Macquarie Research:: Wipro- Management change to chase growth

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Wipro
Management change to chase growth
Event
 Wipro has appointed a new CEO for its IT business and discontinued the joint
CEO structure. The company chairman, Mr. Azim Premji, stressed on the
earnings call that this management change is to help Wipro catch up on
growth relative to other Tier 1 players. We maintain our Outperform rating.

Impact
 Meet the new CEO. Mr. T K Kurien will be the new CEO of Wipro’s IT
business from 1 February 2011. He has been with the company for the past
10 years and has run the Healthcare & Life Sciences business and the
Telecom Service Provider business. Mr. Kurien was also the CEO for the
BPO business in the past.
 Focus squarely on growth... Wipro’s growth relative to its competitors has
lagged for the past few quarters, and the stock was under peer pressure. As
such, a leadership change aimed at putting Wipro back in the top-quartile
growth bracket is positive.
 …though vertical mix could prolong the pain. The 3Q result once again
brought to fore that laggard verticals – Technology, Media & Telecom – have
dragged the overall performance. These three verticals grew 1.5% QoQ vs
company growth of 4.1% QoQ on constant-currency basis.

 Minimal changes post 3Q. We have made minor changes to our model post
3Q results. The key difference is our revised currency assumption. Our US$
growth forecast remains 23% for FY12 (see Fig 8 for detailed estimate
changes).
 3Q results. Wipro delivered 3Q IT services revenues of US$1,344m (up 5.6%
QoQ), which was in line with our estimate. EBIT margin was flat at 22.2% (vs
our estimate of 22.6%). The company guided to US$ growth guidance of 5%
QoQ at the high end and 3% at the low end for the next quarter. Infosys has
guided for 2% sequential growth at the high end.
Earnings and target price revision
 We are increasing our FY12 and FY13 EPS estimates by 1% and 5%,
respectively, to account for our revised currency forecast. Our revised target
price is Rs540 (vs Rs510 previously) to factor in our raised EPS estimates.
Price catalyst
 12-month price target: Rs540.00 based on a PER methodology.
 Catalyst: Large deal wins and volume growth.
Action and recommendation
 Retain OP. We believe that Wipro will benefit from the strong demand outlook
for the Indian IT industry. Even so, the company has not been able to show
similar growth momentum as its larger peers. We believe this is related more
to vertical mix than to the sales engine at Wipro. In our view, the company
should be able to pick up growth momentum in FY12, albeit still lagging peers.


 Key vertical growth lags. Technology, Media and Telecom, manufacturing and financial services
contribute two-third of Wipro’s IT services revenues. These verticals showed sequential growth of
3–7% for 3Q FY11, which was the main driver for the US$ revenue growth that the company
witnessed during the quarter.



Key financial highlights of the results
 Revenues: Wipro IT services reported US$ revenues of US$1,344m, showing growth of 5.6%
QoQ (vs 5.9% for INFO and 6.9% at TCS). In INR terms, IT services revenue of Rs59.4bn (up 4%
QoQ, 15% YoY) was 3% lower than our expectation.
 EBIT and EBIT margin: IT services EBIT of Rs13.2bn (up 4% QoQ and up 9% YoY) was 5% lower
than our estimate. The IT services segment margin was flat at 22.2%. This compares with similar
sequential margins at INFO and TCS.
 Guidance: 4Q FY11 US$ revenue guidance is US$1,384–1,411m, implying 5% QoQ growth at
the high end of the guidance (vs 2% QoQ implied by INFO guidance). Although the guidance is
encouraging, it would not be enough to ease concerns on the growth for Wipro


3Q FY11 key operating details
 Net employee additions were 3,591 (vs Infosys at 5,311 and TCS at 12,497).
 Volume growth. Wipro reported 1.5% QoQ volume growth (vs INFO: 3% and TCS: 6%).
 Pricing. The company reported a 3.7% QoQ jump in offshore pricing and a 0.6% QoQ uptick in
onsite pricing, helping it to deliver US$1,344m (up 5.6% QoQ) in revenues in the IT services
segment.
 Attrition. LTM attrition for Wipro is 21.6% (vs 19.4% in 2Q) compared with attrition of 17.5% at
Infosys and 14.4% at TCS. Management specified that attrition for 3Q was lower than in the past
quarters and that it expects a declining trend in coming quarters.
 Wipro reported 79.9% utilization excluding trainees vs 82.4% reported for 2Q.


Our revised TP is based on 10% discount to target PER multiple for peers
 We arrive at our target price of Rs540 (vs Rs510 previously) for Wipro by using a multiples-based
valuation methodology. Our target PER multiple for Wipro is 23x FY12E, which is a 10% discount
to the peer group target multiple of ~25x for TCS and Infosys.


Analysis of our key estimate changes
 Our estimate changes are largely linked to a revised currency forecast, and there are minor
changes to our business assumptions.
 US$ revenue growth. We are reducing our FY11 US$ revenue growth estimate to 19% from
20%. This has resulted in FY12 revenues of US$6.4bn, as we have made minor changes to the
growth rates.
 EBITDA margin. We believe that our revised margin assumptions adequately capture the
pressure from wages and increased investment in the business.
 EPS. Factoring in all the above changes and revised tax rates, our new EPS estimates for FY11,
FY12 and FY13 are Rs22, Rs23 and Rs26, respectively