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Wipro's 3QFY11 volume growth of 1.5% QoQ was disappointing and even lower than Infosys' 3.1%. IT EBIT margins were
sequentially flat despite lower utilization, lower working days and currency headwinds. Margins benefited from pricing
and higher fixed-bid. Guidance of 3-5% revenue growth in 4QFY11 was slightly below our expectation. Key highlights are:
Wipro's 3QFY11 volume grew 1.5% QoQ, which was disappointing and lagged its peers for the second consecutive
quarter. An offshore price increase of 3.7% and onsite increase of 0.6% QoQ (2.5% and -0.8% in CC) ensured
revenues were in line with expectations at US$1,344m, representing sequential growth of 5.6%. The Technology and
Healthcare verticals were especially weak, reporting a sequential decline in revenue of 3.5% and 3.6% respectively
(CC decline of 4% and 4.8%). Energy and Utilities (9.9% of revenue) grew fastest at 16.5%.
The stepping down of Wipro's joint-CEOs was a surprise and was likely to have been driven by the company's
underperformance to top-tier peers ever since the industry emerged from the downturn. The new CEO, Mr Kurien's
credentials seem strong, having led Wipro's healthcare, telecom and BPO practices in the past. The immediate
focus of the new leadership would be to return Wipro to peer growth rates and not so much on margins.
IT EBIT margin was flat QoQ (v/s our estimate of 40bp improvement to 22.6%), which is credible given lower working
days, lower utilization and a 50bp currency headwind in 3QFY11. However, SGA continues to remain high at 12.3%
of revenue, which can be used to offset prospective margin headwind in 1QFY12 on the further wage increases.
We believe lower exposure to higher growth BFSI and higher exposure to lower growth TMT verticals makes things
incrementally more difficult for Wipro in terms of efforts to catch up with peers.
Continued underperformance to peers on volumes and strategic/execution risks emerging out of change in leadership
warrant a wait and watch approach on the stock. We are embedding slightly lower volume growth than before for the next
few quarters and revise our EPS assumptions downwards by 4.4% (to Rs24.1) for FY12 and 4.3% (to Rs28.7) for FY13.
We expect Wipro's US dollar revenue to post 20% CAGR over FY11-13 and EPS CAGR of 15%. The stock trades at a
P/E of 18.9x FY12E and 15.9x FY13E. Maintain Neutral, with a target price of Rs488, based on 18x FY13E
Joint-CEOs resign: a look at revenue, stock performance during their tenure
Wipro outperformed its peers on revenue growth modestly during the recession, much
of which was driven by: (1) lower exposure to the BFSI vertical than peers, which
was a severely challenged segment during the period, (2) better proportion of services
like IMS, a segment relatively insulated from recessionary headwinds. A leaner
organization approach driven by the management led to a cut in the size of the bench
and higher utilization, which helped Wipro grow its margins from 15.9% in 4QFY08 to
20.1% in 1QFY10.
However, with the upturn, demand for IT services increased and Wipro was caught
off guard, resulting in peers catching up with Wipro. The impact was felt most in the
past three quarters, in which factors like pent-up demand and M&A integration led to
higher demand and a rush for resources. Wipro's decision to stay away from low-end
work and staff augmentation turned out to be its undoing as clients migrated to higher
end work with its peers
Higher fixed-bid proportion and large deployment of sub-contractors amid
high attrition remains a risk
IT EBIT margins at 22.2% were sequentially flat after having dropped 230bp in
2QFY11. Wipro maintained its positive outlook on margins due to the levers of: (1)
improved bulge mix through a larger proportion of fresher additions, going forward,
(2) productivity-based improvement on a high fixed-bid mix (46.3% v/s 44% in 2QFY11),
(3) strong thrust on a non-linear model, constituting 11% of revenue and (4) utilization
- a medium-term lever, as it is unlikely to pick up over the next two quarters.
However, we maintain that material improvement in margins looks difficult in the near
term and may materialize gradually, given delivery pressure due to high attrition (21.7%
quarterly annualized v/s 23% quarterly annualized attrition in 2QFY11) and a tendency
of contract staff to turn to permanent jobs in an improving demand scenario (subcontracting
fees increased to ~25% of employee costs in 2QFY11). A higher proportion
of fixed-bid in such an environment creates greater risk as higher fixed bid would
require greater operational control and continuity of resources for productivity gains
to materialize. We believe this limits Wipro's ability to meaningfully improve utilization
from current levels relative to that of peers like Infosys and TCS.
Revenue up 5.6% QoQ, guides for 3-5% QoQ growth in 4QFY11
Wipro's 3QFY11 IT Services US dollar revenue grew 5.6% QoQ to US$1,344m (in
line with our estimate of US$1,342m), at the higher end of its guidance of US$1,317m-
1,343m. In CC terms, revenue was US$1,325m implying growth of 4.1% QoQ. Volume
growth of 1.5% QoQ was worst among the peer set, with 3.7% QoQ offshore and
0.8% QoQ onsite improvement in pricing leading to in-line revenue growth.
4QFY11 revenue guidance is US$1,384m-1,411m, up 3-5% QoQ (against our estimate
of 4-6% and Infosys' guidance of 1-2% QoQ).
IT services EBIT margin of 22.2% was sequentially flat (against our estimate of
22.6%, up 40bp). Overall EBIT margin of 18.2% was down 40bp QoQ (in line with
our expectations).
SGA as a percentage of sales increased 40bp from 12.9% to 13.3% (against our
estimate of 12.7%).
Other income was Rs1.3b (against our estimate of Rs1.1b) due to forex gains of
Rs91m (against our estimated loss of Rs95m).
Profit after tax was Rs13.2b, up 2.6% QoQ (against our estimate of Rs13b).
Valuation and view
Under-performance on volume growth compared with its peers and a change in
leadership limit our confidence in Wipro bridging the gap with peers in the near term.
Given execution uncertainties associated with a new leadership, we are taking a cautious
approach in modeling our volume growth. Better currency assumptions (Rs45 v/s
Rs44.5 in FY12 and Rs44 in FY13 v/s Rs43 earlier) offset execution uncertainty to an
extent. Our revised EPS assumptions for FY12 and FY13 are Rs24.1 (down 4.4%)
and Rs28.7 (down 4.3%) respectively.
Lower exposure to higher growth BFSI (27.3% v/s 36.2% for Infosys and 44.6% for
TCS) and higher exposure to lower growth TMT verticals makes it difficult for Wipro
to catch up with its peers. Within TMT, Wipro has higher exposure to R&D/Product
Engineering instead of core IT services. R&D spends are yet to pick up meaningfully
as has been indicated by relatively weak R&D/PE results across companies (excluding
Infosys, though it has only a small exposure here).
We expect Wipro to post US dollar revenue of 20% CAGR over FY11-13 and EPS
CAGR of 15%. The stock trades at a P/E of 18.9x FY12E and 15.9x FY13E. We
maintain a Neutral rating on the stock with a target price of Rs488 (7% upside), based
on 18x FY13E (a lower multiple on continued underperformance to top-tier peers).
We prefer Infosys and HCL Tech among large cap IT companies.
Company description
Wipro is the third largest Indian IT services company and
the second largest third-party BPO operator in India. It is
the largest third-party R&D services provider globally,
employing over 119,000 employees. It offers the widest
range of IT and ITeS services and its corporate governance
and transparency are at the highest level in the industry.
Key investment arguments
Wipro was able to forecast the slowdown much before
its peers, which has translated into better margin
management. Strong cost optimization continues.
It is the largest player in infrastructure management
services (IMS), the fastest growing service line for
Indian IT companies.
It has a strong presence in domestic and emerging
markets, growing ahead of developed markets.
Key investment risks
Risk pricing in FPP projects could go wrong.
Increase in attrition could put pressure on wages and
moderate the company's ability to increase utilization
and affect productivity in fixed bid projects.
Limited operational scope with near historical high
utilizations.
New management raises uncertainty over execution in
the near term
Recent developments
Announced the appointment of TK Kurien as the new
CEO from 1 February 2011, after the joint CEOs
stepping down.
Wipro added eight clients in the US$20m-50m category
in 3QFY11.
Valuation and view
Valuations at 18.9x FY12E and 15.9x FY13E.
Maintain Neutral with a target price of Rs488, based
on 18x FY13E.
Sector view
Indian offshoring has been vindicated with global clients
and service providers making India their base for IT
enabled solutions. India still commands less than 5% of
global IT markets. We are positive on the sector from
a long-term perspective.
The US economic slowdown, wage inflation and sharper
currency appreciation are key concerns.
Frontline Indian IT companies will be better placed to
sail through near term adversities. Niche IT/ITeS
services companies with strong business models are
likely to be better placed to face near-term uncertainties.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro's 3QFY11 volume growth of 1.5% QoQ was disappointing and even lower than Infosys' 3.1%. IT EBIT margins were
sequentially flat despite lower utilization, lower working days and currency headwinds. Margins benefited from pricing
and higher fixed-bid. Guidance of 3-5% revenue growth in 4QFY11 was slightly below our expectation. Key highlights are:
Wipro's 3QFY11 volume grew 1.5% QoQ, which was disappointing and lagged its peers for the second consecutive
quarter. An offshore price increase of 3.7% and onsite increase of 0.6% QoQ (2.5% and -0.8% in CC) ensured
revenues were in line with expectations at US$1,344m, representing sequential growth of 5.6%. The Technology and
Healthcare verticals were especially weak, reporting a sequential decline in revenue of 3.5% and 3.6% respectively
(CC decline of 4% and 4.8%). Energy and Utilities (9.9% of revenue) grew fastest at 16.5%.
The stepping down of Wipro's joint-CEOs was a surprise and was likely to have been driven by the company's
underperformance to top-tier peers ever since the industry emerged from the downturn. The new CEO, Mr Kurien's
credentials seem strong, having led Wipro's healthcare, telecom and BPO practices in the past. The immediate
focus of the new leadership would be to return Wipro to peer growth rates and not so much on margins.
IT EBIT margin was flat QoQ (v/s our estimate of 40bp improvement to 22.6%), which is credible given lower working
days, lower utilization and a 50bp currency headwind in 3QFY11. However, SGA continues to remain high at 12.3%
of revenue, which can be used to offset prospective margin headwind in 1QFY12 on the further wage increases.
We believe lower exposure to higher growth BFSI and higher exposure to lower growth TMT verticals makes things
incrementally more difficult for Wipro in terms of efforts to catch up with peers.
Continued underperformance to peers on volumes and strategic/execution risks emerging out of change in leadership
warrant a wait and watch approach on the stock. We are embedding slightly lower volume growth than before for the next
few quarters and revise our EPS assumptions downwards by 4.4% (to Rs24.1) for FY12 and 4.3% (to Rs28.7) for FY13.
We expect Wipro's US dollar revenue to post 20% CAGR over FY11-13 and EPS CAGR of 15%. The stock trades at a
P/E of 18.9x FY12E and 15.9x FY13E. Maintain Neutral, with a target price of Rs488, based on 18x FY13E
Joint-CEOs resign: a look at revenue, stock performance during their tenure
Wipro outperformed its peers on revenue growth modestly during the recession, much
of which was driven by: (1) lower exposure to the BFSI vertical than peers, which
was a severely challenged segment during the period, (2) better proportion of services
like IMS, a segment relatively insulated from recessionary headwinds. A leaner
organization approach driven by the management led to a cut in the size of the bench
and higher utilization, which helped Wipro grow its margins from 15.9% in 4QFY08 to
20.1% in 1QFY10.
However, with the upturn, demand for IT services increased and Wipro was caught
off guard, resulting in peers catching up with Wipro. The impact was felt most in the
past three quarters, in which factors like pent-up demand and M&A integration led to
higher demand and a rush for resources. Wipro's decision to stay away from low-end
work and staff augmentation turned out to be its undoing as clients migrated to higher
end work with its peers
Higher fixed-bid proportion and large deployment of sub-contractors amid
high attrition remains a risk
IT EBIT margins at 22.2% were sequentially flat after having dropped 230bp in
2QFY11. Wipro maintained its positive outlook on margins due to the levers of: (1)
improved bulge mix through a larger proportion of fresher additions, going forward,
(2) productivity-based improvement on a high fixed-bid mix (46.3% v/s 44% in 2QFY11),
(3) strong thrust on a non-linear model, constituting 11% of revenue and (4) utilization
- a medium-term lever, as it is unlikely to pick up over the next two quarters.
However, we maintain that material improvement in margins looks difficult in the near
term and may materialize gradually, given delivery pressure due to high attrition (21.7%
quarterly annualized v/s 23% quarterly annualized attrition in 2QFY11) and a tendency
of contract staff to turn to permanent jobs in an improving demand scenario (subcontracting
fees increased to ~25% of employee costs in 2QFY11). A higher proportion
of fixed-bid in such an environment creates greater risk as higher fixed bid would
require greater operational control and continuity of resources for productivity gains
to materialize. We believe this limits Wipro's ability to meaningfully improve utilization
from current levels relative to that of peers like Infosys and TCS.
Revenue up 5.6% QoQ, guides for 3-5% QoQ growth in 4QFY11
Wipro's 3QFY11 IT Services US dollar revenue grew 5.6% QoQ to US$1,344m (in
line with our estimate of US$1,342m), at the higher end of its guidance of US$1,317m-
1,343m. In CC terms, revenue was US$1,325m implying growth of 4.1% QoQ. Volume
growth of 1.5% QoQ was worst among the peer set, with 3.7% QoQ offshore and
0.8% QoQ onsite improvement in pricing leading to in-line revenue growth.
4QFY11 revenue guidance is US$1,384m-1,411m, up 3-5% QoQ (against our estimate
of 4-6% and Infosys' guidance of 1-2% QoQ).
IT services EBIT margin of 22.2% was sequentially flat (against our estimate of
22.6%, up 40bp). Overall EBIT margin of 18.2% was down 40bp QoQ (in line with
our expectations).
SGA as a percentage of sales increased 40bp from 12.9% to 13.3% (against our
estimate of 12.7%).
Other income was Rs1.3b (against our estimate of Rs1.1b) due to forex gains of
Rs91m (against our estimated loss of Rs95m).
Profit after tax was Rs13.2b, up 2.6% QoQ (against our estimate of Rs13b).
Valuation and view
Under-performance on volume growth compared with its peers and a change in
leadership limit our confidence in Wipro bridging the gap with peers in the near term.
Given execution uncertainties associated with a new leadership, we are taking a cautious
approach in modeling our volume growth. Better currency assumptions (Rs45 v/s
Rs44.5 in FY12 and Rs44 in FY13 v/s Rs43 earlier) offset execution uncertainty to an
extent. Our revised EPS assumptions for FY12 and FY13 are Rs24.1 (down 4.4%)
and Rs28.7 (down 4.3%) respectively.
Lower exposure to higher growth BFSI (27.3% v/s 36.2% for Infosys and 44.6% for
TCS) and higher exposure to lower growth TMT verticals makes it difficult for Wipro
to catch up with its peers. Within TMT, Wipro has higher exposure to R&D/Product
Engineering instead of core IT services. R&D spends are yet to pick up meaningfully
as has been indicated by relatively weak R&D/PE results across companies (excluding
Infosys, though it has only a small exposure here).
We expect Wipro to post US dollar revenue of 20% CAGR over FY11-13 and EPS
CAGR of 15%. The stock trades at a P/E of 18.9x FY12E and 15.9x FY13E. We
maintain a Neutral rating on the stock with a target price of Rs488 (7% upside), based
on 18x FY13E (a lower multiple on continued underperformance to top-tier peers).
We prefer Infosys and HCL Tech among large cap IT companies.
Company description
Wipro is the third largest Indian IT services company and
the second largest third-party BPO operator in India. It is
the largest third-party R&D services provider globally,
employing over 119,000 employees. It offers the widest
range of IT and ITeS services and its corporate governance
and transparency are at the highest level in the industry.
Key investment arguments
Wipro was able to forecast the slowdown much before
its peers, which has translated into better margin
management. Strong cost optimization continues.
It is the largest player in infrastructure management
services (IMS), the fastest growing service line for
Indian IT companies.
It has a strong presence in domestic and emerging
markets, growing ahead of developed markets.
Key investment risks
Risk pricing in FPP projects could go wrong.
Increase in attrition could put pressure on wages and
moderate the company's ability to increase utilization
and affect productivity in fixed bid projects.
Limited operational scope with near historical high
utilizations.
New management raises uncertainty over execution in
the near term
Recent developments
Announced the appointment of TK Kurien as the new
CEO from 1 February 2011, after the joint CEOs
stepping down.
Wipro added eight clients in the US$20m-50m category
in 3QFY11.
Valuation and view
Valuations at 18.9x FY12E and 15.9x FY13E.
Maintain Neutral with a target price of Rs488, based
on 18x FY13E.
Sector view
Indian offshoring has been vindicated with global clients
and service providers making India their base for IT
enabled solutions. India still commands less than 5% of
global IT markets. We are positive on the sector from
a long-term perspective.
The US economic slowdown, wage inflation and sharper
currency appreciation are key concerns.
Frontline Indian IT companies will be better placed to
sail through near term adversities. Niche IT/ITeS
services companies with strong business models are
likely to be better placed to face near-term uncertainties.
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