97.6%, down from 99.0% in
2QFY11.
• Global IT gross utilization was 68.6%, down 230 bps from 70.9% in
2QFY11. Notably, IT Services’ (excluding Infocrossing, BPO and India and
Middle East business) offshore utilization was down 300 bps to 69.9% from
72.9% last quarter, declining for the fourth straight quarter. One primary
reason for low utilization is high attrition as the company has to maintain a
larger bench in anticipation of higher attrition. The meaningful utilization
headroom may provide potential for margin tailwind in the coming
quarters, but we believe constant decrease in utilization is a matter of
concern.
• By geography, Europe witnessed strong growth of 12.6%, while Americas
were weak with only 2.4% revenue growth. Wipro registered top-line
growth of 7.6% from Japan, 5.6% India and Middle East and 3.9% from
APAC and other emerging markets.
• By horizontals, Consulting and ADM business reported strong Q/Q growth
of 14.4% and 9.5%, respectively. Technology Infrastructure growth was
also strong at 6.6%. Product Engineering and R&D Business revenues
declined 1.0% and 0.4%, respectively, while Package Implementation
(+2.3%), Testing Services (+1.8%) and BPO (+0.1%) also experienced
weak growth.
• Operating Margins for IT Services were flat at 22.2% as margins headwinds
driven by lower utilization and fewer working days were offset by
improvement in productivity and forex benefits. Margins had declined 230
bps last quarter.
• DSOs remained flat at 69 days and Effective tax rate was 16.5%.
Management expects tax rate to increase by about 2 percentage points in the
next few quarters.
• IT Products business, which contributes about 11% of total revenues,
recorded 18% Q/Q decline in revenues, while Customer Care revenues grew
4% Q/Q.
4QFY11 Guidance reasonable; out-performance not
factored in
Management expects Global IT services revenues in the range of US$1,384-1,411
million, up 3%-5% Q/Q. We believe the guidance is reasonable but believe that
Wipro’s chances of outperforming it are slim given its historical performance versus
guidance equation. This, we believe, is already factored in current valuations (15%
discount to TCS on FY12 P/E).
Valuation and price target
Our Sep-11 price target of Rs470 is based on one-year forward/trailing P/E multiple
of 19x; this is at a 15% discount to TCS’s target P/E multiple of 22x. We take TCS
as our benchmark multiple in the Indian IT universe.
Downward risks to our price target
A sharp slowdown in IT spending environment and appreciation of the rupee against
the US dollar are key risks to our price target.
Upward risk to our price target
Faster recovery of developed economies, particularly the US, and large deal wins,
resulting in upgrades to our FY12/13 estimates.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro Ltd. Neutral
WIPR.BO, WPRO IN
Biting the bullet by appointing a new CEO; we
advocate patience; stay Neutral as near-term earnings
surprise unlikely
• Change of management the most striking feature of Wipro's 3QFY11
results. Wipro's 3QFY11 results made news more for its decision to replace the
joint CEOs of IT-Services (Mr. Girish Paranjpe and Mr. Suresh Vaswani) with
Mr. T.K. Kurien (who has served the company in various leadership positions)
than the results per se. We believe that the track-record of systematic underperformance
relative to peers TCS/Infosys justifies the replacement (its revenue
growth has lagged peers for the past 7 quarters). This is a secular lag.
• We expect changes ahead but advocate patience; results not likely in FY12.
To be sure, propelling Wipro to a higher-growth trajectory will take time given
its size (its revenue growth is still a good.6-7% points lower than TCS/Infosys).
There could be disruptions in the near-term (reflected in change/rotation of
management personnel/structure or both) which we must be prepared for as new
leadership decides its path and strategies. We identify some of the burning
issues herein. We believe that the new CEO must assure stability once the
envisaged changes have been made (as sustained performance cannot be
achieved when BU heads/middle-management perceive insecurity/instability).
• 3QFY11 results below expectations primarily on account of flat margin
performance (Q/Q) on IT-Services. We expected EBIT margins for ITServices
to be about 50 bps ahead of 2QFY11's levels of 22.2% as Wipro came
off a wage hump in the previous quarter (Sep-10) in which it incurred costs of
salary hikes and restricted stock/option. Low utilization (on account of low
volume growth) is the reason for the IT-Services margin miss. Revenue miss is
on account of performance of IT products (down 13% Q/Q) but this does not
affect profitability being a low-margin division.
• Consensus expectations quite moderate for FY12; stock downside seem
protected but upside still some time away. Consensus builds in lower revenue
growth expectations for Wipro than for peers (TCS/Infosys) each year through
FY11-13 (6-9% lower in FY11, 5-6% lower in FY12 and 3% lower in FY13).
Success of the change in guard can potentially reflect in FY13 upside surprise.
• Investment view: Near-term stock triggers unlikely. The issue with Wipro is
less with its margins; it is more to do with the top-line trajectory. We
believe that investors must be patient for no professional can accelerate the
growth trajectory of a company of Wipro’s size quickly; it needs time. Remain
Neutral on the stock. Valuations at 19.6x P/E 12 represent a ~15% discount to
our benchmark TCS, which we believe is deserved. TCS (OW) remains our
top pick in the sector.
A multitude of issues facing the new CEO including an
altogether different scale
First, a brief introduction to the new CEO. Mr. T.K Kurien brings a proven track
record to the role of the CEO though the scale of leadership expected of him now is
of a much greater order of magnitude than he has displayed within Wipro in the past.
Prior to his ascension, he was the president of the newly created non-IT initiative
(eco-energy) for just about 9 months. Most notably, as the head of Wipro's BPO
division, he oversaw the transformation of this practice from a low-margin voicedominated
business to a higher-value/margin, transaction-processing led one (EBIT
margins of Wipro's BPO is higher than Infosys' BPO margins). He has also headed
the telecom segments, consulting and large program management group in the past.
That said, studying the profile of Mr. T.K. Kurien’s responsibilities at Wipro in
the past, we believe that he has not had responsibility in the past for more than
10% of Wipro's revenues and that was when Wipro was smaller than now.
Clearly, the scale of the task before him is significant and altogether different.
Wipro’s underperformance in the past reflects several points to a systemic deficiency
in (a) management structures (accountability does not always get fixed in the joint-
CEO structure), (b) employee engagement (for instance, witness the much higher
attrition at Wipro's IT-Services group over a period of time and inability to expand
the pyramid) and (c) client management (account mining structure does not deliver as
well as peers). We believe that the decision is the right one though we were
surprised by the suddenness of it evidenced by the new-CEO's admission that he
is yet to deep-dive into the company's issues/difficulties; let alone formulate a
plan of action to deal with them.
We identify below some of the systemic issues (among other unlisted ones) that
the new CEO will have to contend with:
Issue no. 1: Frequent management changes disturb the
rhythm
Cognizant and TCS tell us that their business heads and senior personnel have been
largely wedded to their domains (be they vertical and horizontal) for well over a
decade and that is a factor in providing customers a sense of comfort and assurance
of continuity. Studying Infosys’ management structure over the last three years, we
note that the primary changes relate to additional responsibility for management (e.g.
members of the executive council), not a change in core responsibility with few
exceptions (likewise for TCS).
In contrast, we can identify at least ten verticals/horizontals/functions (such as
strategy) in Wipro in the past three years where leadership has changed hands either
on account of senior management departures or rotation (see table 1 for the
changes/rotations in the last one year alone). In several such cases, the leader is new
to the reassigned domain. This might be good to provide refresh to management but
we believe that this takes some getting used to both for the new person in charge as
well as for the team. In our view, what should ideally have been a period of
acceleration in certain well-functioning business units is possibly reduced to a period
of consolidation and what should have been a period of consolidation is now a period
of stability/modest uptick.
Thus, it becomes imperative for the new CEO to assure stability once the initial
round changes/rotation of personnel has been rung in. This cannot be an
ongoing exercise.
• Delay in integrating domain intensity into the relationships as opposed to
technology and seemingly poor prioritization of accounts and accordingly
allocation resources.
We think it will be difficult for Wipro to match peers on volume growth on a
consistent basis unless it addresses the issues we identify above. For a company of its
size, the quality of growth could improve only with larger sizes of client accounts.
Growth that primarily depends on primarily increasing client count of USD 30-40
mn size is decidedly inferior and less scalable to one that accrues from cultivating
much larger account sizes. Cognizant’s top-5 and top-10 clients yield 58% and 44%
more than Wipro’s top-5 and top-10 accounts despite comparable overall size. All of
Infosys’ higher revenues than Wipro in FY09 and FY10 come from the top-10
clients, whereas 50% of TCS’ higher revenues than Wipro come from top-10 clients.
Wipro’s client approach is still primarily hunting- and limited mining-led.
Essentially, its market-facing approach needs to be more intensive and in-depth
rather than expansive.
Issue no. 3: Management of the supply-side has been
shortsighted
For the year-ended FY10, Wipro’s involuntary attrition in IT-Services stood at 6.2%
(4x TCS and 2x Infosys). Also, as per our tracking, despite its size, Wipro does not
enjoy the prime slot status in several of the engineering campuses it hires from where
Cognizant, Infosys, TCS and MNCs such as Accenture/IBM also hire.
In the Dec-10 quarter, its attrition in IT-Services alone stood at 23.9% (quarterly
annualized), rather high compared to peers (Infosys’ quarterly annualized attrition
rate stood at 18.8% but that included BPO, excluding which it was ~17%; (see table
1).
Table 2: Wipro's employee attrition (in just IT) for Dec-10 is much higher than that of peers*
Wipro 23.9%
Infosys 18.8%
TCS 17.7%
*Note:.For peers this includes BPO, excluding which their attrition would have been even lower and Wipro’s gap
would be even wider (BPO attrition normally about 2x IT-Services)
Source: Company reports and J.P. Morgan estimates
Behind the curve in keeping with wage inflation; more variability in pay can be
injected to manage this. We think Wipro has also been behind the curve in giving
salary hikes and when it did (as in February 2010), the average offshore pay-out hike
was just 8-10% (as against 14-15% by peers two months later in April 2010). To
some extent, the company has corrected this with a promotion-based hiked effective
July-10 which provides another 4%. However, we note that the last offshore wage
hike prior to Feb 10 happened in Aug-08 (18 months back, 8-10% increase on that
occasion as well).
In our view, too much tightening of the supply-side in favor of margins during the
downturn has resulted in subsequent, high attrition. In the current environment
which is constrained by supply and not by demand, high attrition if unchecked
potentially results in lost revenues (though it has not happened in 3QFY11 as
utilization was sub-par). Some of the increase in wage could be made variable as
TCS has effected.
3QFY11 Highlights
• IT Services revenues were at $1,344 million, up 5.6% Q/Q. In constant
currency terms, IT services revenues grew 4.1% Q/Q to $1,325 million,
which is in line with guidance range of $1,317-1,343 million. IT Services
revenues increased 19.3% Y/Y in 3QFY11, which is significantly below
peers.
• IT services volumes showed a tepid 1.5% Q/Q increase, primarily driven by
4.0% increase in onsite volumes, while offshore volumes were up only
0.5%. On volume growth, Wipro has lagged behind peers, with HCLT,
TCS and Infosys reporting 6.5%, 5.7% and 3.1% volume growth,
respectively.
• Energy and Utilities grew 16.5% Q/Q, the only vertical reporting double
digit growth. Financial Services and Manufacturing also exhibited above
average revenue growth of 7.1% and 6.4%, respectively. Healthcare and
Services had a revenue decline of 3.6%, while Retail & Transportation and
Technology, Media & Telecom grew 5.1% and 3.1%, respectively.
Management plans to focus on specific growing verticals like BFSI,
Healthcare, Energy and Utilities and Retail in the coming quarters.
• Revenues from the top 5 and top 10 clients were up 5.6% Q/Q, in line with
non top-10 clients' revenue growth. Wipro continues to struggle in mining
top clients effectively, substantiated by the fact that the company
generates only 19.2% of total revenues from top 10 clients, compared to
25.7% for Infosys and 29.9% for TCS (in 3QFY11). Infosys derives 58%
higher revenues from its top-10 clients than Wipro, which explains more
than 60% overall revenue difference, while Infosys' revenues from non top-
10 clients are only 8% higher than Wipro.
• Pricing was strong with blended pricing expanding 3.0% on the back of
strong offshore pricing growth of 3.7%, after remaining flat/down for 4
straight quarters. Onsite pricing witnessed a modest increase of 0.6%.
• IT Services headcount increased by 3,591 (net) compared to 2,975 last
quarter. Wipro added 16,745 employees in its IT Services business in CY10.
The company expects employee pyramid to marginally shift to freshers in
the next few quarters.
• Global IT Services' attrition (voluntary and involuntary) was high at
23.9% despite meaningful wage hikes, on annualized quarterly basis.
BPO quarterly attrition was 14.2%, flat from last quarter. The high attrition
rate may translate into lost business if not contained and would continue to
pressure utilization.
• Wipro new client additions continue to be strong as the company added
36 clients in 3QFY11 following 29 clients last quarter. Happily, US$1+
million accounts increased to 433 from 425 last quarter; following a
decrease of 9 clients in 2QFY11. There was only one US$100+ million
customer on TTM basis, unchanged from last year, but management
suggested that on a quarterly annualized basis, 3 customers have crossed the
threshold and four other are close, in $95-100 million range. However, total
number of active clients decreased to 880 from 890 last quarter. Proportion
of revenues from existing customers was 97.6%, down from 99.0% in
2QFY11.
• Global IT gross utilization was 68.6%, down 230 bps from 70.9% in
2QFY11. Notably, IT Services’ (excluding Infocrossing, BPO and India and
Middle East business) offshore utilization was down 300 bps to 69.9% from
72.9% last quarter, declining for the fourth straight quarter. One primary
reason for low utilization is high attrition as the company has to maintain a
larger bench in anticipation of higher attrition. The meaningful utilization
headroom may provide potential for margin tailwind in the coming
quarters, but we believe constant decrease in utilization is a matter of
concern.
• By geography, Europe witnessed strong growth of 12.6%, while Americas
were weak with only 2.4% revenue growth. Wipro registered top-line
growth of 7.6% from Japan, 5.6% India and Middle East and 3.9% from
APAC and other emerging markets.
• By horizontals, Consulting and ADM business reported strong Q/Q growth
of 14.4% and 9.5%, respectively. Technology Infrastructure growth was
also strong at 6.6%. Product Engineering and R&D Business revenues
declined 1.0% and 0.4%, respectively, while Package Implementation
(+2.3%), Testing Services (+1.8%) and BPO (+0.1%) also experienced
weak growth.
• Operating Margins for IT Services were flat at 22.2% as margins headwinds
driven by lower utilization and fewer working days were offset by
improvement in productivity and forex benefits. Margins had declined 230
bps last quarter.
• DSOs remained flat at 69 days and Effective tax rate was 16.5%.
Management expects tax rate to increase by about 2 percentage points in the
next few quarters.
• IT Products business, which contributes about 11% of total revenues,
recorded 18% Q/Q decline in revenues, while Customer Care revenues grew
4% Q/Q.
4QFY11 Guidance reasonable; out-performance not
factored in
Management expects Global IT services revenues in the range of US$1,384-1,411
million, up 3%-5% Q/Q. We believe the guidance is reasonable but believe that
Wipro’s chances of outperforming it are slim given its historical performance versus
guidance equation. This, we believe, is already factored in current valuations (15%
discount to TCS on FY12 P/E).
Valuation and price target
Our Sep-11 price target of Rs470 is based on one-year forward/trailing P/E multiple
of 19x; this is at a 15% discount to TCS’s target P/E multiple of 22x. We take TCS
as our benchmark multiple in the Indian IT universe.
Downward risks to our price target
A sharp slowdown in IT spending environment and appreciation of the rupee against
the US dollar are key risks to our price target.
Upward risk to our price target
Faster recovery of developed economies, particularly the US, and large deal wins,
resulting in upgrades to our FY12/13 estimates.
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