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January 22, 2011
Wipro Ltd.
Wait for Better Entry Opportunity; Maintain EW
What's Changed
Price Target Rs420.00 to Rs480.00
Investment conclusion: We are positive on the recent
changes and the new management structure at Wipro.
However, in the near term, internal reorganization and
realigning the sales team could be the key management
challenges, in our view. We maintain our EW rating on
the stock and raise our price target to Rs480. Although
the stock is trading at a steep discount to its larger peers,
we would wait for signs of a pick up in revenue growth
trajectory for Wipro before accumulating the stock at
current levels.
Dec-10 results: Overall revenue of Rs78.2bn (+0.6%
QoQ, +12.7% YoY) was marginally below our and Street
expectations. Net income of Rs13.2bn (+2.6% QoQ,
+10% YoY) was also a shade below our expectations.
Wipro’s revenue guidance of US$1,384-1,411mn
(+3-5% QoQ) is ahead of that of Infosys of 1-2% QoQ.
The F4Q revenue guidance implies full-year revenue
growth of 18.5-19% YoY in F2011e.
Financials: We expect 22% revenue CAGR for Wipro’s
IT services business over F2011-13 in USD terms,
which is below that of Infosys and TCS. Overall for the
company, we expect revenue and earnings CAGR of
21% and 13%, respectively, over F2011-13.
Valuation: Wipro is trading at 19x F2012e and 16x
F2013e EPS, a 10-15% discount to its peers. We
believe that unless revenue growth at Wipro accelerates
to match that of the other large companies’ in the sector,
the stock could continue to trade around its current
discount levels. We would be opportunistic in
accumulating the stock in the event of continued
corrosion in the stock price or a broad based market
correction
Investment Case
Summary & Conclusions
Maintain Equal-weight
We maintain Equal-weight rating on Wipro with a new price
target of Rs480. Wipro’s revenue growth has lagged that of its
larger peers for the last few quarters. The company named a
new CEO (Mr. T.K. Kurien) to drive its IT services business. We
believe Mr. Kurien is a promising leader. However, in the near
to medium term, internal reorganization and sprucing up the
Wipro sales engine will be his key challenges, in our view.
We expect revenue growth in F2012e for Wipro to accelerate to
23% YoY in USD terms compared with 19% USD revenue
growth in F2011e. However, this may not be sufficient for the
stock to break out of its current range, in our view. Given the
lack of any near-term trigger, we believe the stock upside will
be capped and it could continue to trade at a discount to its
larger peers.
Key results positives: 1) Offshore pricing improved 3.7%
QoQ and onsite pricing increased 0.6% QoQ; 2) strong growth
in Europe revenues (12.7% QoQ) was in line with its larger
peers’; 3) attrition rates (annualized) declined to 23.9% (-100bp
QoQ); and 4) Energy and Utilities, Media and Financial
Services were the leading verticals.
Key results negatives: 1) Revenue growth for Wipro
continues to lag that of its larger peers; 2) management
indicated that decisions of some large deals were delayed,
leading to muted volume growth of 1.5% QoQ; 3) Technology,
Media, and Telecom verticals (25% of revenues) grew below
the company average of 3.5% QoQ.
Conference Call Takeaways
1) Management indicated that the pricing environment remains
stable and revenue growth in F4Q would be led by volume
growth.
2) The outlook for BFSI remains strong. BFSI vertical
represents ~40% of the total pipeline, as per the management.
3) Attrition rate remains high and management believes it may
not be possible to improve its utilization rates significantly in the
near term.
4) Hedge position of US$1.5bn.
Price Target: We have raised our price target to Rs480
(previously Rs420). Our price target is arrived at by using a
probability-weighted average of our risk-reward scenarios. [PT
Rs480=Rs580*40%+Rs440*50%+Rs280*10%]. We maintain
the probability weights and assumptions for our risk-reward
scenarios and roll forward the values to F2012e. We have
rolled forward our price target to F2012e, and it now implies
20x F2012e EPS and 17x F2013e EPS.
Risk-Reward Scenarios
Base Case: Our new base case value for the stock is Rs440
(Rs389 previously). We have rolled forward our base-case
value to F2012e. Wipro reported in-line IT services revenues in
F3Q11. Overall revenue and net income were marginally below
our estimates in f3Q11. We now expect IT services revenue
growth of 19% YoY in F2011e with EBIT margin of 23% (-40bp
YoY). For F2012-13e, we believe Wipro could deliver IT
services revenue CAGR of 22% with flat to lower margins.
Overall, we maintain our earnings estimates for F2011-13 and
expect revenues and earnings CAGR of 21% and 13%,
respectively, for Wipro. Over the longer term (F2011-21e), we
maintain our forecasts of 20% and 19% revenue and EBIT
CAGR, respectively. Given that we have rolled forward our
base-case value by one year (increase equivalent to the cost of
equity), w our growth assumptions for the base case do not
change. Our base case implies P/E of 18x F2012e EPS.
Bull Case: Our new bull case for the stock is Rs580
(previously Rs504). We have revised our bull-case value to
factor in improving outlook for tech spending in 2011 and roll it
forward to FY2012. In our bull case, we believe Wipro’s
revenue growth could accelerate and grow in line with that of its
larger peers. Strong revenue growth would help margins. We
factor in faster ramp up in revenue and improving margin
performance YoY in F2012e.
Over the longer term, we assume revenue and EBIT CAGR of
23.7% and 22.7%, respectively, over F2011-21 and a ~140bp
margin decline by F2021. So far, larger companies have
indicated clients’ budgets in 2011 to be flat to up marginally.
Despite low single-digit growth in budgets, higher-than-
expected offshore spending by clients could help revenue grow
faster than expectations. Strong revenue growth, stable
operating margins, and favorable currency benefits could push
the stock closer to our bull case value. Our bull-case value
implies a P/E of 22x F2012e bull-case EPS.
Bear Case: Our bear-case value of Rs280 (previously Rs240).
Despite lagging revenue growth, we believe the visibility for
F2012e earnings has improved for IT services companies. We
revise our bear-case scenario to factor in the improved visibility
and roll it forward to F2012. Wipro’s Technology, Media, and
Telecom verticals continue to lag and grow below the company
average. We assume Wipro’s IT services revenue growth lags
expectations and climbs at a slower pace and that margins
decline in F2012e. Our bear-case assumptions for the longer
term (F2011-21) are revenue and EBIT CAGR of 15.7% and
~13.4%, respectively, with EBIT margin declining to ~15% by
F2021e. Our bear case implies a P/E of 13x F2012e bear case
EPS.
Valuation: Over the past three years, Wipro has generally
traded at a discount of about 0-30% to Infosys. Wipro is
currently trading at a discount of 15-20% to Infosys and TCS. In
the absence of any material pick up in revenue growth, we think
it could continue to trade at a discount to its larger peers.
Company Description
Wipro Ltd provides high-end R&D services along with
application development and maintenance services to corporate
giants and global technology organizations. Wipro also
manages IT infrastructure for both types of customers globally.
Wipro's solutions cover a wide range of business areas including
hardware design, system software and embedded software,
telecom software, e-commerce consulting, web enabling and
customer management.
India Software
Industry View: In-Line
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
January 22, 2011
Wipro Ltd.
Wait for Better Entry Opportunity; Maintain EW
What's Changed
Price Target Rs420.00 to Rs480.00
Investment conclusion: We are positive on the recent
changes and the new management structure at Wipro.
However, in the near term, internal reorganization and
realigning the sales team could be the key management
challenges, in our view. We maintain our EW rating on
the stock and raise our price target to Rs480. Although
the stock is trading at a steep discount to its larger peers,
we would wait for signs of a pick up in revenue growth
trajectory for Wipro before accumulating the stock at
current levels.
Dec-10 results: Overall revenue of Rs78.2bn (+0.6%
QoQ, +12.7% YoY) was marginally below our and Street
expectations. Net income of Rs13.2bn (+2.6% QoQ,
+10% YoY) was also a shade below our expectations.
Wipro’s revenue guidance of US$1,384-1,411mn
(+3-5% QoQ) is ahead of that of Infosys of 1-2% QoQ.
The F4Q revenue guidance implies full-year revenue
growth of 18.5-19% YoY in F2011e.
IT services business over F2011-13 in USD terms,
which is below that of Infosys and TCS. Overall for the
company, we expect revenue and earnings CAGR of
21% and 13%, respectively, over F2011-13.
Valuation: Wipro is trading at 19x F2012e and 16x
F2013e EPS, a 10-15% discount to its peers. We
believe that unless revenue growth at Wipro accelerates
to match that of the other large companies’ in the sector,
the stock could continue to trade around its current
discount levels. We would be opportunistic in
accumulating the stock in the event of continued
corrosion in the stock price or a broad based market
correction
Investment Case
Summary & Conclusions
Maintain Equal-weight
We maintain Equal-weight rating on Wipro with a new price
target of Rs480. Wipro’s revenue growth has lagged that of its
larger peers for the last few quarters. The company named a
new CEO (Mr. T.K. Kurien) to drive its IT services business. We
believe Mr. Kurien is a promising leader. However, in the near
to medium term, internal reorganization and sprucing up the
Wipro sales engine will be his key challenges, in our view.
We expect revenue growth in F2012e for Wipro to accelerate to
23% YoY in USD terms compared with 19% USD revenue
growth in F2011e. However, this may not be sufficient for the
stock to break out of its current range, in our view. Given the
lack of any near-term trigger, we believe the stock upside will
be capped and it could continue to trade at a discount to its
larger peers.
Key results positives: 1) Offshore pricing improved 3.7%
QoQ and onsite pricing increased 0.6% QoQ; 2) strong growth
in Europe revenues (12.7% QoQ) was in line with its larger
peers’; 3) attrition rates (annualized) declined to 23.9% (-100bp
QoQ); and 4) Energy and Utilities, Media and Financial
Services were the leading verticals.
Key results negatives: 1) Revenue growth for Wipro
continues to lag that of its larger peers; 2) management
indicated that decisions of some large deals were delayed,
leading to muted volume growth of 1.5% QoQ; 3) Technology,
Media, and Telecom verticals (25% of revenues) grew below
the company average of 3.5% QoQ.
Conference Call Takeaways
1) Management indicated that the pricing environment remains
stable and revenue growth in F4Q would be led by volume
growth.
2) The outlook for BFSI remains strong. BFSI vertical
represents ~40% of the total pipeline, as per the management.
3) Attrition rate remains high and management believes it may
not be possible to improve its utilization rates significantly in the
near term.
4) Hedge position of US$1.5bn.
Price Target: We have raised our price target to Rs480
(previously Rs420). Our price target is arrived at by using a
probability-weighted average of our risk-reward scenarios. [PT
Rs480=Rs580*40%+Rs440*50%+Rs280*10%]. We maintain
the probability weights and assumptions for our risk-reward
scenarios and roll forward the values to F2012e. We have
rolled forward our price target to F2012e, and it now implies
20x F2012e EPS and 17x F2013e EPS.
Risk-Reward Scenarios
Base Case: Our new base case value for the stock is Rs440
(Rs389 previously). We have rolled forward our base-case
value to F2012e. Wipro reported in-line IT services revenues in
F3Q11. Overall revenue and net income were marginally below
our estimates in f3Q11. We now expect IT services revenue
growth of 19% YoY in F2011e with EBIT margin of 23% (-40bp
YoY). For F2012-13e, we believe Wipro could deliver IT
services revenue CAGR of 22% with flat to lower margins.
Overall, we maintain our earnings estimates for F2011-13 and
expect revenues and earnings CAGR of 21% and 13%,
respectively, for Wipro. Over the longer term (F2011-21e), we
maintain our forecasts of 20% and 19% revenue and EBIT
CAGR, respectively. Given that we have rolled forward our
base-case value by one year (increase equivalent to the cost of
equity), w our growth assumptions for the base case do not
change. Our base case implies P/E of 18x F2012e EPS.
Bull Case: Our new bull case for the stock is Rs580
(previously Rs504). We have revised our bull-case value to
factor in improving outlook for tech spending in 2011 and roll it
forward to FY2012. In our bull case, we believe Wipro’s
revenue growth could accelerate and grow in line with that of its
larger peers. Strong revenue growth would help margins. We
factor in faster ramp up in revenue and improving margin
performance YoY in F2012e.
Over the longer term, we assume revenue and EBIT CAGR of
23.7% and 22.7%, respectively, over F2011-21 and a ~140bp
margin decline by F2021. So far, larger companies have
indicated clients’ budgets in 2011 to be flat to up marginally.
Despite low single-digit growth in budgets, higher-than-
expected offshore spending by clients could help revenue grow
faster than expectations. Strong revenue growth, stable
operating margins, and favorable currency benefits could push
the stock closer to our bull case value. Our bull-case value
implies a P/E of 22x F2012e bull-case EPS.
Bear Case: Our bear-case value of Rs280 (previously Rs240).
Despite lagging revenue growth, we believe the visibility for
F2012e earnings has improved for IT services companies. We
revise our bear-case scenario to factor in the improved visibility
and roll it forward to F2012. Wipro’s Technology, Media, and
Telecom verticals continue to lag and grow below the company
average. We assume Wipro’s IT services revenue growth lags
expectations and climbs at a slower pace and that margins
decline in F2012e. Our bear-case assumptions for the longer
term (F2011-21) are revenue and EBIT CAGR of 15.7% and
~13.4%, respectively, with EBIT margin declining to ~15% by
F2021e. Our bear case implies a P/E of 13x F2012e bear case
EPS.
Valuation: Over the past three years, Wipro has generally
traded at a discount of about 0-30% to Infosys. Wipro is
currently trading at a discount of 15-20% to Infosys and TCS. In
the absence of any material pick up in revenue growth, we think
it could continue to trade at a discount to its larger peers.
Company Description
Wipro Ltd provides high-end R&D services along with
application development and maintenance services to corporate
giants and global technology organizations. Wipro also
manages IT infrastructure for both types of customers globally.
Wipro's solutions cover a wide range of business areas including
hardware design, system software and embedded software,
telecom software, e-commerce consulting, web enabling and
customer management.
India Software
Industry View: In-Line
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