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Wipro- Growth vs margin trade off likely
Wipro reported another quarter of muted volume growth
of 1.5% lagging behind its larger peers. The company
managed better realization due to higher FPP and nonlinear
projects. Management change at the top indicates
Wipro’s concern regarding slow growth rate and renewed
focus towards higher growth. This could come at the cost
of margins as S&M spend would likely go up. Our negative
stance on the stock is mainly driven by low capital
efficiency resulting in lower ROIC (refer our recent update
on Wipro “Underperformance Justified” dated 22 Dec 2010)
which could further worsen if margins were to decline in
pursuit of growth. We believe it should trade at a higher PE
discount to Infosys and maintain Sell.
Revenue growth in line. IT services revenue grew by 5.6%
in dollar terms. Volume growth was 1.5% while
pricing/realization increased by 3%. Higher realization was
due to favorable cross currency movement, higher proportion
of Fixed price projects (FPP) and higher revenue from nonlinear
projects. EBIT margin for IT services increased by 60bps
to 19.3% driven by lower S&M expenses which declined by
70bps and better execution of FPP to achieve higher
productivity.
Portfolio Mix hurting volume growth. Low exposure to fast
growing segments like BFSI and package implementation and
sluggish growth in verticals like technology is resulting in
lower volume growth as compared to its peers. Management’s
focus has now shifted to growth which could come at the cost
of margins.
Should trade at significant discount to Infosys. We believe
the market, by according it higher PE multiples, is pricing in a
marked change in performance of the company going
forward, something we are sceptical about. With much lower
ROIC and below par growth rates compared to Infosys, Wipro
should trade at a multiple of 13.6x March 2013 FDEPS, 35%
discount to Infosys’ multiples. We reiterate Sell.
IT services revenue grew by 5.6% in dollar terms and 0.2% in rupee terms. Volume growth was 1.5%
while pricing/realization increased by 3%. Higher realization was due to favorable cross currency
movement, higher proportion of Fixed price projects (FPP) and higher revenue from non-linear projects.
EBIT margin for IT services increased by 60bps to 19.3% driven by lower S&M expenses which declined
by 70bps and better execution of FPP to achieve higher productivity. Consumer care and lighting
segment grew by 4.5% sequentially although operating margins declined 20bps due to higher raw
material cost.
Low volume and topline growth compared to peers
While Wipro beats the lower end of its Q3 guidance of $1,317mn by clocking $1,344mn dollar, the
growth is muted in the context of strong growth exhibited by TCS, Infosys and HCL. Wipro has again
missed out on volume growth this quarter which has boosted the topline of its peers. Management
cited delay in contract signing and focus on non-linearity as reasons for low volume growth. The
company has guided for a 3-5% sequential growth for Q4 to $1,384-$1,411 which we expect should be
largely driven by volume growth.
Portfolio Mix hurting growth
Wipro’s slow volume growth could largely be attributable to its portfolio mix from both vertical and
service line standpoint. Wipro has one of the lowest exposure to BFSI space among the top 3 IT services
companies. It therefore has not been able to benefit from the demand pickup in this vertical. Wipro’s
exposure to Technology vertical is also not paying dividends as this vertical continues to disappoint.
Wipro also has lower exposure than peers in package implementation space which is a fast growing and
high margin segment.
Focus on growth and wage hike could impact margins
We believe the new CEO’s focus will be primarily on driving growth. The company will invest in verticals
which have growth momentum behind them. This growth could be at the cost of margins as S&M
spends would likely go up in order to chase the volume growth.
Apart from higher S&M expenses, wage hike in Q1FY12 would impact gross margins. Postponing the
wage review cycle from February to Q1 for next fiscal could impact attrition at mid to junior level
employees. We suspect attrition will likely remain high in this category or could possibly go up.
Should trade at significant discount to Infosys
With a growth rate which has been at par with that of Infosys and TCS in the past despite acquisitions
and a significantly lower ROIC, Wipro should trade at steep discount to Infosys. We believe the market,
by according it higher PE multiples, is pricing in a marked change in performance of the company going
forward, something we are sceptical about. We believe the PE multiple should trade at significantly
lower levels than what we have currently accorded to Infosys. This is because we believe growth is likely
to be at par, at best, while ROIC is likely to be much lower (at 30% Vs 94% of Infosys) over the next three
years (Average ROIC from FY11E to FY13E).
Estimates revised; Maintain sell
On the back of our assessment that renewed focus on growth will impact margins, we have increased the
growth rate by 200bps for FY13E and reduced the margins by ~80bps for FY12E and FY13E. We value the
stock at 13.6x March 2013E earnings, giving us a price target of Rs 348. We recommend a Sell.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro- Growth vs margin trade off likely
Wipro reported another quarter of muted volume growth
of 1.5% lagging behind its larger peers. The company
managed better realization due to higher FPP and nonlinear
projects. Management change at the top indicates
Wipro’s concern regarding slow growth rate and renewed
focus towards higher growth. This could come at the cost
of margins as S&M spend would likely go up. Our negative
stance on the stock is mainly driven by low capital
efficiency resulting in lower ROIC (refer our recent update
on Wipro “Underperformance Justified” dated 22 Dec 2010)
which could further worsen if margins were to decline in
pursuit of growth. We believe it should trade at a higher PE
discount to Infosys and maintain Sell.
Revenue growth in line. IT services revenue grew by 5.6%
in dollar terms. Volume growth was 1.5% while
pricing/realization increased by 3%. Higher realization was
due to favorable cross currency movement, higher proportion
of Fixed price projects (FPP) and higher revenue from nonlinear
projects. EBIT margin for IT services increased by 60bps
to 19.3% driven by lower S&M expenses which declined by
70bps and better execution of FPP to achieve higher
productivity.
Portfolio Mix hurting volume growth. Low exposure to fast
growing segments like BFSI and package implementation and
sluggish growth in verticals like technology is resulting in
lower volume growth as compared to its peers. Management’s
focus has now shifted to growth which could come at the cost
of margins.
Should trade at significant discount to Infosys. We believe
the market, by according it higher PE multiples, is pricing in a
marked change in performance of the company going
forward, something we are sceptical about. With much lower
ROIC and below par growth rates compared to Infosys, Wipro
should trade at a multiple of 13.6x March 2013 FDEPS, 35%
discount to Infosys’ multiples. We reiterate Sell.
IT services revenue grew by 5.6% in dollar terms and 0.2% in rupee terms. Volume growth was 1.5%
while pricing/realization increased by 3%. Higher realization was due to favorable cross currency
movement, higher proportion of Fixed price projects (FPP) and higher revenue from non-linear projects.
EBIT margin for IT services increased by 60bps to 19.3% driven by lower S&M expenses which declined
by 70bps and better execution of FPP to achieve higher productivity. Consumer care and lighting
segment grew by 4.5% sequentially although operating margins declined 20bps due to higher raw
material cost.
Low volume and topline growth compared to peers
While Wipro beats the lower end of its Q3 guidance of $1,317mn by clocking $1,344mn dollar, the
growth is muted in the context of strong growth exhibited by TCS, Infosys and HCL. Wipro has again
missed out on volume growth this quarter which has boosted the topline of its peers. Management
cited delay in contract signing and focus on non-linearity as reasons for low volume growth. The
company has guided for a 3-5% sequential growth for Q4 to $1,384-$1,411 which we expect should be
largely driven by volume growth.
Portfolio Mix hurting growth
Wipro’s slow volume growth could largely be attributable to its portfolio mix from both vertical and
service line standpoint. Wipro has one of the lowest exposure to BFSI space among the top 3 IT services
companies. It therefore has not been able to benefit from the demand pickup in this vertical. Wipro’s
exposure to Technology vertical is also not paying dividends as this vertical continues to disappoint.
Wipro also has lower exposure than peers in package implementation space which is a fast growing and
high margin segment.
Focus on growth and wage hike could impact margins
We believe the new CEO’s focus will be primarily on driving growth. The company will invest in verticals
which have growth momentum behind them. This growth could be at the cost of margins as S&M
spends would likely go up in order to chase the volume growth.
Apart from higher S&M expenses, wage hike in Q1FY12 would impact gross margins. Postponing the
wage review cycle from February to Q1 for next fiscal could impact attrition at mid to junior level
employees. We suspect attrition will likely remain high in this category or could possibly go up.
Should trade at significant discount to Infosys
With a growth rate which has been at par with that of Infosys and TCS in the past despite acquisitions
and a significantly lower ROIC, Wipro should trade at steep discount to Infosys. We believe the market,
by according it higher PE multiples, is pricing in a marked change in performance of the company going
forward, something we are sceptical about. We believe the PE multiple should trade at significantly
lower levels than what we have currently accorded to Infosys. This is because we believe growth is likely
to be at par, at best, while ROIC is likely to be much lower (at 30% Vs 94% of Infosys) over the next three
years (Average ROIC from FY11E to FY13E).
Estimates revised; Maintain sell
On the back of our assessment that renewed focus on growth will impact margins, we have increased the
growth rate by 200bps for FY13E and reduced the margins by ~80bps for FY12E and FY13E. We value the
stock at 13.6x March 2013E earnings, giving us a price target of Rs 348. We recommend a Sell.
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